Facility location

1
Facility location
2

• There are three important things in retailing-
• location,
• location
• and location
• Lord Sieff, the boss of Marks Spencer, the UK-
  based retail organization

3
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?

4
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

5
What is facility location?

• Facility location is the process of determining a
  geographic site for a firms operations, or it is
  the process of identifying the best geographic
  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 be minimum 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.

6

• 2- The need for location decision

7
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.

8
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.

9

• 3- Strategic importance of location decisions

10
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 where labor 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).

11
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.

12

• 4- Location options

13
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.

14
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.

15

• 5- Factors affecting location decisions

16
Factors affecting location decisions

• Regional factors
• Community considerations
• Site-related factors

17
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 for three 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.

18
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.

19
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.

20
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.

21
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 costs are 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 industries
  makes this possibility even more likely than in
  the past.

22
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 jobs
  if they move to a new location.
• However, in many instances, employees are
  reluctant to move, especially when it means
  leaving families and friends.

23
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

24
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)

25
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.

26
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

27
Non-economic Factors Affecting the Location
Decision
Labor attitudes and traditions Training and
employment services Communitys
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
28

• 6- Services and retail locations

29
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 a prime
  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 be cost-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

30
Services and retail locations

• Retail and service organizations typically place
  traffic volume and convenience high 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.

31

• 7- Global locations

32
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,

33
Global locations-Facilitating factors

• 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

34
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

35
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.

36
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.
• .

37
Global locations- Disadvantages-

• (4)- Import restrictions-
• Some countries place restrictions on 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 child
  labor, and operating in countries that have less
  stringent environmental requirements

38
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.

39

• 7- Dynamics of location

40
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.