COMMERCE 4OB3 Chapter Notes - Chapter 8-9: Servicescape

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4 Mar 2015

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The Strategic Importance of Location
Depending on product and type of production the transportation costs can be 25%
of product’s selling price
Location may alter total operating expenses by as much as 50%
Location options:
1) Expanding existing facility instead of moving
2) Maintaining current sites while adding another facility elsewhere
3) Closing existing facility and moving to another location
Location and Costs:
oLocation can make or break a company’s business strategy
oLocation decisions to support a low-cost strategy require careful
oEx. may select region with high energy or labour costs (cannot reduce
these costs)
Location and Innovation:
oPresence of high-quality and specialized inputs (scientific and technical
oEnvironment that encourages investment and intense local rivalry
oPressure and insight from sophisticated local market
oLocal presence of related and supported industries
Factors that Affect Location Decisions
Globalization has taken place because of:
1) Market economics
2) Better international communications
3) More rapid travel and shipping
4) Ease of capital flow
5) High differences in labour costs
Sequence of location decisions often begins with choosing the country to operate
Switzerland and the US rank high on global competitiveness
Labour Productivity
Management must consider productivity as well as wage rates
Labour cost per unit = (Labour cost per day)/(Production units per day)
Tangible costs: costs that can be precisely identified and measured
Ex. utilities, labour, material, taxes, depreciation
Intangible costs: less easily quantified
Ex. quality of education, public transportation, quality of life, government
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Ethical Issues: is it ethical for developed countries to locate plants in undeveloped
countries where sweatshops and child labour are used?
Other Considerations
Political risk, values and culture
Proximity to markets (very important for service organizations)
Proximity to suppliers: firms locate near raw materials and suppliers because of
perishability, transportation costs or bulk
Proximity to competitors (clustering):
oOccurs when major resource is found in that region
oNatural resources, info resources, venture capital resources, relent
Methods of Evaluating Location Alternatives
The Factor-Rating Model
Factor-rating method: location method that instills objectivity into the process of
identifying hard-to-evaluate costs
Has six steps:
1. Develop a list of key success factors
2. Assign weight to each factor to reflect importance
3. Develop a scale for each factor
4. Have management score each location for each factor using the scale
5. Multiply score by weights for each factor to get total score for location
6. Make recommendation based on maximum point score
Locational Break-Even Analysis
Locational break-even analysis: cost-volume analysis to make an economic
comparison of location alternatives
Graph fixed and variable costs for each location
Determine which provides the lowest cost
Center-of-Gravity Method
Center-of-gravity method: used to find best location for single distribution point
that services several areas
Find distribution center that will minimize distribution costs
Takes into account: location of markets, volume of goods shipped to markets,
shipping costs
X-coordinate of center of gravity = (dixQi)/(Qi)
Y-coordinate of center of gravity = (diyQi)/(Qi)
odix = x-coordinate of location i
odiy = y-coordinate of location i
oQi = quantity of goods moved to or from location i
Assumes that cost is directly proportional to distance and volume shipped
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