Unit 5
Operations Management
Location
Learning Objectives
To be able to explain the causes and
consequences of location and relocation –
domestically and internationally
Start with this
Which location is better and why?
Location
• Location decisions have three key
characteristics
– Strategic in nature
– Difficult to reverse
– Taken at the highest management level and not
delegated
Optimal Location
• One that selects the best site for expansion
of the business or for its relocation, given
current information
– It is a compromise that balances
• High fixed costs with convenience for customers
• Low costs of a remote site with limited supply of
suitably qualified labour
• Quantitative factors with qualitative ones
• Opportunities of receiving government grants in areas
of high unemployment with the risks of low sales as
average incomes in the area may be low
Optimal Location
• List some of the disadvantages to a business
of non optimal location decisions using the
examples below
Problem
High fixed site costs
High variable costs
E.G. Labour
Low unemployment rate
High unemployment rate
Poor transport infrastructure
Disadvantages to business
• High break even level of
production
Example
• Low profits – losses even
Problem
Disadvantages to business
High fixed site costs
• High break even level of production
• Low profits – losses even
• If operating at low-capacity utilisation,
unit fixed costs will be high
High variable costs
E.G. Labour
• Low contribution per unit produced or
sold
• Low profits – losses even
• High unit variable costs reduce
competitiveness
Low unemployment rate
• Recruitment problems
• High staff turnover
High unemployment rate
• Average consumer disposable income
may be low
Poor transport infrastructure
• Raised transport costs
• Relatively inaccessible for customers
• Difficult to operate JIT
Factors influencing location decisions
Quantitative Factors
Measurable in financial terms
and will have a direct impact on
either the costs of a site or the
revenues from it and its
profitability
Qualitative Factors
Non-measurable factors that may
influence business decisions
Site and other capital
costs
Vary greatly from region
to region within a
country and between
countries
Transport Costs
Businesses that use
heavy and bulky raw
materials will incur high
transport costs if
suppliers are far. Service
industries, such as
hotels, need to be
conveniently located.
Once these quantitative factors have been
Labour Costs
Businessesand
which are
labourand
intensive,
where wages make up a
identified,
cost
revenues
high percentage of costs, look closely at average wages at
possible
locations for theirtechniques
business. A business has
to paybe
estimated, the
following
can
highly for skilled labour if they locate to an area which lacks
those skilled workers.
used to assist in location
decisions
Sales revenue potential
Level of sales made can
depend directly on
Location. Confectionary
shops have to be just
that – convenient
Government Grants
May be necessary to
stimulate the economy of a
location. Grants may be given
or funds to help with wages
or for training.
QUANTITATIVE FACTORS
1. Profit Estimates
2. Investment Appraisal
3. Break-Even Analysis
Investment Appraisal
methods
Payback
How long will
it take the
company to
pay back the
loan?
ARR
Average rate of return
% return on your
investment which you
can use to compare
different strategies
NPV
Net Present Value
Future return put
into today’s values
Labour Supply
Quantity of workers must be taken into
account. This is how many workers would
have access to the business. Quality (skill
level) of workers must be taken into
account. This is whether workers with
necessary skills will have access to the
business.
Managers Preferences
In small businesses managers’
personal preferences
regarding desirable work
could influence options
Room for further expansion
Expensive to relocate if a site proves to be
too small. If there is room to expand
managers should take this into consideration
when deciding whether to buy or not.
Safety
Avoid potential risk
to the public and
damage to the
company’s
reputation.
Environmental Concerns
A business may be reluctant to
set up in an area where there
is particular sensitivity to the
environment
QUALITATIVE FACTORS
Ethical Considerations
For example a move from
the UK to India – think
about all the issues this
could flag up
Infrastructure
To ensure delivery systems can still be put
into place
Other locational issues
• The pull of the market – What do they want?
The move towards internet shopping
• Planning restrictions
• External economies of scale
• Multi site locations – have a lot of advantages
and disadvantages for both customers and the
business
Change of Location
• Relocation due to business growth or decline
– A business may decide to relocate for two main
reasons
• If a business does well and sees an increase in demand
for goods or services then they would increase capacity
by relocating to larger premises
• If a business is struggling and sees a lack of demand for
the goods or services it sells then a possible solution
would be to move to a smaller location to reduce costs
Change of Location
• Re-development of current location to meet
business needs
– A business may need to re-develop a site rather
than move
• A business may be too big to actually move to another
location so the current site would be re-developed.
• The cost of moving may be dramatically higher than redevelopment costs
• The installation of new technologies may not require a
move but a business may need to update its premises
So is it impossible to succeed once
you have made a bad location
decision?
• Article – thriving in a bad location