Business and Management

Module 5: Operations Management

Unit 5.5: Location of Production

Content

Location of production• National• International

Learning OutcomeExplain the causes and consequences of location and

relocation, and consider the effect of globalization.

Reading Focus

Hall, Jones and Raffo, Business Studies, 3rd Edition, Unit 88.

Stimpson, AS and A Level Business Studies, Chapter 20, pages320 – 325.

Barratt and Mottershead, AS and A Level Business Studies

ContextAnyone involved in the surveying/property business will tell you that

the three most important factors affecting the success of a business are location!, location! and location! Consider the issue facing Shell the oil company , when deciding where to locate its oil refineries. It must consider a multiplicity of factors, e.g., how easily the crude oil can be transported to the refinery, which obviously depends on where the oil has been found; then it must consider the availability of suitably qualified labour within a particular area, along with the cost of building the plant and hiring the labour. It must also consider the location of its customers, in that the petrol retailers will need to gain access to fuel at short notice. Shell might even consider that the government provide finance for the refinery, but with the condition that it locates in a particular area of high unemployment.

ContextShell will arrive at the decision only by balancing the various benefits

and cost of available sites and evaluating each factor in terms of its importance within the overall decision. For example, access to the North sea oilfields may well be more important that being close to its retailers, because the cost of transporting from the oilfields to the refinery may be much cheaper per mile traveled than the cost of moving the petrol in road tankers to the petrol stations.

Alternatively, if the government is providing grants for creating jobs, but the unemployed do not possess the technical skills, and the training cost out weigh the government grant, this will also affect the decision.

Location Decisions

The decision about where to locate is crucial to many businesses. It can affect their sales, costs, profitability and perhaps even their survival. Why might a company need to make a decision about where to locate?

New businesses will need to carefully consider where to locate their initial premises.

Existing businesses may need to expand, but may be unable to do so on their present sites.

The modernisation of a business may involve moving to more up to date premises.

A business aiming to cut its costs might achieve this by relocating.

Multi-national companies aiming to set up a new plant in another country for the first time may evaluate a variety of possible locations worldwide.

Location Decisions

Location decisions will have an impact on all aspects of the profit equation:

Fixed costs of different sites, such as purchase or rent of land can vary greatly.

Variable costs, such as labour wage rates, and transport costs of raw materials, will depend greatly on location.

Revenue earned by the business, especially if in a service industry, will be influenced by location proximity to market.

Quantitative Factors influencing the location decision

Site costs: These are the most important fixed costs of location. They include purchase or rent of land and property as well as conversion of fitting out costs.

Regional incentives: Certain regions of most countries are able to offer financial and other incentives to businesses which decides to locate there.

Transport costs: These are particularly significant for manufacturing businesses as they need to transport both raw materials and components as well as finished products.

Labour costs: The quality and productivity of staff should be important considerations in this area.

Revenue generation: Certain location gives businesses the opportunity to both increase sales volume – due to market proximity – and to add value to sales on account of t the prestige of the area such as, a lawyer’s office in a city centre location.

Qualitative Factors influencing the location decision

Infrastructure: The quality of the local infrastructure, especially transport and communication links, will influence choice of location.

Environmental and Planning Considerations: A business might be reluctant to set up in an area that is particularly sensitive from an environment view point as this could lead to poor public relations and actions from pressure groups.

Management Preferences: Senior managers often influence a location decision if there is an opinion to set up in an area with substantial ‘quality of life’ benefits.

Clustering: The benefits of the businesses in the same industry locating in the same region are well recognised but are difficult to quantify. For example, the computer industry in the USA is heavily clustered around ‘Silicon Valley’ in California. These benefits include proximity to existing and potential customers and suppliers and the availability of well-qualified staff.

Other issues

The state and public opinion often have a very strong influence over some industries, particularly power stations and sensitive defense industries, but location has another strategic importance for governments. It needs to ensure the stable economic development of the nation and that requires it to divert businesses away from some areas and attract them to others.

It is difficult to have good policy in this respect, simply because the areas that are not the most attractive usually costly to locate in and even short-term gains from government grants and tax relief will rarely overcome this problem.

Many firms want the same facilities and the same labour skills, and they can gain from specialist training provision and useful general facilities. This lead them to localise-locate in the same areas. Often is has been development over time that has led to this clustering and new industries often gravitate naturally towards the same areas.

What factors influence location of production? - Summary

LOCATION

DECISION

Source of power and raw materials

Markets

Transport Links

Land

Labour

Government Influence

Industrial Inertia

Mini Cases

Cases: Questions 2&3

Source: Barratt and Mottershead, AS and A Level Business Studies, Unit 24, pages278-279

Cases: Questions 3&4

Source: Jones, Hall, Raffo, Business Studies, Unit 88,pages 645-646

International Location- Globalisation offers additional opportunities

Location decisions for many businesses are no longer merely national decisions. Most large business organisations now have the option of establishing sites in more than one country- and even relocating existing sites into other nations. The reduction in barriers to the movement of capital which is such a feature as globalisation means that international options are now a real possibility for many firms.

What factors should managers consider when deciding to locate overseas

Exchange rate risks

Trade barriers

Ethical considerations

Political, legal and language considerations

QUESTION FOR YOUR CONSIDERATION Why do business organisations relocate to areas in which

they were once established?What consequences can arise from a firm’s decision to

relocate?

MAXI Case Study

Case: Motorola plans Scottish software plant

Source: Stimpson. AS and A Level Business Studies, Chapter 20, page 323

QUESTIONS – Module 5

1. a) Differentiate between production levels and levels of productivity.(5marks)

b) Examine three ways in which a manufacturer of hand made wooden toys might increase productivity. (10)

c) Outline the factors that this business should take into account before deciding whether to relocate. It is currently operating from a small town centre site with high rental costs. All workers currently live nearby(10 marks)

2. a) Assess the view that high labour productivity guarantees business success. (10 marks).

b) Discuss the factors that a manufacturing firm should consider when deciding on the most appropriate method of production. (15 marks)

MAXI CASE STUDY

Case: Business location in Cumbria

Source: Jones, Hall, Raffo. Business Studies, 3rd Edition, Unit 88, page 648

END OF UNIT