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Facility location. “ There are three important things in retailing- location, location and location” Lord Sieff, the boss of Marks & Spencer, the UK- based retail organization. Question – final exam.
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“ There are three important things in retailing- location, location and location” Lord Sieff, the boss of Marks & Spencer, the UK- based retail organization
Question – final exam • Chosen location is a long-term strategic decision. In debate about the nature of this decision, Ali believed that this decision made infrequently (Once a locational decision is executed, it becomes virtually impossible to change it), and involves a heavy commitment of resources for a long-time. Sara think that location decision is dynamic in nature, this means that location problem may occur more than once. What is your point of view in this debate?
Contents 1- What is facility location? 2- The need for location decision 3- Importance of location decisions 4- Location options 5- Factors affecting location decisions 6- Services and retail locations 7- Global locations 8- Dynamics of location
What is facility location? • Facility location is the process of determining a geographic site for a firm’s operations, or it is the process of identifying the bestgeographic location for a service or production facility. • The ideal location is the site at which the cost of gathering materials and fabricating them plus the cost of distributing the finished product to the customers will beminimum per unit. • Locational decision has to be taken in case of a new business as well as for setting up a branch of an existing business • Every company is faced with the problem of deciding the best site for location of its plant or factory • Businessman should try to make an attempt for optimum or ideal location.
The need for location decision • Existing organizations may need to make location decisions for variety of reasons: • firms such as banks, fast-food chains, supermarkets and retail stores view locations as apart of marketing strategy, and they look for locations that will help them to expand their markets. • Basically, the location decisions in those cases reflect the addition of new locations to an existing system. • A similar situation occurs when an organization experiences a growth in demand for its products or services that cannot be satisfied by expansion at an existing location. • The addition of a new location to complement an existing system is often a realistic alternative.
The need for location decision • Some firms face location decisions through depletion of basic inputs. Fore example fishing and logging operations are often forced to relocate due to the temporary exhaustion of fish or forests at a given location. Mining and petroleum operations face the same sort of situation, although usually with a longer time horizon. • For other firms, a shift in markets causes them to consider relocation, or the cost of doing business at a particular location reach a point where other locations begin to look more attractive.
2-Strategic importance of location decisions • Location decisions for many types of businesses are made infrequently, but they tend to have a significant impact on the organization... • Location decisions are closely tied to an organization's strategies. • For example, a strategy of being a low-cost producer might result in locating wherelabor or material costs are low, or locating near markets or raw materials to reduce transportation costs. • A strategy of increasing profits by increasing market share might result in locating in high-traffic areas, • and a strategy that emphasizes convenience for the customer might result in having many locations where customers can transact their business or make purchases (e.g., branch banks, ATMs, fast-food outlets).
2- Strategic importance of location decisions • Location decisions are also strategically important for other reasons as well. • One is that they entail a long-term commitment, which makes mistakes difficult to overcome. • Another is that location decisions often have an impact on investment requirements, operating costs and revenues, and operations. • A poor choice of location might result in excessive transportation costs, a shortage of qualified labor, loss of competitive advantage, inadequate supplies of raw materials, or some similar condition that is detrimental to operations. • For services, a poor location could result in lack of customers and/or high operating costs. • For both manufacturing and services, location decisions can have a significant impact on competitive advantage.
Location options • Managers of existing companies generally consider four options in location planning. • (1)- Expand an existing facility:- • This option can be attractive if there is adequate room for expansion, especially if the location has desirable features that are not readily available elsewhere. Expansion costs are often less than those of other alternatives. • (2)- New locations:- • To add new locations while retaining existing ones, as is done in many retail operations. • In such cases, it is essential to take into account what the impact will be on the total system. • Opening a new store in a shopping mall may simply draw customers who already patronize an existing store in the same chain, rather than expand the market. • On the other hand, adding locations can be a defensive strategy designed to maintain a market share or to prevent competitors from entering a market.
Location options • (3)- Shut down location:- - A third option is to shut down at one location and move to another. - An organization must weight the cost of a move and the resulting benefits against the costs and benefits of remaining in an existing location. -A shift in markets, exhaustion of raw materials, and the cost of operations often cause firms to consider this option seriously. • (4)- Do nothing:- • Finally, organizations have the option of doing nothing. • If a detailed analysis of potential locations fails to uncover benefits that make one of the previous three alternatives attractive, a firm may decide to maintain the status quo, at least for the time being.
Factors affecting location decisions: • Regional factors • Community considerations • Site-related factors
Regional factors • The primary regional factors involve raw materials, markets, and labor considerations. (1)- Location of raw Materials:- • Firms locate near or at the source of raw materials forthree primary reasons: • necessity, perishability, and transportation costs. • Mining operations, farming forestry, and fishing fall under necessity. • Obviously, such operations must locate close to the raw materials. • Firms involved in canning or freezing of fresh fruit and vegetables, processing of dairy products, baking, and so on, must consider perishability when considering location. • Transportation costs are important in industries where processing eliminates much of the bulk connected with a raw material, making it much less expensive to transport the product or material after processing. Examples include aluminum reduction, cheese making, and paper production.
Regional factors • (2)-Locations of markets: • Profit-oriented firms frequently locate near the markets they intend to serve as a part of their competitive strategy, • whereas nonprofit organizations choose locations relative to the needs of the users of their services. Other factors include distribution costs or the perishability of a finished product. • Retail sales and services are usually found near the center of the markets they serve. Examples include fast-food restaurants, dry cleaners, and supermarkets.
Regional factors • Locations of markets (cont) • Competitive pressures for retail operations can be extremely vital factors. • In some cases a market served by a particular location may be too small to justify two or more competitors , so that a search for potential locations tends to concentrate on locations without competitors. • Some firms must locate close to their markets because of the perishability of their products. Examples include bakeries, flower shops, and fresh seafood stores . • Other firms require close customer contact, so they too tend to locate within the area they expect to serve. Typical examples are tailor shops, cabinetmakers, rug cleaners, and lawn and garden services.
Regional factors • Locations of markets (cont) • Locations of many government services are near the markets they are designed to serve. • Hence, post offices are typically scattered throughout large metropolitan areas. • Police and emergency health care locations are frequently selected on the basis of client needs. For instance, police patrols often concentrate on high crime areas, and emergency health care facilities are usually found in central locations to provide ready access from all directions.
Regional factors • Labor factors: • Primary labor considerations are the cost and availability of labor, wage rates in an area, labor productivity and attitudes toward work, and whether unions are serious potential problem. • Labor costsare very important for labor-intensive organizations. • Skills of potential employees may be a factor, although some companies prefer to train employees rather than rely solely on previous experience. Increasing specialization in many industriesmakes this possibility even more likely than in the past.
Regional factors • Labor factors (cont):- :- • Workers attitudes toward turnover, absenteeism, and similar factors may differ among potential locations-. • Worker attitudes in different parts of or in different countries may be markedly different. • Some companies offer their current employees jobsif they move to a new location. • However, in many instances, employees are reluctant to move, especially when it means leaving families and friends.
Community considerations • From a company standpoint, a number of factors determine the desirability of a community as a place for its workers and managers to live. They include facilities for education, shopping, recreation, transportation, religious worship, and entertainment; the quality of police, fire, and medical services; local attitudes toward the company; and the size of community. • Other community-related factors are the cost and availability of utilities, environmental regulations, taxes
Site-related factors • The primary considerations related to sites are land, transportation, • Because of the long-term commitment usually required, land costs may be secondary to other site-related factors, such as room for future expansion, current utility and sewer capacities- • any limitations on these that could hinder future growth-and sufficient parking spaces for employees and customers. • In addition, for many firms access roads for trucks or rail spurs are important. • Power and Water: (electricity generating, clean water, water disposal, fuel availability are important factors)
Factors -all I. Input Considerations (a) Materials-Quantity, quality, cost and regular supply (b) Land-Site availability and costs, costs of construction, constructional regulations (c) Equipment-Availability and costs (d) Plant utilities-gas, electricity, coal, water, etc.-Availability and rates (e) Labor-Availability, total supply, skills, wage rates, unionization (f) Capital-Equity and debt potential, banking facilities. 2. Processing Considerations: (a) Production analysis-Educational and research facilities (b) Process analysis-Engineering and consultancy (c) Forecasting and scheduling-Data sources and capabilities (d) Production control -Inventory storage and future expansion (e) Maintenance/-Service and repair facilities (f) Cost-control---Accounting and credit facilities (g) Presence of related industries.
Factors -all 3. Output Considerations: (a) Distribution-Distribution and storage facilities . (b) Transportation-Facilities and costs (c) Present and future market potential (d) Local rates and taxes. 4. Other Considerations (a) Community attitudes towards industry and company (b) Public or community services-educational, recreational, housing, medical, cultural, etc. (c) Stockholder interests (d) Organizational decentralization policies (e) Environmental standards-air, water, zoning and building codes (h) Political situation
Non-economic Factors Affecting the Location Decision • Labor attitudes and traditions • Training and employment services • Community’s attitude • Schools • Cultural attractions • Amount and type of housing available. • Climate • Community activities • Education and health services • Recreation • Union activities • Environmental Regulation • Political Risk • Government Barriers • Trading Blocs • Host Community
Services and retail locations • Service and retail are typically governed by somewhat different considerations than manufacturing organizations in making location decision. • For one thing, nearness to raw not a factor, nor is concern about processing requirements. Customer access is sometimes aprime consideration, as it is with banks and supermarkets, but not a consideration in others, such as call centers, catalog sales, and online services. • Manufacturers tend to becost-focused, concerned with labor, energy, and material costs and availability, as well as distribution costs. • Service and retail businesses tend to be profit or revenue focused, concerned with demographics such as age, income, and education, population/drawing area, competition, traffic volume/patterns, and customer access/parking
Services and retail locations • Retail and service organizations typically place traffic volume and conveniencehigh on the list of important factors. • Specific types of retail or service businesses may pay more attention to certain factors due to the nature of their business or their customers. • If a business is unique, and has its own drawing power,nearness to competitors may not be a factor. • however, generally retail businesses prefer locations that are near other retailers (although not necessarily competitors) because of the higher traffic volumes and convenience to customers • Thus, automobile dealerships often tend to locate near each other, and restaurants often locate in and around malls, benefiting from the high traffic.
Global locations • Globalization has opened new markets, and it has meant increasing dispersion of manufacturing and service operations around the world. • In addition, many companies are outsourcing operations to other companies in foreign locations. • In the past, companies tended to operate from a "home base" that was located in a single country. • Now, companies are finding strategic and tactical reasons to globalize their operations. • As they do, some companies are profiting from their efforts, while others are finding the going tough, and all must contented with issues involved in managing global operations. • In the following slides we examine some of the reasons for globalization, the benefits, disadvantages, risks,
Global locations-Facilitatingfactors • There are a number of factors that have made globalization attractive and feasible for business organizations. Two key factors are trade agreements and technological advances. • Trade Agreements: • Barriers to international trade such as tariffs and quotas have been reduced or eliminated with trade agreements such as the North American Free Trade Agreement (NAFTA), the General Agreement on Tariffs and Trade (GATT), • Also, the European Union has dropped many trade barriers, and the World Trade Organization is helping to facilitate free trade. • Technology:- • Technological advances in communication and information sharing have been very helpful. These include faxing capability, e-mail, cell phones, teleconferencing, and the Internet
Global locations-Benefits • Companies are discovering a wide range of benefits in globalizing their operations. • Here is a list of some of the benefits, although it is important to recognize that not all benefits apply to every situation: • 1- Markets:- • Companies often seek opportunities for expanding markets for their goods and services, as well as better serving existing customers by being more attuned to local needs and having a quicker response time when problems occur. • 2- Cost saving:- • Among the areas for potential cost saving are transportation costs, Labor costs, raw material costs, and taxes. • High production costs have contributed to a number of companies locating some of their production facilities in lower-cost countries
Global locations-Benefits • 3- Legal and regulation: • There may be more favorable liability and labor laws, and less restrictive environmental and other regulations . • 4- financial:- • Companies can avoid the impact of currency changes that can occur when goods are produced in one country and sold in other countries. • Also, a variety of incentives may by offered to attract businesses that will create jobs and boost the local economy.
Global locations- Disadvantages:- • There are numbers or disadvantages of having global operations. These can include the fowling:- • (1)- Transportation costs:- • Transportation costs can occur due to poor infrastructure or having to ship over great distances, and the resulting costs can offset savings in labor and material costs. • (2)- Security cost:- • Increased security risks and theft can increase costs. Also, security at international borders can slow shipments to other countries. • (3)- Unskilled labor:- • Low labor skills may negatively impact quality and productivity, Additional employee training may be required. • .
Global locations- Disadvantages:- • (4)- Import restrictions:- • Some countries place restrictionson the importation on manufacturing goods, so having local suppliers avoids those issues. • (5)- Criticisms;- • Critics may argue that cost savings are being generated through unfair practices as using sweatshops, in which employees are paid low wages and made to work in poor conditions, using childlabor, and operating in countries that have less stringent environmental requirements
Global locations- Risk:- • (1)- Political:- • Political instability and political unrest can create risks for personnel safety and the safety of assets, • Moreover a government might decide to nationalize facilities, taking them over. • (2)- Terrorism:- • Terrorism continues to be a threat in many parts of the world, putting personnel and assets at risk and decreasing the willingness of domestic personnel to travel to or work in certain areas. • (3)- Economic:- • Economic instability might create inflation or deflation, either of which can negatively impact profitability.
Dynamics of location • The significance of various factors influencing location changes with time due to natural events and human actions. • A place that is an ideal location may become unprofitable with changes in technology, transport and the development of other regions. The changes which require shifts in location have been classified into four categories: • (a) Secular changes: • such as shifts in population, expansion of plant, exhaustion of local raw materials, etc. • (b) Structural changes: • such as new techniques of production, new resources, development of electricity as a source of power, new means of transport, increase in prices of land, etc. • (c) Cyclical changes: • such as changes in the distribution of income and wealth • (d) Seasonal changes: • such as heavy rains ,snowfall, etc. in particular periods in a region.
