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
 Chosen location is a long-term strategic decision. In debate
Ali
about the nature of this decision, 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 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.
2- The need for location decision
 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.
3- Strategic importance of location decisions
 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,
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,
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.

4- Location options
 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 .
5- Factors affecting location decisions
 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 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.

 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 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.
 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.
 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
6- Services and retail locations
 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
 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.
7- Global locations
 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-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,
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 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
 Global locations- Risk:-
 (1)- Political:-
 Political instability and political unrest can create risks for
personnel safety and the safety of assets,
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.
profitability
7- Dynamics of location
 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.