Operational Strategies: Location

Operational Strategies: Location


The benefits of an optimal location

·         Strategic in nature- as they are long term and have an impact on the whole firm.

·         Difficult to reverse if an error of judgement is made- due to the costs of relocation.

·         Taken at the highest management levels- they are not delegated to subordinates.

Optimal location: a business location that gives the best combination of quantitative and qualitative factors.

Best site should maximise the long term profits of the business.

Optimal site nearly always is a compromise between conflicting benefits and drawbacks, so an optimal location is likely to be one that balances:

·         High fixed costs of site and building with convenience for customers and potential sales revenue

·         The low costs of a remote site with supply of suitably qualified labour

·         Quantitive factors with qualitative ones

·         The opportunities of receiving government grants in areas of high unemployment with the risks of low sales as average incomes in the area may be low. 

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Potential drawbacks of poor, non optimal location


Impact on business

High fixed site costs

·         High breakeven level of production

·         Low profits- or even losses

·         If operating at low capacity utilisation, unit fixed costs will be 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 for income elastic products

Poor transport infrastructure

·         Raises transport costs for both materials and finished products

·         Relatively inaccessible to customers

·         Difficult to operate a just in time stock management system due to unreliable deliveries.

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Methods of making location decisions. Quantitative

Depend on accurate estimation of quantitative factors.

·         Site and other capital costs, such as building or shop fitting.

·         Labour costs: depends on whether the business is labour or capital intensive.

·         Transport costs

·         Sales revenue potential

·         Government grants.

Once these factors have been identified and costs and revenues estimated, the following techniques can be used to assist the location decision: profit estimates, investment appraisal and break even analysis. 

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Profit Estimates & Investment Appriasal

By comparing the estimated revenues and costs of each location you can identify the site with the highest annual potential profit.

Annual profit forecasts alone are of limited use. They need to be compared with the capital cost of buying and developing the site.

Locations decisions often involve a substantial capital investment

Investment appraisal methods, such as 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.

Payback method can be used to estimate the location most likely to return the original investment quickest. –particularly beneficial to a business with capital shortage or in times of economic uncertainty.

Methods require estimates of costs and revenues for several years- degree of inaccuracy and uncertainty.  

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Break even analysis

Straightforward method of comparing two or more possible locations.

Calculates which sites will break even at the lowest level of production and the estimated profits to be earned at the expected output level.

Important for firms that face high levels of fixed costs and which may benefit from a location with lower overheads

 Breakeven analysis should be used with caution and the normal limitations of this technique apply when using it to help make locations decisions.  

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Qualitative factors

·         Safety: to avoid potential risk to the public and damage to the company’s reputation

·         Room for further expansion

·         Mangers’ preferences

·         Ethical considerations

·         IT infrastructure

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Advantages and Disadvantages of Multi site Locatio

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

Advantages of multisite locations

Disadvantages of multisite locations

·         Greater convenience for consumers

·         Lower transport costs

·         Production based companies reduce the risk of supply disruption if there are technical or industrial relations problems in one factory

·         Opportunities for delegation of authority to regional managers from head office- helps to develop staff skills and improves motivation

·         Cost advantages of multisite in different countries

·         Coordination problems between the locations

·         Potential lack of control and direction from senior management based at head office

·         Different cultural standards and legal systems in different countries

·         If sites are too close to each other there may be a danger of ‘cannibalism’ where one restaurant or store takes sales from another owned buy the same business.

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Reasons for international location decisions. Cost

Major reason for most company moves abroad.

With labour rates in the developing world less than those in Western Europe and the USA.

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Access to global (world) markets

Access to global markets

Rapid economic growth in less developed countries has created huge market potential for most consumer products.

Access to these markets is best achieved by direct operation in these countries

Markets for some products in home markets may have reached saturation point and further sales growth can only be achieved by expanding abroad.

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Avoidance of protectionist trade barriers and othe

Avoidance of protectionist trade barriers

Barriers to free international trade are being rapidly reduced but some still exist

To avoid these it may be necessary to set up operations within the country or trading bloc concerned

Other reasons

Substantial government financial support to relocating businesses, good educational standards and highly qualified staff and avoidance of problems resulting from exchange rate fluctuations.

It makes pricing decisions very difficult with products that are not made within the country, but are important, when its currency fluctuates considerably. One way around this problem is to locate production in the country.

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Issues and potential problems with international l

  • ·         Language and other communication barriers
  • ·         Cultural differences
  • ·         Level of service concerns
  • ·         Supply chain concerns
  • ·         Ethical consideration
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