LOCATION STRATEGIES

Location Strategies

The objective of location strategy is to maximize the benefit of location to the firm

Location and Costs

• Location decisions based on low cost require careful consideration
• Once in place, location-related costs are fixed in place and difficult to reduce
• Determining optimal facility location is a good investment 

Location and Innovation

• Cost is not always the most important aspect of a strategic decision
• Four key attributes when strategy is based on innovation
• High-quality and specialized inputs
• An environment that encourages investment and local rivalry
• A sophisticated local market
• Local presence of related and supporting industries

Location Decisions

• Long-term decisions 
• Decisions made infrequently
• Decision greatly affects both fixed and variable costs 
• Once committed to a location, many resource and cost issues are difficult to change 

Key Success Factors

Country Decision

• Political risks, government rules, attitudes, incentives 
• Cultural and economic issues 
• Location of markets 
• Labor talent, attitudes, productivity, costs 
• Availability of supplies, communications, energy 
• Exchange rates and currency risks 

Region/ Community Decision

• Corporate desires 
• Attractiveness of region 
• Labor availability and costs 
• Costs and availability of utilities 
• Environmental regulations 
• Government incentives and fiscal policies 
• Proximity to raw materials and customers 
• Land/construction costs 

Site Decision

• Site size and cost 
• Air, rail, highway, and waterway systems 
• Zoning restrictions 
• Proximity of services/ supplies needed 
• Environmental impact issues 

Factors That Affect Location Decisions

 1. Labor productivity

• Wage rates are not the only cost
• Lower productivity may increase total cost 

2. Exchange rates and currency risks

• Can have a significant impact on costs
• Rates change over time

3. Costs

• Tangible - easily measured costs such as utilities, labor, materials, taxes 
• Intangible - less easy to quantify and include education, public transportation, community, quality-of-life

4. Political risk, values, and culture

• National, state, local governments attitudes toward private and intellectual property, zoning, pollution, employment stability may be in flux
• Worker attitudes towards turnover, unions, absenteeism
• Globally cultures have different attitudes towards punctuality, legal, and ethical issues

5. Proximity to markets

• Very important to services
• JIT systems or high transportation costs may make it important to manufacturers 

6. Proximity to suppliers

• Perishable goods, high transportation costs, bulky products 

7. Proximity to competitors

• Called clustering
• Often driven by resources such as natural, information, capital, talent
• Found in both manufacturing and service industries 

A. Factor-Rating Method

• Popular because a wide variety of factors can be included in the analysis
• Six steps in the method :

1. Develop a list of relevant factors called key success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for each location
6. Recommend the location with the highest point score

B. Location Break-Even Analysis

•  Method of cost-volume analysis used for industrial locations
• Three steps in the method :

1. Determine fixed and variable costs for each location
2. Plot the cost for each location 
3. Select location with lowest total cost for expected production volume 

C. Center-of-Gravity Method

• Finds location of distribution center that minimizes distribution costs
• Considers :  Location of markets
         Volume of goods shipped to those markets
         Shipping cost (or distance) 

• Place existing locations on a coordinate grid
• Calculate X and Y coordinates for ‘center of gravity’

D. Transportation Model

• Finds amount to be shipped from several points of supply to several points of demand
• Solution will minimize total production and shipping costs
• A special class of linear programming problems

Service Location Strategy

1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management

The Call Center Industry

• Requires neither face-to-face contact nor movement of materials
• Has very broad location options
• Traditional variables are no longer relevant
• Cost and availability of labor may drive location decisions

Geographic Information Systems (GIS)

• Important tool to help in location analysis
• Enables more complex demographic analysis
• Available data bases include
• Detailed census data
• Detailed maps
• Utilities
• Geographic features
• Locations of major services