Download - Factory Location as a Cost- Minimising Exercise By Peder Martin Floe Fejerskov and Katherine Reid
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Factory Location as a Cost-Minimising Exercise
By Peder Martin Floe Fejerskov and Katherine Reid
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Agenda
i. Key Conceptsii. Historical theories iii. Transportationiv. Labourv. Access to marketsvi. Short and long-term planningvii. Differences between small and large firmsviii. Conclusionix. Thoughts for discussion
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Key Concepts
• Neo-Classical Economic Theory
• Homo Economicus
• Cost-Minimising Theory
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Historically
• Weber: Transportation as the most general princible of location
• Waterways• Railways• Highways• Example:
– Ruhr area along the Rhine
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Example: European waterways
Source: http://www.sustainablelogistics.org/Inland_Shipping
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Transportation
• Transportation costs lower today– Offshoring to minimize production costs
• Important factors of location: – Production inputs:
• Labour• Capital• Raw matreials
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• Factor in determining optimal location:• In increqasingly competitive global economy
companies locate in low wage regions– Guangdong, China
weight of localized raw materials Weight of final productsMI:
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Labour
• Access to low-wage labour
• Firms must make compromises between transportation costs and labour costs (Weber) ‘Weberian’ Triangle
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Access to Markets
• Demand will decrease with distance from factory
• In a market with two sellers, both will locate in the middle (Hotelling)
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Predicting the future
• Difficult to predict future conditions for manufacturing locations
• Assumptions for the investment might change– Changes in economic and political environment– Technological innovation and rival behaviour= Decision process of manufacturing location
difficult
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Differences between SPFsand MPFs
• Responces to change• Short term:
– SPFs have limited options, increase labour or overtime– MNCs can shift oders from one company to another
• Medium term:– SPFs limited options– MNCs possibly expansion
• Long term:– Geographical expansion and new site locations
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Conclusion
• Main cost-minimising concerns: Transportation costs, input costs (labour) and access to markets
• Firms must always compromise to achieve the right balance between different costs
• Planning for the future is always difficult
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Things to take away
• A firm can make a profit without necessarily being in the ultimate cost-minimising position
• No two firms will ever have the exact same cost-minimising position
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Discussion
• Earlier, transportation costs played a key role in cost-minimizing, today transport is of less importance
• Global warming and transportation costs
• What might the consequences be if there will be a price on CO2 emissions in the future?