Operational Strategies: Location

Factors affecting locational decisions



OPTIMAL LOCATION - one that selects the best site for expansion of the business or for its reloaction, given current information. A location that gives the best combination of quantitative and qualitative factors

Not easy to achieve, as the optimal site is a compromise between conflicting benefits and drawbacks e.g. a well positioned high-street shop has the potential for high sales, but will have higher rental rates than an out of town shop

Location decisions have three key characteristics:

  • strategic in nature - as they are long term
  • difficult to reverse if an error in judgement is made - costs
  • taken at the highest management levels
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High fixed costs

  • high break even point
  • low profits - possibly losses
  • low capacity utilisation can lead to unit fixed costs being high

High variable costs e.g. labour

  • low contribution per unit produced or sold
  • low profits - or even losses
  • high unit variable costs reduce competitiveness

Low unemployment rate

  • problems with recruiting suitable staff
  • staff turnover likely to be a problem
  • pay levels may have to be raised to attract and retain staff

High unemployment rate

  • average consumer disposable incomes may be low - leading to relatively low demand

Poor transport infrastructure

  • raies transport costs for both materials and finished products
  • relatively innaccesible for customers
  • difficult to operate just-in-time
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Quantitative factors

  • Site and other capital costs (such as building or shop fitting)
  • Labour costs (depends on whether the business is capital or labour intensive)
  • Transport costs (heavy raw materials.. incur high costs if suppliers are a long way away)
  • Sales revenue potential (location may even allow value to be added)
  • Government grants (incentives to locate in a certain geographical location)

Qualitative factors

  • Safety (e.g. industrial plants)
  • Room for further expansion (long term consideration..?)
  • Managers' preferences (small businesses)
  • Ethical considerations (relocating from the UK will cause redundancies, for example)
  • IT infrastructure (varies considerably around the world)
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Cost reduction

Access to global (world) markets

Avoidance of protectionist trade barriers

Issues and problems with international location:

Language and other communication barriers

Cultural differences (marketing)

Level of service concerns (off-shoring of call centres for example)

Supply chain concerns

Ethical considerations


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