Question

What are the even major factors that affect location decisions?

Answer 1

The Major factors affecting location decisions are:

1. labor productivity

2. foreign exchange

3. culture

4. Cost

5. proximity to markets

6. proximity to suppliers

7. proximity to competitors

Labor productivity:

The company should consider the wages and skillfulness of the labor around the facility location. The labor cost is categorized under variable cost, thus region with low wages rates are most preferable. This will reduce the product cost. But it is also important to understand the education, training, and skill levels of the labor, if these are inadequate then the productivity will reduce.

Foreign exchange:

The unfavorable exchange rates and currency risk in the country may have negative effect on the profitability of the company those serving global market. The currency rates do fall and rise abruptly in many countries, so company should select multiple country locations to hedge the changes in the exchange rates.

Culture:

The working values and culture differs from country to country and even region to region. The culture and attitude towards industry varies with the changes in the political leadership of the country, these also have major effect on the operation from time to time. Bribery and other form of corruptions in countries also effects the economic. Legal, and moral stability of the company. The leadership and managers of the parent company faces various work-related and attitude-related issues due to culture difference by locating in various locations.

Cost of locating:

The cost of locating the facility can be divided into two major categories (a) tangible and (b) intangible cost. The tangible cost consists of cost involved in construction of facility, labor, utilities, material, taxes, etc those are visible directly. This are under direct control of the company, the manager can decide how this cost influence the company.

The intangible cost consists of qualitative cost such as education and sill level of localities, qualities of amenities around the facility, attitude towards industry and company, etc. This cost is not under control of the company, manager have to manage this cost.

Proximity to markets

The decision of locating near the market or away depends on the nature of business, whether it is offering only products or services or both. Proximity to market ensures a consistent supply of product and services to customer. To capture the market, service firms need to be easily accessible by their customers. For example, retail shops or fast food restaurants are typically located in densely populated and easily accessible locations. Proximity to market is preferred when the buyers are concentrated, products have low shelf-life, which is delicate and susceptible to spoilage, and after-sales services are promptly required, very often.

Proximity to suppliers

For uninterrupted production, the availability of raw material in right quantity and time is very important. Thus, firms dealing with farm or forestry products or mining operations have no other choice than to locate nearer to supply. Sugar factories are located nearer to areas where there is maximum sugarcane production. Another view is that the proximity to supply sites of raw material is considered when the material to be transported is in bulk and the transportation cost is huge. Proximity of raw material is needed in case of industries, such as sugar, cement, cotton textiles, etc.

Recently, in operations, outsourcing or make-or-buy decisions of certain processes to vendors came in practice, in order to reduce the burden and cost of further investment. Thus, the availability of such vendors is also an important factor. Automobile industries prefer to locate in close proximity of suppliers or vendors, for the prompt delivery of components.

Proximity to competitors

Both manufacturing and service organizations prefer to near competitors or supporting industries. This tendency, called clustering , which is often occurs when a major resource is found in that region. Such resources include natural resources, information resources, venture capital resources, and talent resources. For example IT industries are located near each other. The Automobile industries are located where auto-component suppliers are clustered.