Location Analysis

Chapter 4
4.1: Location Analysis
LOCATION: Introduction
LOCATION: Introduction
The most important decisions made by management
Such decision are long term and need large capital investment
What happen if u made a wrongly decision???
Are the profitability will be affected????
The selection of a location depends upon the type of firm being

considered.
Port???
Factory???
Office???
Warehouse?
Objectives
The objective is to obtain the maximum operating efficiency

and effectiveness by minimizing operating cost
To achieve the maximum revenues.
The demand for the companys product or revenues is highly

dependent on the location of the firm.
Definition
Facility location is a place where a factory,

warehouse, office or any other business firm is
built.
Factory ???
Warehouse???
Port???
Office???
Farm???
Estate???
Kinokuniya
Kinokuniya
April
RM
2001 at Suria KLCC
24 million in 2003-2004
Double
digit growth
Monthly
150,000 customers
Monthly
100,000 books, magazines sale
Kinokuniya
Kinokuniya
We believe that this location in Suria
KLCC is the best location in Malaysia
to have our store.
- Hiroyoshi Hageyama, Managing director
One of the most important strategic decisions

made by companies is where to locate their
facilities.
The location of a businesss facility has a

significant impact on the companys operating
costs, the prices it charges for goods and
services, and its ability to compete in the market
place.
Matsushita
Matsushita
More and more electronic producers are
moving production to China. Its a trend.
The much lower labor costs in China make

prices of Japan-made products not
competitive at all.
-LanFeiyan,ananalystatChinaSouthernSecuritiesCo
inShenszhen
Importance of Location
Decisions
Long-term commitment
It decisions involve considerably large amounts of capital.
Once decision is made and implemented, it cannot be

changed without substantial cost.
The cost is large and difficult to be reduced.
Example; cost of construct the facility, purchase of

equipment, plant and machineries, fixture and fittings,
and also decoration cost.
Impact
on Operating Cost
It
often impact on operating costs (FC

and VC) and revenues
Fixed
cost (FC)
Cost
of constructing
Purchasing
Renting
of building
Renovating
Example:
Tower
new facility
existing facility
KLIA, Petronas Twin Tower, KL
Impact
on Operating Cost
Variable
Cost
cost
of labour, materials
If
located near the source of materials, it can save

on the transportation cost.
If
located further away from the source of

materials, it will increase the transportation cost.
Impact
on Operating Cost
Revenues
It
depend on having the facility near the

potential customers.
Example:
movies theaters, restaurants,

laundry shops, shopping malls and
recreational parks.
Manufacturing
firm, time delivery can be

an important determinant of revenues.
Efficiency
and effectiveness
The
efficiency and effectiveness of business

operation is dependent upon location
Example:
Manufacturing firms, increase in profits

can only be obtained by maximising revenues and
minimising operating costs i.e. production and
distribution costs.
Service
organisations, location can affect the

demand for services and the effectiveness of the
entire operation.
Reasons for Facility Location

Decisions
Starting
a Business
Suitable
for a new company that has no existing

factory or service facility.
Need
to find a proper location to build, rent, buy

or construct a new plant or facility
Reasons for Facility Location

Decisions
Introduction
of New product or
Service
When
the existing facility does not

have the technology to make a new
product, the firm may need to locate
a new place to build new facility.
Insufficient
Capacity
The
current capacity is insufficient to

accommodate an increase in demand
for a new or old product.
Example:
Does
Subang Airport cater the increasing in

demand????
How
about KLIA???
Second
PETRONAS refining facility in Sungai

Udang Melaka, is to cover the limited
refining capacity of the existing oil refinery
in Kerteh, Terengganu. (the increase in
projects domestic and international)
Changes
in technology
Organisations may need to set up new plants due to
new process requirements, environmental guidelines

and requirements as well changes in customer
demand.
Mergers
Mergers
of co. may result in redundant facilities, i.e.

some of which must be phased out.
Example:
economy crisis, many smaller bank and

financial institution merged to increase financial
stability and strength.
Changes
in Input Resources
Cost of raw materials, labor, other
supporting resources (subcontract) may

change to fulfill the need for plant or
facility relocation.
Shifts
in Geographical Demand
Product
market changes, the facility to

provide timely delivery also changes.
Better
accessibility need to increase in

revenue.
Factor that Influence Facility Location
Labor productivity
Focus on areas low wage rates
Consider on productivity
Example: labor cost per day
= labor cost per unit
production (units per day)

a). South Carolina plant = $70 / 60 units produced per day = $1.17 per unit
b). Juarez, Mexico plant = $ 25 / 20 units produced per day =$1.25 per unit
Employees with poor training, poor education, or poor work habits may not be a
good even at low wages.
Proximity to market
Locating
near customers is extremely important
Service
organisation: restaurants, post offices, barbers

(proximity to market is the primary location factor)
Manufacturing firms: useful to be close to customers
when transporting finished is expensive or difficult (perhaps
because they are bulky, heavy, fragile)
Just-intime
production: suppliers want to be locate near
users
Example:
Coca-Cola, whose products primary ingredient is

water, it makes sense to have bottling plants in many cities
rather than shipping heavy containers cross country

Proximity
to vendors and suppliers
Firm
locates near raw materials and suppliers

because
Perishability
Transportation
costs
Bulk
Companies
dependent on inputs of heavy or bulky

raw materials face expensive inbound transportation
costs, therefore transportation cost become a major
factor.
As a result need facilities near the raw material

Proximity
to competitors
The
location of competing companies near each

other , often because of a critical mass of
information, talent, venture capital, or natural
resources.
Often
occurs when a major resource is found in that
region
Resources includes natural resources, information
resources, venture capital resources and talent
resources.

Political
Risk, Values and Culture
Political risk is associated with national, state and local

governments attitudes toward private and intellectual
property, zoning, pollution, and employment stability.
This
attitudes can be influenced by their own leadership

Workers values may also differ from country to country, region to
region and small town to city
Workers view regarding turnover, unions and absenteeism.
This values can affect a companys decision whether to make offers to

current workers if the firm relocates to a new location
Cultural variations in punctuality by employees and suppliers make

a marked difference in production and delivery schedules.
Bribery and other forms of corruption also create substantial economic

inefficiency, as well ethical and legal problems in the global arena.

Exchange
rate and currency risk
Political risk is associated with national, state and local

governments attitudes toward private and intellectual
property, zoning, pollution, and employment stability.
This
attitudes can be influenced by their own leadership

Workers values may also differ from country to country, region to
region and small town to city
Workers view regarding turnover, unions and absenteeism.
This values can affect a companys decision whether to make offers to

current workers if the firm relocates to a new location
Cultural variations in punctuality by employees and suppliers make

a marked difference in production and delivery schedules.
Bribery and other forms of corruption also create substantial economic

inefficiency, as well ethical and legal problems in the global arena.
Cont.
Government
regulations and policies

Community facilities
Availability of labor
Community attitudes towards new facility
locations
Government inducements
Management preference
Size and cost of each site
Availability of utilities
Zoning restrictions and legal regulations
OPTION
Expand
Add
existing facilities
new facilities
Move
MAKING LOCATION DECISIONS

Decide
on criteria
Identify the important factors
Develop location alternatives
Evaluate the alternatives
Make selection
Example:
Manufacturing/distribution
Transportation
Service
based?
cost, labor cost, building etc
or retail?
Demographics,
population, competition, customer

access/facilities

Location Analysis

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Chapter 4

4.1: Location Analysis

The most important decisions made by management

What happen if u made a wrongly decision???

Are the profitability will be affected????

The selection of a location depends upon the type of firm being

The objective is to obtain the maximum operating efficiency

To achieve the maximum revenues.

The demand for the companys product or revenues is highly

Facility location is a place where a factory,

2001 at Suria KLCC

100,000 books, magazines sale

One of the most important strategic decisions

The location of a businesss facility has a

moving production to China. Its a trend.

The much lower labor costs in China make

It decisions involve considerably large amounts of capital.

Once decision is made and implemented, it cannot be

The cost is large and difficult to be reduced.

Example; cost of construct the facility, purchase of

often impact on operating costs (FC

KLIA, Petronas Twin Tower, KL

located near the source of materials, it can save

located further away from the source of

depend on having the facility near the

movies theaters, restaurants,

firm, time delivery can be

efficiency and effectiveness of business

Manufacturing firms, increase in profits

organisations, location can affect the

Reasons for Facility Location

for a new company that has no existing

to find a proper location to build, rent, buy

Reasons for Facility Location

the existing facility does not

current capacity is insufficient to

Subang Airport cater the increasing in

PETRONAS refining facility in Sungai

Organisations may need to set up new plants due to

new process requirements, environmental guidelines

of co. may result in redundant facilities, i.e.

economy crisis, many smaller bank and

Cost of raw materials, labor, other

supporting resources (subcontract) may

market changes, the facility to

accessibility need to increase in

Factor that Influence Facility Location

Focus on areas low wage rates

Example: labor cost per day

= labor cost per unit

production (units per day)

Factor that Influence Facility Location

near customers is extremely important

organisation: restaurants, post offices, barbers

production: suppliers want to be locate near

Coca-Cola, whose products primary ingredient is

Factor that Influence Facility Location

to vendors and suppliers

locates near raw materials and suppliers

dependent on inputs of heavy or bulky

Factor that Influence Facility Location

location of competing companies near each

occurs when a major resource is found in that

Factor that Influence Facility Location