A2 Operations Management

Regional and International location

Focus of subject:

This section will look at regional and international location of business

It will link with the accounting and finance module as break-even and investment appraisal accounting methods will be used to make location decisions in addition to qualitative factors

Location

When setting up, businesses will usually look to locate in the least-cost site, to allow lower prices to be charged for their goods

Other factors may come into the consideration such as the reputation of the company related to its location

Student activity

Think of as many factors as you can that may influence where a business decides to locate. Briefly discuss this with the person next to you.

Factors determining the location of businesses

1. Costs of factors of production Wage levels vary between regions, more expensive the nearer to

London Availability of skilled workers Land costs

2. Resources Location of raw materials, very important for primary industries, Location of suppliers (JIT), Special requirement e.g. airports need large areas of flat land

Factors determining the location of businesses (contd..)

3. Infrastructure network of utilities, such as transport links, sewerage,

telecommunication systems, health service and educational facilities Transport links - moving raw materials and finished goods, workers

getting to work

4. The market Where they sell their goods to the consumer. Customers demand convenience and easy access Transport costs lower if close to market

Factors determining the location of businesses (contd..)

5. Government intervention The UK government, in line with EU policy, provides assistance to

areas of low economic activity and high unemployment The Gov.. provides grants to firms to set up in these assisted areas e.g. Nissan locating in Sunderland

Additional reading: AQA textbook Pg.. 305 - 306, DTI web-site

6. Qualitative factors e.g. where the owners live, the quality of life in the area

Questions to consider

Why do you think Dixons closed many of its inner city stores and moved to out-of-town locations in April 2004?

Why may a company such as Rolls Royce decide to keep its engine production facilities in UK rather than moving overseas?

Why do Governments provide grants to businesses for locating in certain areas?

Why does the clothes retailer Zara continue to produce most of its clothes in Europe rather than in a country with low wage levels?

Why do fashion houses choose to locate in the cities of Paris, Milan and London when the land cost is expensive?

Industrial Inertia

The tendency for firms to remain where they are, even though the original reasons for location no longer apply

This can also influence location

Once established firms may be reluctant to relocate

One reason is that firms may benefit from external economies of scale

External economies of scale

Student task using the AQA textbook Pg.. 307 define external economies of scale and list the main types (5 minutes)

Student Activity (15 minutes)

In pairs complete Group exercise Pg. 312 AQA textbook

Task 1: Decide which square you feel is the least-cost site. Work out the cost per unit for both of the assisted areas as well as the ones you feel would be most suitable.

Task 2: Consider other factors that may be important?

This activity clearly demonstrates that transport costs can be very important in location decisions

A2 Operations Management

Location (Lesson 2)

Recap

Main factors when considering location

1. Costs of factors of production 2. Resources 3. Infrastructure 4. The market 5. Government Intervention 6. Qualitative factors

External economies of scale Recap

The benefits gained by a firm as a result of the concentration of an industry in one location

Main types:

Labour supply with right skills Specialist training Local suppliers and customers Infrastructure geared towards the needs of that industry Reputation of an area allows premium price to be charged

External diseconomies of scale

Firms should be aware of the disadvantages arising from a concentration of firms in one location. These are known as external diseconomies of scale.

Congestion Pollution Shortages of resources - land, skilled labour

Other factors preventing relocation include - poor morale, loss of skills developed in existing workforce, redundancy payments, damage to firms image

Factors influencing international location

All of the factors previously discussed will be considered when making world-wide location decisions. In addition to:

Political and economic stability Exchange rates Local legislation Local culture Demand for product/service Access to free trade areas

Factors influencing international location contd.

There are two more factors of particular importance

Achieving high economies of scale - moving abroad gives firms access to larger markets and often cheaper labour e.g. China

Avoiding protectionism -

Task: Read Page 309 of the AQA A2 textbook and produce notes on protectionism, include the definition of protectionism, types, why its used, the WTO and free trade areas

Location decisions using break-even analysis

Break-even analysis lets a firm see how many units it needs to produce and sell in order to avoid making a loss.

Market research allows a firm to estimate future sales figures when setting up in a new location

Student activity

A restaurant is seeking to set up in a new location. The financial forecasts for setting up and operating the new restaurant are as follows:

Fixed costs: £120,000 Average price: £18 per meal Variable cost per meal: £8

Task:

1. Calculate the restaurant’s contribution per meal and the necessary break-even output for the year, month and each day.

2. Is this realistic to achieve? How might the owners judge if this sales figure is achievable?

Answer

Contribution = Selling price - Variable cost per meal

Contribution = £18 - £8 = £10 per meal

Break-even = Fixed costs / Contribution

Break-even = £120,000 / £10 = 12,000 meals per annum 1,000 meals per month, 33 meals per day

Student activity

Flybe. are wondering whether to set up base in Newcastle or Teeside International Airport.

Using the forecasts given above calculate the break-even point and the margin of safety for each airport to discover which airport Flybe. should locate to.

Answer

Newcastle: BE = £48 million / £12,000 = 4,000 flights MOS = 4,400 - 4,000 = 400 flights

Teeside: BE = £47.3 million / £11,000 = 4,300 flights MOS = 3,800 flights - 4,300 flights = - 500 flights

Therefore Flybe.com should locate to Newcastle Airport. However qualitative factors should also be considered.

Location decisions using investment appraisal

Investment appraisal can be used to see if a location gives a quick payback, yields a high average rate of return, or gives a positive net present value

Investment appraisal will be a more useful approach to aid making decisions on location

Student Activity:

Argos is considering opening a new store in Liverpool Initial cost (year 0) - £800,000

Argos has targets of : Payback - 3 yearsAverage Rate of Return (ARR) - greater than 12% Net Present Value (NPV) - positive based on a 10% discount rate

Is Liverpool a good location based on investment appraisal?

Answer

Payback period = 2 years + (300/360 x 12 months) = 2 years 10 months

ARR =Net return/ Number of years x 100

Initial cost

Annual return = £840,000 / 5 years = £168,000 per annum

ARR = £168,000 / £800,000 x 100 = 21%

NPV =

Therefore when comparing with Argos’ targets the location is a good option using investment appraisal

NPV = £408,600

Student Activity

Complete Practice exercise 2 Page 317 AQA A2 Textbook

WELL DONE