Critically discuss the factors that influence location decisions.

Explain three steps to locational costvolume analysis (20 marks).

Introduction
Context: Globalized business operations

Subject: Decisions
Limited Subject:
a) Location
b) Factors
Issue: What important factors influence the locational decisions of a company?

Thesis: To maximize locational benefits, a company location decisions involve careful

consideration of 7 important factors which are, labor productivity, foreign exchange, culture, changing
attitudes toward the industry, proximity to markets, suppliers, and competitors.

Main Idea 1. Labor Productivity

Main Idea 2. Foreign exchange
Main Idea 3. Culture and Changing Attitudes
Main Idea 4. Proximity to markets, suppliers, and competitors
Main Idea 3. Cost-volume analysis
Conclusion
Restatement of Thesis:
Implication:
Recommendation:
Final Thought:

In an era of expanding world markets and globalized operations, companies have to be strategic
in their operations to survive the highly competitive business environment. One of the crucial decisions
a company must make for its operations, is where to locate their facilities. Careful consideration must be
taken in deciding location as this can greatly impact company costs and ultimately the overall
profitability of a company. These decisions usually have to be made when its current facilities or plant
cannot meet demand, a change in levels of production due to labor available, increasing costs, or a
change in local attitude toward company operations. Upon deciding locations, a company could have
the options to expand current facilities, maintain current facilities but outsource additional operations,
or completely relocate to a new location. However, in deciding upon which option with maximum
benefits to employ, there are several important factors to be considered and certain analysis to be
made. This essay will examine these important factors which are, labor productivity, foreign exchange,
culture, changing attitudes toward the industry, proximity to markets, suppliers, and competitors and
will further elaborate with practical locational analysis using the cost-volume method.
A measure of the profiency of labor, labor productivity is a factor a company looks at when
deciding on a location for its operations. A low wage rate may be attractive but it cannot be considered
alone. Instead, managers usually look at the combination of labor and wages (Rodrik, 1999). The
combination is expressed in terms of labor cost per unit or labor content of the product (Heizer &
Render, 2011). The labor cost is computed by dividing the wages for a day by the number of units
produced on that day and the dollar figure that the expression amounts to is the labor content of each
unit product cost. An efficient workforce would be one that for a reasonable wage rate workers with the
required level of skill, training and work habits competently produce a reasonable number of units. A
given location may offer lower costs in wages but on the other hand offers employees with insufficient
levels of skill, poor training and work habits that result if less-efficient productivity. Hence, as final cost is
the vital factor, low productivity can invalidate low wage costs therefore labor productivity is an
important factor when considering the lucrativeness of a given location.
In addition to this, foreign exchange rates are also an influencing factor in deciding site locations.
While wage rates and labor productivity may appear favorable in a given country, undesirable exchange
rates may cancel out any savings that may have been accumulated (Heizer & Render, 2011). These
undesirable rates may also have an impact on costs such as the import of materials or the export of
supplies. On the other hand, favorable rates in a given country could be highly advantageous for a
company. However in the long term, with constant rise and fall of currencies, exchange rates alone may
not be a reliable deciding factor in considering facility location site.
Another important influencing factor in location decisions is the collective elements of local
government, values and culture. Local government is a vital influencing factor when deciding on location
as government policies set guidelines for business operations (Rohlin, 2009). However, government
attitudes toward pollution, zoning, private and intellectual property, and employment may continually
change over time due to those in leadership (Heizer & Render, 2011). Worker values and attitudes are
also vital as these may determine whether to company will keep current workers when relocating. Tied
in with worker values is the third element of culture. A major challenge for companies with global
operations, variations in culture make a significant difference in levels of production and delivery
programs (2011).
Lastly, three additional factors that are also important considerations in deciding location of
facility are, proximity to markets, suppliers, and competitors. Proximity to market or customers is

extremely important for businesses as proximity will mean more traffic consequently more revenue for
service firms and less costs incurred by company logistics for manufacturing firms (Heizer & Render,
2011). Closeness also ensures prompt supply to customers for firms using just-in-time production.
Proximity to suppliers on the other hand are important due to perishability of materials, transportation
costs, and bulk (2011). Companies that import perishable materials such as that of food and other fragile
items need to be close to suppliers to avoid spoilage and damage. Transportation costs are also reduced
when facilities are located in close proximity to suppliers. Subsequently, goods that are transported in
bulk also mean discounted cost of goods thus a saving for the firms. Finally, proximity to competitors is
surprising also beneficial for location as this means closeness to a major resources found within the
region (2011). This closeness with competitors of similar or related activities is called clustering, a term
introduced by Michael Porter. According to Porter, the interaction is mutually advantageous and selfreinforcing (Porter, 1990). An example of the benefits of clustering would be that while firm A
intermingles with firm B of similar activities and in proximity for styles and production techniques, firm B
benefits from knowing the upcoming trends of the season. However, this mutually advantageous
relationship will only work if firms are close to each other. All in all, proximity to market, suppliers and
competitors are crucial influencing factors when deciding plant or facility location.
Once all these major factors have been taken into considerations and several favorable locations
have been sighted, a company must analyze these alternative locations. This is done through the breakeven or cost-volume analysis. This analysis takes into account the fixed and variable costs involved in
each location then considers locations with the lowest cost (Heizer & Render, 2011). This method
provides the advantage of showing the most preferable location according to the volume of costs
involved in a given range. This approach involves three steps which are briefly described in the points
below.

1. Determine the fixed and variable cost for each location.

This first step involves ascertaining the costs incurred in each location, this includes both fixed
and variable costs. Examples of fixed cost are rent and administrative expenses. Variable cost
examples are inventory purchases and product manufacture. The difference between the two
costs are that fixed costs do not change with sales volume while variable costs on the other
hand change directly in relation with the volume of sales (The U.S. Small Business
Administration).
2. Plot the costs for each location. Once, costs are ascertained, these are then plotted on a
map. This is to help graph the location with the least cost involved.
3. Selecting location with lowest total cost for expected production volume. After costs
are plotted, the firm will then select location based on the lowest figures of the given ranges
showing the most profitable location.
In summation, consideration of important influencing factors and the conducting of analysis is
vital when making decisions on facility locations in a company. While it may be time-consuming, these
careful considerations will require companies to supply adequate resources and skill into researching for
new locations. locational decisions may be made if external and professional advisors with fresh and
new perspectives be brought into the company for maximization of location benefits. As stated by
former boss of the world-renown and successful high-end Marks & Spencer, the three most important
things . Are location, location, and location.

Critically discuss some of the techniques used by service organizations to select locations (20
marks).
The focus of service-sectors is that to maximize revenue. Unlike manufacturing firms in which
location mainly affect costs, in the service sector a location is significant in that it has more impact on its
revenue than its costs (Heizer & Render, 2011). As services are intangible therefore non-tradable and
are simultaneously produced and consumed (Business Dictionary.com, 2014), it is imperative that
service firm locations are strategic and in proximity of its market. In order to select the most strategic
locations, there are several location analysis techniques that can be employed, of which three will be
discussed in this essay. The three location analysis techniques that will be discussed are factor-rating
method, geographical information systems, and center of gravity method.
One of the location techniques used by service organizations when deciding between alternative
locations, the factor-rating method objectively identifies hard to gauge costs through six steps. The first
step of this method is to develop a list of significant factors called key success factors. These key
success factors are what give an organization an edge over their competitors for example the availability
of skilled labor and proximity to market. Once these factors have been listed, each factor is then
assigned a weight in accordance to its importance to the company. Following this, the third step is to
develop a scale for each factor. After the scale for each factor has been established, each location is
then given a score for each factor using the scale. Afterwards, for each location, these scores are then
multiplied by the weight for their corresponding factors and then totaled. Lastly, recommendations for
the best location are then made based on the location with the maximum point score in addition to
considering results of other quantitative measures (Heizer & Render, 2011).
Another location technique that is also employed by service firms is geographic information
systems. A geographic information system (GIS) is sort of a demographical data bank of a given location.
Utilizing a GIS in selection location is an important as it analyzes the complex demographics of a given
location.