Operations Management: Location Strategies 8

Location Strategies

• Location decisions are one of the most important decisions a firm makes, with a significant impact on fixed and variable costs.
• Location decisions are increasingly global in nature and are made relatively infrequently.

The Strategic Importance of Location

• Long-term decisions are involved in location strategy, and once committed, many resource and cost issues are difficult to change.
• The objective of location strategy is to maximize the benefit of location to the firm.
• Options include expanding existing facilities, maintaining existing and adding sites, or closing existing and relocating.

Location and Costs

• Location decisions require careful consideration, and once in place, location-related costs are fixed in place and difficult to reduce.
• Effort spent determining optimal facility location is a good investment.

Factors That Affect Location Decisions

• Globalization adds to complexity, and drivers of globalization include market economics, communication, rapid and reliable transportation, ease of capital flow, and differing labor costs.
• Identify key success factors (KSFs) to make informed location decisions.
• Exchange rates and currency risks can have a significant impact on costs, and operational hedging involves shifting production as exchange rates change.
• Costs can be categorized into tangible (easily measured) and intangible (not as easy to quantify) costs.

Factors That Affect Location Decisions (continued)

• Political risk, values, and culture can affect location decisions, including national, state, and local governments' attitudes toward private and intellectual property, zoning, pollution, and employment stability.
• Worker attitudes toward turnover, unions, and absenteeism can vary globally.
• Cultures have different attitudes toward punctuality, legal, and ethical issues.

Factors That Affect Location Decisions (continued)

• Proximity to markets is very important to services, and JIT systems or high transportation costs may make it important to manufacturers.
• Proximity to suppliers is important for perishable goods, high transportation costs, and bulky products.
• Proximity to competitors (clustering) is often driven by resources such as natural, information, capital, and talent, and is found in both manufacturing and service industries.

Location Strategies

• Location decisions are one of the most important decisions a firm makes, with a significant impact on fixed and variable costs.
• These decisions are made relatively infrequently, are long-term, and can be difficult to change once committed.

The Strategic Importance of Location

• The objective of location strategy is to maximize the benefit of location to the firm.
• Options include expanding existing facilities, maintaining existing and adding sites, or closing existing and relocating.

Location and Costs

• Location decisions require careful consideration, as location-related costs are fixed in place and difficult to reduce once in place.
• Effort spent determining optimal facility location is a good investment.

Factors That Affect Location Decisions

• Globalization adds to complexity, with drivers including market economics, communication, rapid and reliable transportation, ease of capital flow, and differing labor costs.
• Key success factors (KSFs) must be identified.

Location Decisions Based on Costs

• Exchange rates and currency risks can have a significant impact on costs, and rates change over time.
• Operational hedging involves shifting production as exchange rates change.
• Costs can be tangible (e.g., utilities, labor, materials, taxes) or intangible (e.g., education, public transportation, community, quality-of-life).

Service Location Strategy

• Major determinants of volume and revenue include:
  • Purchasing power of customer-drawing area
  • Service and image compatibility with demographics of the customer-drawing area
  • Competition in the area
  • Quality of the competition
  • Uniqueness of the firm's and competitors' locations
  • Physical qualities of facilities and neighboring businesses
  • Operating policies of the firm
  • Quality of management

How Hotel Chains Select Sites

• Location is a strategically important decision in the hospitality industry.
• La Quinta used a regression model to predict profitability, starting with 35 independent variables and refining it to four variables:
  • Price of the inn
  • Median income levels
  • State population per inn
  • Location of nearby colleges
• The final model predicted 51% of profitability with just these four variables.