Operational Strategies: Location

Section 3.4

Chapter 14

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Location: choosing new sites for expansion or relocation of the business 
Selecting the best site for a business will potentially effect the profitability and success of the whole firm. Location decisions have 3 characteristics:

  • Strategic in nature- because they are long term and have an impact on the whole business
  • Difficult to change if an error or judgement is made- very costly
  • Taken at the highest levels of management- not delegated to subordinates

Optimal location: a business location that gives the best combination of quantitative and qualitative factors 
An optimal location decision is one that selects the best possible site for expansion or relocation, given current information. Best sites should maximise long term profits of the business.

 

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Potential drawbacks of non-optimal location decisi

High fixed site costs:
- High break even level of output
- Low profits/even losses
- If operating at low capacity utilisation, unit fixed costs will be high

High variable costs (such as labour):
- Low contribution per unit produced or sold
- Low profits/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 income may be low- low demand

 

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Poor transport infrastructure:
- Raises transport costs for both materials and finished products
- Relatively inaccessible to customers
- Difficult to operate in JIT stock management system 

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Methods of making location decisions

Quantitative methods: these techniques rely on accurate estimation of quantitative factors
Quantitative factors: these are measurable in financial terms and will have direct impact on either the costs of a site or the revenues from it and its profitability

  • Site/other capital costs (such as building or shop fitting)- could compare the costs of adapting existing buildings on a developed site with building new
  • Labour costs- depends on whether the business is labour or capital intensive, attraction of lower wage rates overseas has encouraged many businesses to set up in other countries 
  • Transport costs
  • Sales revenue potential- location can directly depend on sales levels, certain types of businesses need to be convenient to potential customers
  • Government grants- governments are keen to attract new businesses to locate in their country so grants may be offered as an incentive. 

Once these qualitative factors have been identified and cost revenues estimated, profit estimates, investment appraisal, and break even analysis can be used to assist the decision

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Profit estimates: by comparing the estimated revenues and costs of each location, the site with the highest annual potential profit may be identified
A limitation of this technique is that annual forecasts alone are of limited use, they need to be compared with the capital cost of buying and developing the site 

Investment appraisal: methods such as payback period and the average rate of return and net present value can be used to identify locations with the highest potential returns over a number of years 
However may not be accurate  

Break even analysis: comparing two or more possible locations, it calculates which sites will break even at the lowest level of production 
Should be used with caution, past and estimated figures are not always used accurately  

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Qualitative factors: non-measurable factors that influence businesses decisions, cannot be measured in financial terms

  • Safety- avoiding risk to the public and damaging the companies reputation 
  • Room for further expansion- expensive to relocate, so if it turns out to be too small to accommodate expansion will lose money- its a long term consideration
  • Managers preferences- desirable work and home environments 
  • Ethical considerations- if relocating, redundancies are likely, which may cause bad publicity and be viewed as immoral and cause future recruitment problems
  • IT infrastructure- quality of IT varies across countries, some businesses need speedy communication with its different sites and with customers, so this needs to be considered
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Multisite locations

Multisite locations: a business that operates from more than one location 

Advantages:

  • Greater convenience for consumers (like McDonalds locating in every town)
  • Lower transport costs (Supplying to various locations not on national)
  • Production based companies reduce the risk of supply disruption if there are any technical or industrial relations problems in one factory
  • Opportunities for delegation of authority to regional managers from head office- helping develop staff skills and improves motivation
  • Cost advantages of multisites in different countries- lower wages

Disadvantages:

  • Coordination problems between locations (2 way communication needed)
  • Potential lack of control and direction from management in head office
  • Different cultural standards and legal systems- adapting to changes
  • If sites are too close to eachother may be a danger of cannibalism- taking sales away from other locations
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International location decisions

International location decisions are made to reduce costs, access global markets, and avoid protectionist trade barriers.

Off-shoring: the relocation of a business process done in one country to the same or another company in another country

Multinational: a business with operations or production bases in more than on country

Reasons for international location decisions:

  • Cost reductionlow wage rate, low wage rate economies
  • Access to global markets rapid economic growth is less developed countries has created huge market potential for most consumer products, access to these is often achieved by direct operation in the countries concerned. 
  •  Avoidance of protectionist trade barriers trading blocks between EU and other continents can become a problem; to avoid trade barriers businesses may set up operations within the country

Trade barriers: taxes/other limitations on the international movement of goods

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Problems with international locations:

  • Language/communication barriers distance can be a problem for effective communication, face to face contact is less likely and this becomes worse when languages differ between areas of communication
  • Cultural differences important for the marketing department as they need to cooperate with the culture to get the products to them appropriately 
  • Level of service concerns off-shoring can lead to inferior customer service due to time difference problems, phone call delays language barriers
  • Supply chain concerns may be loss of control over quantity and reliability of delivery 
  • Ethical considerations  loss of jobs when companies relocate or move overseas and so redundancies need to be handled, also low wage labour in other countries needs to be controlled so that labour is not taken advantage of
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