Chapter 11 location DECISIONS

 Identify the factors influencing location decisions..  Understand the impact of the Regional Trade Agreements on location decisions.. CHAPTER OUTLINE• Introduction • Critical Locatio

LOCATION DECISIONS

Chapter 11

LEARNING OBJECTIVES

You should be able to:

 Explain the impact of location decisions on a supply chain

 Identify the factors influencing location decisions

 Understand the impact of the Regional Trade

Agreements on location decisions

 Use several location evaluation models

 Understand the advantages of business clusters

 Understand the importance of sustainable

development

CHAPTER OUTLINE

• Introduction

• Critical Location Factors

• Helpful On-Line Information for Location

Analysis

Location decision can impact firm’s competitive advantage It is very costly to move or shut down the facility so Facility location must be part of the firm’s supply chain strategy

Companies can locate anywhere in the world due to increased globalization, technology, transportation, & open markets

Location still key matters for firm Many successful industry

clusters (Silicon valley, Wall Street,…) show that innovation & successful competition are geographically concentrated

Global location decisions involve location of the facility, defining its strategic role, & identifying the markets it serves

Location Strategies

Dr Kasra Ferdows suggests 6 location types

 Offshore factory – this kind of factory produce at low cost with:

 Minimum investment in technical/managerial resources

 Make use of low labor costs

 Buy local parts/components, export finished goods.( Ex Samsung in VN)

 Source factory –

 plant mgmt involved in supplier selection & production planning.

 This kind of factory is controlled by low production cost, fairly

developed infrastructure and availability of skilled workers

 Server factory –

 Based primary on government incentives & low exchange risk & tariff

Location Strategies

(cont.)

 Contributor factory –

 involved in product development, production

planning, critical procurement decisions, &

developing suppliers

 Outpost factory –

 Is set up at location of advanced suppliers,

competitors, research facilities where easy to get

access almost current information on materials,

components, products and technologies

 Lead factory –

 is a source of innovation & competitive advantage for firm

Critical Location Factors

where to position assets strategically to create

a long term competitive advantage.

 To solve above question partially, need to answer following questions:

 What will be the reaction of shareholder, clients, competitors, employees or market?

 Will the location provide a sustainable competitive advantage?

 What will impact on product, service quality or deliver

performance?

 Can hire right people?

 What will be the effect on Supply chain?

 What is the projected cost?

Critical Location Factors

(Cont.)

Regional Trade Agreements (RTA) & WTO

World Trade Organization (WTO) successor to the

General Agreement on Tariffs/Trade (GATT) Functions include:

 Administering agreements,

 Forum for trade negotiations,

 Trade disputes,

 Monitor trade policies,

 Aid for Developing countries

 International organizations.

Location Factors (Continued)

RTA & the WTO (Continued)

European Union (EU): [1950] Set up after the WWII, the

EU consists of 27 members

North American Free Trade Agreement (NAFTA): [1994]

among the U.S., Canada, & Mexico

Southern Common Market (MERCOSUR): [1991]

among Argentina, Brazil, Paraguay, & Uruguay

Association of Southeast Asian Nations (ASEAN):

Competitiveness of Nations

Degree to which a country produces goods &

services which meet the needs of international

markets, while maintaining or expanding personal

real income over time Made up of 323 criteria,

grouped into 4 factors –

1 Economic performance (79 criteria)

2 Government efficiency (72 criteria)

3 Business efficiency (71 criteria)

4 Infrastructure (101 criteria)

Location Factors (Continued)

Rank Global Competitiveness

2006-07 World Competitiveness Rankings

Location Factors (Continued)

 Goods market efficiency

 Labor market efficiency

 Financial market sophistication

 Technological readiness

Government Taxes & Incentives

 Several levels of government must be considered when evaluating potential locations

 Countries with high tariffs discourage importing

goods into the country

 High tariffs encourage multinational corporations to produce locally

 Many countries have foreign trade zones (FTZs)

where materials are imported duty-free as inputs to production

Location Factors (Continued)

 Coordination on environmental issues will mitigate

 Greenhouse gas production & Ozone depletion

 Production of Nitrogen & Sulfur Dioxide

 Deforestation

Location Factors (Continued)

Access & Proximity to Markets

 Relocation to China not just for cheap labor but for access

 Labor availability, productivity, & skill

 Unemployment & underemployment rates

 Wage rates; turnover rates; labor force competitors

 Right-to-work laws

Location Factors (Continued)

Access to Suppliers & Cost

 Supplier proximity influences the delivery of materials

& effectiveness of the supply chain

Utility Availability & Cost

 Supply of electricity has not kept pace with the high speed of development

 In heavy industries the availability & cost of energy are critical considerations

 Telecommunication costs have dropped dramatically Many organizations now have back office operations

Location Factors (Continued)

Land Availability & Costs

 As land & construction costs in big cities continue

to escalate, the trend is to locate in the suburbs & rural areas

Location Factors (Continued)

Facility Location Models

The Weighted-Factor Rating Model

Compares the attractiveness of several locations along a number of quantitative &

qualitative dimensions.

 Identify the factors

 Assign weights to each factor The weights sum

to 1

 Determine a score for each factor

 Multiply the factor score by the weight, then

sum the weighted scores

 The location with the highest total weighted

score is the recommended location

Facility Location Models

(Continued)

Facility Location Models

(cont.)

The Break – Even Model

This model is suitable where we can classify the fixed

and variable cost for each potential location.

• Identify the location to be considered

• Determine the fixed cost for each facility( land, property taxes, insurance, equipment, buildings)

• Determine the unit variable cost for each facility( labors, materials, utilities, transportation cost)

• Construct the total cost line for each location on a graph

• Determine the break-even point on graph

• Identify the range over which each location has the lowest cost

Facility Location Models

(cont.)

Facility Location Models

Helpful Online Information for Location Analysis

Web sites that provide useful information for use

in location analysis:

the International Economic Development council

& Conway Data, Inc

in site selection for a wide array of businesses

Business Clusters

companies & institutions

 Research parks & special economic/industrial

zones serve as magnets for business clusters.

 close cooperation, coordination, & trust among

clustered companies

 fierce competition among rival companies

 companies recruit from local skilled workers