facility location. “ there are three important things in retailing- location, location, location...

Facility locationFacility location

“ “ There are three important things in There are three important things in retailing-retailing-

location, location,

location location

and location”and location”

Lord Sieff, the boss of Marks & Spencer, the UK- based retail organizationLord Sieff, the boss of Marks & Spencer, the UK- based retail organization

Question – final examQuestion – final exam

Chosen location is a long-term strategic decision. In debate

about the nature of this decision, Ali 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?

ContentsContents

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?What is facility location?

Facility location is the process of Facility location is the process of determining a determining a geographic sitegeographic site for a firm’s operations, or it is the process for a firm’s operations, or it is the process of identifying the of identifying the bestbest geographic locationgeographic location for a service for a service or production facility. or production facility.

The ideal location is the site at which the The ideal location is the site at which the cost of gathering cost of gathering materials and fabricating them plus the cost of distributing materials and fabricating them plus the cost of distributing the finished product to the customers will bethe finished product to the customers will be minimum per minimum per unitunit. .

Locational decision has to be taken in case of a new Locational decision has to be taken in case of a new business as well as for setting up a branch of an business as well as for setting up a branch of an existing businessexisting business

Every company is faced with the problem of deciding the Every company is faced with the problem of deciding the best site for location of its plant or factorybest site for location of its plant or factory

Businessman should try to make an attempt for optimum Businessman should try to make an attempt for optimum or ideal location.or ideal location.

2- The need for location 2- The need for location decisiondecision

The need for location The need for location decisiondecision

Existing organizations may need to make location decisions Existing organizations may need to make location decisions for for variety of reasons: variety of reasons:

firms such as banks, fast-food chains, supermarkets and retail stores firms such as banks, fast-food chains, supermarkets and retail stores

view locations view locations as apart of marketing strategyas apart of marketing strategy, , and they look for locations that will help them to and they look for locations that will help them to expand their expand their marketsmarkets. .

Basically, the location decisions in those cases reflect the Basically, the location decisions in those cases reflect the addition of addition of new locationsnew locations to an existing system. to an existing system.

A similar situation occurs when an organization experiences a A similar situation occurs when an organization experiences a growth in demandgrowth in demand for its products or services that cannot be for its products or services that cannot be satisfied by expansion at an existing locationsatisfied by expansion at an existing location. .

The addition of a The addition of a new locationnew location to complement an existing to complement an existing system is often a realistic alternativesystem is often a realistic alternative..

The need for location The need for location decisiondecision

Some firms face location decisions through Some firms face location decisions through depletion depletion of basic inputs.of basic inputs. Fore example Fore example fishing and loggingfishing and logging operations are often forced to operations are often forced to relocaterelocate due to the due to the temporary exhaustiontemporary exhaustion of fish or forests at a given location. of fish or forests at a given location. Mining and petroleum operations face the same sort of Mining and petroleum operations face the same sort of situation, although usually with a longer time horizon. situation, although usually with a longer time horizon.

For other firms, a For other firms, a shift in marketsshift in markets causes them to causes them to consider relocation, or the consider relocation, or the cost of doing businesscost of doing business at a particular location reach a point where other at a particular location reach a point where other locations begin to look more attractivelocations begin to look more attractive..

3- Strategic importance of location 3- Strategic importance of location decisionsdecisions

2-Strategic importance of location 2-Strategic importance of location decisionsdecisions

Location decisions for many types of businesses are are made infrequentlymade infrequently, but they tend to have a but they tend to have a significant impact on the organization...significant impact on the organization...

Location decisions are closely tied to an Location decisions are closely tied to an organization's strategies.organization's strategies.

For example, a strategy of being a low-cost producera strategy of being a low-cost producer might result in locating wherelocating where labor or material costs are lowlabor or material costs are low, or locating near near markets or raw materials to reduce transportation costs. markets or raw materials to reduce transportation costs.

A strategy of increasing profits by increasing market shareincreasing profits by increasing market share might result in locating in high-traffic areaslocating in high-traffic areas,

and a strategy that emphasizes convenienceconvenience for the customer might result in having many locationsmany locations where customers can transact their business or make purchases (e.g., branch banks, ATMs, fast-food outlets).

2- Strategic importance of location 2- Strategic importance of location decisionsdecisions

Location decisions are also strategically important for other reasons as well.

OneOne is that they entail a long-term commitmentlong-term commitment, which makes mistakes difficult to overcomemakes mistakes difficult to overcome.

AnotherAnother is that location decisions often have an impact on investment requirements, operating costs and revenues, and investment requirements, operating costs and revenues, and

operations. operations. A poor choice of locationA 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 locationa 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 advantagesignificant impact on competitive advantage.

4- Location options4- Location options

Location optionsLocation options Managers of existing companies generally consider Managers of existing companies generally consider four optionsfour options in location planning. in location planning.

(1)- Expand an existing facility:- (1)- Expand an existing facility:- This option can be attractive if there is This option can be attractive if there is adequate room for expansionadequate room for expansion, ,

especially if the location has desirable features that are not readily available especially if the location has desirable features that are not readily available elsewhere. Expansion elsewhere. Expansion costs are often lesscosts are often less than those of other than those of other alternatives.alternatives.

(2)- New locations:-(2)- New locations:- To add new locations while To add new locations while retaining existing onesretaining existing ones, as is done in , as is done in

many retail operations. many retail operations. In such cases, it is essential to 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 Opening a new store in a shopping mall may simply draw draw

customerscustomers who already patronize an existing store in the same who already patronize an existing store in the same chain, rather than expand the market. chain, rather than expand the market.

On the other hand, adding locations can be a On the other hand, adding locations can be a defensive strategydefensive strategy designed to designed to maintain a market sharemaintain a market share or to or to prevent prevent competitorscompetitors from entering a market. from entering a market.

Location optionsLocation options (3)- Shut down location:-(3)- Shut down location:- - A third option is to shut down at one location and move to another. - 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 An organization must weight the cost of a move and the

resulting benefits against the costs and benefits of resulting benefits against the costs and benefits of remaining in an existing location. remaining in an existing location.

-A shift in markets, exhaustion of raw materials, and the cost of -A shift in markets, exhaustion of raw materials, and the cost of operations often cause firms to consider this option seriously. operations often cause firms to consider this option seriously.

(4)- Do nothing:-(4)- Do nothing:- Finally, organizations have the option of doing nothing.Finally, organizations have the option of doing nothing. If a detailed analysis of potential locations fails to uncover benefits If a detailed analysis of potential locations fails to uncover benefits

that make one of the previous three alternatives attractive, a firm that make one of the previous three alternatives attractive, a firm may decide to maintain the status quo, at least for the time beingmay decide to maintain the status quo, at least for the time being . .

5- Factors affecting location 5- Factors affecting location decisionsdecisions

Factors affecting location Factors affecting location decisions:decisions:

Regional factorsRegional factors Community considerationsCommunity considerations Site-related factorsSite-related factors

Regional factorsRegional factors

The primary regional factors involve raw materials, markets, and labor considerations. The primary regional factors involve raw materials, markets, and labor considerations.

(1)- Location of raw Materials:-(1)- Location of raw Materials:- Firms locate near or at the source of raw materials forFirms locate near or at the source of raw materials for three primary three primary

reasonsreasons:: necessity, perishability, and transportation costs. necessity, perishability, and transportation costs. Mining operations, farming forestry, and fishing fall under necessity.Mining operations, farming forestry, and fishing fall under necessity. Obviously, such operations Obviously, such operations must locate close to the raw materials.must locate close to the raw materials. Firms involved in canning or freezing of fresh fruit and vegetables, Firms involved in canning or freezing of fresh fruit and vegetables,

processing of dairy products, baking, and so on, must consider processing of dairy products, baking, and so on, must consider perishabilitperishabilityy when considering location when considering location. .

Transportation costsTransportation costs are important in industries where processing are important in industries where processing eliminates much of the bulk connected with a raw material, making it eliminates much of the bulk connected with a raw material, making it much less expensive to transport the product or material after much less expensive to transport the product or material after processingprocessing. Examples include aluminum reduction, cheese making, and . Examples include aluminum reduction, cheese making, and paper production.paper production.


(2)-Locations of markets:(2)-Locations of markets: Profit-oriented firmsProfit-oriented firms frequently locate near the near the

marketsmarkets they intend to serve as a part of their competitive strategy,

whereas nonprofit organizationsnonprofit organizations choose locations relative to the needs of the users of their servicesneeds 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 Retail sales and services are usually found near the center of the markets they serve.near the center of the markets they serve. Examples include fast-food restaurants, dry cleaners, and supermarkets.


Locations of markets (cont)Locations of markets (cont) Competitive pressures for retail operations can be Competitive pressures for retail operations can be

extremely vital factorsextremely vital factors. . In some cases In some cases a marketa market served by a particular location served by a particular location may be too may be too

small to justify two or more competitorssmall to justify two or more competitors , so that a search for , so that a search for potential locations tends to concentrate potential locations tends to concentrate on locations without on locations without competitorscompetitors. .

Some firms must locate close to their markets because of the Some firms must locate close to their markets because of the perishability of their productsperishability of their products. Examples include bakeries, flower . Examples include bakeries, flower shops, and fresh seafood stores .shops, and fresh seafood stores .

Other firms require Other firms require close customer contactclose customer contact, so they too tend to locate , so they too tend to locate within the within the area they expect to servearea they expect to serve. Typical examples are tailor . Typical examples are tailor shops, cabinetmakers, rug cleaners, and lawn and garden services.shops, cabinetmakers, rug cleaners, and lawn and garden services.


Locations of markets (cont)Locations of markets (cont) Locations of many Locations of many government services are near government services are near

the markets they are designed to servethe markets they are designed to serve . . Hence, post offices are typically scattered Hence, post offices are typically scattered

throughout large metropolitan areas. throughout large metropolitan areas. Police and emergency health care locations are Police and emergency health care locations are

frequently selected on the frequently selected on the basis of client needsbasis of client needs. . For instance, police patrols often concentrate on For instance, police patrols often concentrate on high crime areashigh crime areas, and emergency health care , and emergency health care facilities are usually found in facilities are usually found in central locationscentral locations to to provide ready access from all directions.provide ready access from all directions.


Labor factors:Labor factors: Primary labor considerations are the Primary labor considerations are the cost and availability cost and availability

of labor, wage rates in an area, labor productivity of labor, wage rates in an area, labor productivity and attitudes toward work, and whether unionsand attitudes toward work, and whether unions are are serious potential problem.serious potential problem.

Labor costsLabor costs are very important for labor-intensive are very important for labor-intensive organizationsorganizations. .

Skills of potential employeesSkills of potential employees may be a factor, although some may be a factor, although some

companies prefer to companies prefer to train employees rathertrain employees rather than rely than rely

solely on previous experience. solely on previous experience. Increasing specialization Increasing specialization in many industriesin many industries makes this possibility even more makes this possibility even more likely than in the pastlikely than in the past. .


Labor factors (cont):- :-Labor factors (cont):- :- Workers attitudes toward turnover, absenteeism, Workers attitudes toward turnover, absenteeism,

and similar factors may differ among potential and similar factors may differ among potential locations-.locations-.

Worker attitudes in different parts of or in different Worker attitudes in different parts of or in different countries may be markedly different. countries may be markedly different.

Some companies Some companies offer their current offer their current employees jobsemployees jobs if they move to a new if they move to a new locationlocation. .

However, in many instances, employees are However, in many instances, employees are reluctant to move, especially when it means leaving reluctant to move, especially when it means leaving families and friends. families and friends.

Community Community considerationsconsiderations

From a company standpoint, a number of factors From a company standpoint, a number of factors determine the desirability of a community as a determine the desirability of a community as a place forplace for its workers and managers to its workers and managers to live.live. They include facilities They include facilities for for education, shopping, recreation, education, shopping, recreation, transportation, religious worship, and transportation, religious worship, and entertainment; the quality of police, fire, and entertainment; the quality of police, fire, and medical services; local attitudes toward the medical services; local attitudes toward the company; and the size of community. company; and the size of community.

Other community-related factors are the cost Other community-related factors are the cost and availability of utilities, environmental and availability of utilities, environmental regulations, taxesregulations, taxes

Site-related factorsSite-related factors

The primary considerations related to sites are land, transportation, are land, transportation, Because of the long-term commitment usually required, Because of the long-term commitment usually required,

land costs may be secondary to land costs may be secondary to other site-related factorsother site-related factors, , such as room for future expansion, such as room for future expansion, current utility and sewer capacities-

any limitations on these that could hinder future growth-any limitations on these that could hinder future growth-and and sufficient parking spaces for employees and customers. for employees and customers.

In addition, for many firms access In addition, for many firms access roads for trucks or rail spurs are important.

Power and Water: (electricity generating, clean water, water Power and Water: (electricity generating, clean water, water disposal, fuel availability are important factors)disposal, fuel availability are important factors)

Factors -allFactors -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 expansionfuture expansion (e) Maintenance/-Service and repair facilities (f) Cost-control---Accounting and credit facilities (g) Presence of related industries.

Factors -allFactors -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 DecisionNon-economic Factors Affecting the Location Decision

Labor attitudes and traditionsLabor attitudes and traditionsTraining and employment servicesTraining and employment servicesCommunity’s attitudeCommunity’s attitudeSchoolsSchoolsCultural attractionsCultural attractionsAmount and type of housing available.Amount and type of housing available.ClimateClimateCommunity activitiesCommunity activitiesEducation and health servicesEducation and health servicesRecreationRecreationUnion activitiesUnion activitiesEnvironmental RegulationEnvironmental RegulationPolitical RiskPolitical RiskGovernment BarriersGovernment BarriersTrading BlocsTrading BlocsHost CommunityHost Community

6- Services and retail locations6- Services and retail locations

Services and retail Services and retail locationslocations

Service and retail are typically governed by somewhat different governed by somewhat different considerations than manufacturing organizations in making considerations than manufacturing organizations in making location decision.location decision.

For one thing, nearness to raw not a factor, nor is concern about processing requirements. Customer access is sometimes Customer access is sometimes aa prime considerationprime consideration, as it is with banks and supermarkets, but not a consideration in others,but not a consideration in others, such as call centers, catalog sales, and online services.

Manufacturers tend to beManufacturers tend to be cost-focusedcost-focused, concerned with labor, energy, and material costs and availability, as well as distribution costs.

Service and retail businesses tend to be profit or Service and retail businesses tend to be profit or revenue focusedrevenue focused, concerned with demographics such as age, income, and education, population/drawing area, competition, traffic volume/patterns, and customer access/parking

Services and retail Services and retail locationslocations

Retail and service organizations typically place traffic volume and convenience high on the list of important factorshigh on the list of important factors.

Specific types of retail or service businesses may pay more attention to attention to certain factors due to the nature of their business or their customers.certain factors due to the nature of their business or their customers.

If a business is unique, and has its own drawing power,unique, and has its own drawing power, nearness to competitors may not be a factornearness to competitors may not be a factor.

however, generally retail businesses prefer locations that are retail businesses prefer locations that are near other retailersnear other retailers (although not necessarily competitors) because of the higher traffic volumes and convenience to customers

Thus, automobile dealerships often tend to locate Thus, automobile dealerships often tend to locate near each other, and restaurants often locate in and near each other, and restaurants often locate in and around malls, benefiting from the high traffic.around malls, benefiting from the high traffic.

7- Global locations7- Global locations

Global locationsGlobal 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 forreasons for globalization, the benefits, disadvantages, risksbenefits, disadvantages, risks,

Global locations-Global locations-FacilitatingFacilitating factorsfactors

There are a number of factors that have made globalization made globalization attractiveattractive and feasible for business organizations. Two key Two key factorsfactors are trade agreements and technological advances.

Trade Agreements: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 barriersdropped many trade barriers, and the World Trade Organization is helping to facilitate free trade.

Technology:-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-Global locations-BenefitsBenefits 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:-1- Markets:- Companies often seek opportunities for expanding opportunities for expanding

marketsmarkets for their goods and services, as well as better serving existing customers by being more attuned to local needs and having local needs and having a quicker response time when problems occur. a quicker response time when problems occur.

2- Cost saving:-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-Global locations-BenefitsBenefits

3- Legal and regulation3- Legal and regulation: There may be more favorable liability and labor laws,

and less restrictive environmentalenvironmental and other regulations .

4- financial:-4- financial:- Companies can avoid the impact of currency avoid the impact of currency

changes that can occur when goods are produced changes that can occur when goods are produced in one country and sold in other countries.in one country and sold in other countries.

Also, a variety of incentivesincentives may by offered to attract businesses that will create jobs and boost the local economy.

Global locations- Global locations- Disadvantages:-Disadvantages:-

There are numbers or disadvantages of having global operations. These can include the fowling:-

(1)- Transportation costs:-(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:- 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:-(3)- Unskilled labor:- Low labor skills may negatively impact quality and

productivity, Additional employee training may be required. .

Global locations- Global locations- Disadvantages:-Disadvantages:- (4)- Import restrictions:-4)- Import restrictions:- Some countries place restrictions on the

importation on manufacturing goods, importation on manufacturing goods, so having local suppliers avoids those so having local suppliers avoids those issues.issues.

(5)- Criticisms;-(5)- Criticisms;- Critics may argue that cost savings are being cost savings are being

generated through generated through unfair practices as using unfair practices as using sweatshopssweatshops, in which employees are , in which employees are paid low wages and made to and made to work in poor conditions, , using child labor, and operating in countries that have and operating in countries that have less stringent environmental requirementsless stringent environmental requirements

Global locations- Global locations- Risk:-Risk:- (1)- Political:-1)- Political:- Political instability and political unrest can create risks for risks for

personnel safety and the safety of assetspersonnel safety and the safety of assets, Moreover a government might decide to nationalizenationalize

facilities, taking them over. (2)- Terrorism:-(2)- Terrorism:- Terrorism continues to be a threat in many parts of the

world, putting personnel and assets at riskpersonnel and assets at risk and decreasing the willingness of domestic decreasing the willingness of domestic personnel to travel to or work in certain personnel to travel to or work in certain areas. areas.

(3)- Economic:-(3)- Economic:- Economic instability might create inflation or deflation,

either of which can negatively impact profitabilitynegatively impact profitability.

7- Dynamics of location7- Dynamics of location

Dynamics of locationDynamics 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:(a) Secular changes: such as shifts in population, expansion of plant, exhaustion of local raw

materials, etc. (b) Structural changes:(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:(c) Cyclical changes: such as changes in the distribution of income and wealth (d) Seasonal changes:(d) Seasonal changes: such as heavy rains ,snowfall, etc. in particular periods in a region.

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