PRODUCT PROTOTYPE

Reporters:
Barcelona, John Louise E.
Cosio, John Joseph D.V.

INTRODUCTION
Location decision by a firm relates to adopting a systematic approach towards making
a decision regarding its geographic location. Making such a decision is important for
every organization in every sector. Such a decision has a long term impact on the
profitability of an organization. Location decision entails investing a large sum of money
which makes a huge part of operating cost. For instance, in the retail sector where either a
company buys or rents a retail space, more than 40 percent of its operating cost is
attributed as location cost.

Location decisions are dictated by different factors depending on whether the

organization is into manufacturing or service. Most firms that are providing services to
customers have to be located close to customers. Whereas, firms which are into the
manufacturing end of the supply chain need not to be close to customers but their
location decisions are governed by factors such as close to raw material, availability of
cheap labor etc. Thus, there are a number of factors which affect an organizations’
location decision.

Another important aspect to be considered is establishment and enormous growth of

the web-based retail industry. Services provided by players such as Shopee, Lazada,
Amazon and other numerous players can be accessed from anywhere and at any time of
the day. So, provision of services by these companies is much less dependent on location
decisions.
● Banks encourage customers to access numerous services through their web sites
● Clothes can be bought online and other needs can also be fulfilled by buying
online.
 But this is predominantly true for service oriented companies. Manufacturing
companies still have to produce so location decision is an important strategic decision for
them.

THE NEED FOR LOCATION DECISIONS: A CASE STUDY OF RETAIL

SECTOR
Location decisions are considered as strategic decisions as they have long term
impact on profitability of an organization. Most of the location decisions are irreversible.
Once a company decides to locate its plant or retail outlet after incurring huge cost it
becomes very difficult for it to change or renew the location of that outlet.

The importance of such a decision has been explained by taking illustration from the
retail sector. This sector has shown huge growth in recent times. The organized retail in
the form of shopping malls has indicated their presence in almost every major city of the
country. The demand side characteristics such as moderately high economic growth, ever
expanding middle and upper class consumer base has fuelled a greater penetration of
modern retail in the economy. These shopping malls house a variety of stores. Shopping
experience of stores such as apparel, jewelry, grocery, book, electronic, movie theaters
etc. are provided under one roof in such malls. Thus, such shopping malls have become
increasingly attractive for retailers.

These shopping malls compete with traditional city markets for location decisions.
These traditional markets have several advantages such as proximity, familiarity and high
personal service. But changing dynamics of the marketplace are persuading local retailers
to move into malls and adapt to compete with bigger domestic and international retailers.
Similarly to tap into the traditional customer base and in pursuit of providing a
better alternative to street shopping, mall retailers are venturing into these high streets.
These dynamics provide numerous location alternatives for a retailer while making an
important location decision. So, the question is “where to locate?
NATURE OF LOCATION DECISIONS

Location decisions are strategic in nature and have direct relation with the long term
objective of the company. For instance, if a company operates in a low cost provider
business environment then it would:
1. Make a location decision which does not have a huge impact on its cost structure.
2. Would be close to customers to reduce its transportation cost, would hire locally to
have low labor costs
3. Would supply from local suppliers and would tend to adopt a mass production
system to achieve its objective of low cost producer.
Barber shops, banks and local sweet shops fall in this category.

A strategy of increasing profits by providing high quality products would ask for
locating in a geographic area which would provide highly skilled labor, high quality raw
material would be produced in batches taking into the needs of different customers even
if it increases cost structure. Car manufacturing, IT service providers fall in this category.
Thus, different location decisions would be governed by long term objectives and
strategy of an organization to beat its competition.
There may be a number of acceptable locations. In many instances, no single location
might be better than other locations. Location is dictated by acceptable location factors
such as proximity to customers, availability of raw materials etc. Availability of all these
factors might not be possible for a particular location. A location might score highly on
some factors and lacks on others. Thus, it becomes highly important that an organization
decides systematically which factors are important and which can be ignored. A
systematic study of these factors would facilitate selection of ‘one best location.’
 Importance of factors on which location decision would be based varies from sector to
sector. Proximity to customers might be important for a barber shop but not for a
shopping mall which are mostly located outside the city on a large scale.

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.

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.
1. Trade Agreements. Barriers to international trade such as tariffs and quotas
have been reduced or eliminated with trade agreements.
2. Technology. Technological advances in communication and information sharing
have been very helpful.

BENEFITS

1. Markets. Companies often seek opportunities for expanding markets for their
goods and services.
2. Cost savings. Among the areas for potential cost saving are transportation costs,
labor costs, raw material costs, and taxes.
3. Legal and regulatory. 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.
5. Other. Globalization may provide new sources of ideas for products and services,
new perspectives on operations, and solutions to problems.

DISADVANTAGES

1. Transportation Costs. High 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 materials costs.
2. Security Costs. 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, and the work ethic may differ from that in the home country.
Additional employee training may be required.
4. Import Restrictions. Some countries place restrictions on the importation of
manufactured goods, so having local suppliers avoids those issues.
 5. Criticisms. Critics may argue that cost savings are being generated through unfair
practices such as when employees are paid low wages and made to work in poor
conditions.
6. Productivity. Low labor productivity may offset low labor costs or other
advantages.

RISKS

1. Political. Political instability and political unrest can create risks for personnel
safety and the safety of assets.
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. Economics. Economic instability might create inflation or deflation, either of
which can negatively impact profitability.
4. Legal. Laws and regulations may change, reducing or eliminating what may have
been key benefits.
5. Ethical. Corruption and bribery, common in some countries, may be illegal in a
company’s home country. This poses a number of issues.
6. Cultural. Cultural differences may be more real than apparent.
7. Quality. Lax quality controls can lead to recalls and liability issues.

GENERAL PROCEDURE FOR MAKING LOCATION DECISIONS

The general procedure for making location decisions usually consists of the following
steps:

1. Decide on the criteria to use for evaluating location alternatives, such as increased
revenues, decreased cost, or community service.
2. Identify important factors, such as location of markets or raw materials. The
factors will differ depending on the type of facility.
3. Develop location alternatives:
○ Identify a country or countries for location.
○ Identify the general region for a location.
○ Identify a small number of community alternatives.
○ Identify site alternatives among the community alternatives.
4. Evaluate the alternatives and make a selection.

IDENTIFYING A COUNTRY, REGION, COMMUNITY OR SITE

● COUNTRY
 Each country carries its own set of potential benefits and risks, and decision
makers need to be absolutely clear on what those benefits and risks are as well as
their likelihood of occurrence so that they can make an informed judgment on
whether locating in that country is desirable.
International Factors:
- Talent
- Labor costs
- Energy costs
- Others (e.g. to avoid or delay paying taxes and pay lower tariffs)

● REGION
Regional Factors:
- Location of Raw materials (necessity, perishability, and transportation
costs)
- Location of Market (near the customers in terms of competition and
perishability, or for the needs of their beneficiaries in NPO)
- Labor considerations (Availability and cost of labor, wage rates,
productivity, and attitudes of workers)

● COMMUNITY
Factors on identifying a Community:
- Job Opportunities
- Environmental Concerns: Pollution, Quality of Life
- Local Opposition: Environmental Impact, Noise, Traffic, Pollution
- Community Desirability: Education, Shopping, Recreation, Transportation,
Emergency Services

● SITE
Factors on identifying a Site:
- Land (e.g. soil condition, etc.)
- Transportation
- Zoning restrictions

SERVICE AND RETAIL LOCATIONS

 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.

Service and retail are typically governed by somewhat different considerations than
manufacturing organizations in making location decisions. For one thing, nearness to raw
materials is usually not a factor. Customer access is sometimes a prime consideration, but
not a consideration in others, such as call centers, catalog sales, and online services.

They are:
- Usually found near the center of the markets they serve
- They rely on convenience to attract customers
- Prefer locations that are near other retailers because of the higher traffic
volumes and convenience to customers (i.e. clustering)

EVALUATING LOCATION ALTERNATIVES

There are a number of techniques that are helpful in evaluating location alternatives:
locational cost-profit-volume analysis and factor rating.

● Locational CVP Analysis

Procedures:
1. Determine the fixed and variable costs associated with each location
alternative.
2. Plot the total-cost lines for all location alternatives on the same graph.
3. Determine which location will have the lowest total cost for the expected
level of output. Alternatively, determine which location will have the
highest profit.

This method assumes the following:

1. Fixed costs are constant for the range of probable output.
2. Variable costs are linear for the range of probable output.
3. The required level of output can be closely estimated.
4. Only one product is involved.

For a cost analysis, compute the total cost for each location:
Total cost = FC + v × Q
 Example:

● Factor Rating
Factor rating is a general approach that is useful for evaluating a given alternative and
comparing alternatives. The value of factor rating is that it provides a rational basis for
evaluation and facilitates comparison among alternatives by establishing a composite
value for each alternative that summarizes all related factors. Factor rating enables
decision makers to incorporate their personal opinions and quantitative information in the
decision process.
Procedures:
1. Determine which factors are relevant (e.g., location of market, water
supply, parking facilities, revenue potential).
 2. Assign a weight to each factor that indicates its relative importance
compared with all other factors.
3. Decide on a common scale for all factors (e.g., 1 to 100), and set a
minimum acceptable score if necessary.
4. Score each location alternative.
5. Multiply the factor weight by the score for each factor, and sum the results
for each location alternative.
6. Choose the alternative that has the highest composite score, unless it fails
to meet the minimum acceptable score.

References
Operations Management This page intentionally left blank Operations Management
Twelfth Edition William J. Stevenson
Singla, V. (2018). Operations Management. Publisher.