Operations Management / Supply Chain Management

Module 07.01 Key Concepts: Factors Impacting Location Strategies

So, as mentioned above, Location decisions depend on both the scope of the decision and key parameters that are important to the business.  We will now look at some of these.

If leaders are looking towards location / relocation of an operation to another country, they may find it useful to evaluate general ratings for the countries being considered.  The text authors provide a few pertinent ones that are interesting to explore.

Labor Productivity is important because it is a key driver of cost / financial performance of a firm.  We looked at Productivity initially in Module 01.  We mentioned that there are many different ways to express productivity.  The following example shows the calculation of Labor Productivity based on the number of units produced. Think about some practical implications.  What drives Labor Productivity to higher values?  Salaries? Experience? Training?  Regulations? Processes? Automation?  Actually, all of these probably have an impact in some way.

The following detailed list is useful as a starting point for other factors that can be selected for rating various alternative.  Location decisions based on costs alone can create difficult ethical situations and may in fact not be based on “total cost.”  If the later is true then obvious mistakes can be made.

  • Exchange rates and currency risks can have a significant impact on costs.  Rates typically change over time.
  • Costs: Tangible – easily measured costs such as utilities, labor, materials, taxes
  • Costs: Intangible – less easy to quantify and include education, public transportation, community, quality-of-life
  • Political risk, values, and culture
  • National, state, local governments attitudes toward private and intellectual property, zoning, pollution, employment stability may be in flux
  • Worker attitudes towards turnover, unions, absenteeism
  • Globally cultures have different attitudes towards punctuality, legal, and ethical issues
  • Proximity to markets – very important to services
  • JIT systems or high transportation costs may make it important to manufacturers
  • Proximity to suppliers
  • Perishable goods, high transportation costs, bulky products
  • Proximity to competitors (clustering)
  • Often driven by resources such as natural, information, capital, talent
  • Found in both manufacturing and service industries

It is not unusual for companies / industries with similar location requirements to locate in the same area / country.