Location Strategy

Topics: Costs, Variable cost, Cost Pages: 8 (1878 words) Published: September 14, 2012


Location has a major impact on the overall risk and profit of the company. Companies make location decisions relatively infrequently, usually because demand has outgrown the current plant’s capacity or because of changes in labor productivity, exchange rates, costs, or local attitudes. Companies may also relocate their manufacturing or service facilities because of shifts in demographics and customer demands.

Location options include:
1. Expanding an existing facility instead of moving.
2. Maintaining current sites while adding another facility elsewhere, or 3. Closing the existing facility and moving to another location.

The location decision often depends on the type of business. For industrial location decisions, the strategy is usually minimizing costs, although innovation and creativity may also be critical. 1. Location and costs. Because location is such a significant cost driver, location often has the power to make (or break) a company’s strategy. Location decisions based on a low-cost strategy require careful consideration. 2. Location and innovation. When creativity, innovation, and research and development investments are critical to the operations strategy the location criteria may change from a focus on costs. When innovation is the focus, four attributes seem to affect overall competitiveness as well as innovation: a. The presence of high-quality and specialized inputs such as scientific and technical talent. b. An environment that encourages investment and intense local rivalry. c. Pressure and insight gained from a sophisticated local market. d. Local presence of related and supporting industries.


1. One approach to selecting a country is to identify what the parent organization believes are critical success factors (CSFs) needed to achieve competitive advantage (globalization). a. Site decision

1) Site size and cost
2) Air, rail, highway, waterways systems
3) Zoning restrictions
4) Proximity of services/supplies needed
5) Environmental impact issues

b. Region/community decision
1) Corporate desires
2) Attractiveness of region (culture, taxes, climate, etc.) 3) Labor availability, costs, attitudes toward unions 4) Cost and availability of utilities

5) Government incentives and fiscal policies 6) Proximity to raw materials and customers 7) Environmental regulations of state and town 8) Land/construction costs

c. Country decision
1) Political risks, government rules, attitudes, incentives 2) Cultural and economic issues
3) Location of markets
4) Labor talent, attitudes, productivity, costs 5) Availability of supplies, communications, energy 6) Exchange rates and currency risks

2. Besides globalization, a number of other factors affect the location decision. a. Labor productivity. Labor cost/Productivity. ($ cost/unit). Labor cost per unit is sometimes called the labor content of the product.) b. Exchange rates and currency risk Unfavorable exchange rates may negate any savings. c. Costs

1) Tangible costs are those costs that are readily identifiable and precisely measured. They include utilities, labor, material, taxes, depreciation, and other costs that the accounting department and management can identify. In addition, such costs as transportation of raw materials, transportation...
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