What location evaluation method bases a decision based on minimum distribution costs?

MAKING LOCATION DECISIONS

Procedure for Making Location Decisions

As with capacity planning, managers need to follow a three-step procedure when making facility location decisions. These steps are as follows:

Step 1 Identify Dominant Location Factors. In this step managers identify the location factors that are dominant for the business. This requires managerial judgment and knowledge.

Step 2 Develop Location Alternatives. Once managers know what factors are dominant, they can identify location alternatives that satisfy the selected factors.

Step 3 Evaluate Location Alternatives. After a set of location alternatives have been identified, managers evaluate them and make a final selection. This is not easy because one location may be preferred based on one set of factors, whereas another may be better based on a second set of factors.

Procedures for Evaluating Location Alternatives

A number of procedures can help in evaluating location alternatives. These are decision-support tools that help structure the decision-making process. Some of them help with qualitative factors that are subjective, such as quality of life. Others help with quantitative factors that can be measured, such as distance. A manager may choose to use multiple procedures to evaluate alternatives and come up with a final decision. Remember that the location decision is one that a company will have to live with for a long time. It is highly important that managers make the right decision.

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Being in the right location is a key ingredient in a business's success. If a company selects the wrong location, it may have adequate access to customers, workers, transportation, materials, and so on. Consequently, location often plays a significant role in a company's profit and overall success. A location strategy is a plan for obtaining the optimal location for a company by identifying company needs and objectives, and searching for locations with offerings that are compatible with these needs and objectives. Generally, this means the firm will attempt to maximize opportunity while minimizing costs and risks.

A company's location strategy should conform with, and be part of, its overall corporate strategy. Hence, if a company strives to become a global leader in telecommunications equipment, for example, it must consider establishing plants and warehouses in regions that are consistent with its strategy and that are optimally located to serve its global customers. A company's executives and managers often develop location strategies, but they may select consultants (or economic development groups) to undertake the task of developing a location strategy, or at least to assist in the process, especially if they have little experience in selecting locations.

Formulating a location strategy typically involves the following factors:

1. Facilities. Facilities planning involves determining what kind of space a company will need given its short-term and long-term goals.
2. Feasibility. Feasibility analysis is an assessment of the different operating costs and other factors associated with different locations.
3. Logistics. Logistics evaluation is the appraisal of the transportation options and costs for the prospective manufacturing and warehousing facilities.
4. Labor. Labor analysis determines whether prospective locations can meet a company's labor needs given its short-term and long-term goals.
5. Community and site. Community and site evaluation involves examining whether a company and a prospective community and site will be compatible in the long-term.
6. Trade zones. Companies may want to consider the benefits offered by free-trade zones, which are closed facilities monitored by customs services where goods can be brought without the usual customs requirements. The United States has about 170 free-trade zones and other countries have them as well.
7. Political risk. Companies considering expanding into other countries must take political risk into consideration when developing a location strategy. Since some countries have unstable political environments, companies must be prepared for upheaval and turmoil if they plan long-term operations in such countries.
8. Governmental regulation. Companies also may face government barriers and heavy restrictions and regulation if they intend to expand into other countries. Therefore, companies must examine governmental—as well as cultural—obstacles in other countries when developing location strategies.
9. Environmental regulation. Companies should consider the various environmental regulations that might affect their operations in different locations. Environmental regulation also may have an impact on the relationship between a company and the community around a prospective location.
10. Incentives. Incentive negotiation is the process by which a company and a community negotiate property and any benefits the company will receive, such as tax breaks. Incentives may place a significant role in a company's selection of a site.

Depending on the type of business, companies also may have to examine other aspects of prospective locations and communities. Based on these considerations, companies are able to choose a site that will best serve their needs and help them achieve their goals.

COMPANY REQUIREMENTS

The initial part of developing a location strategy is determining what a company will require of its locations. These needs then serve as some of the primary criteria a company uses to evaluate different options. Some of the basic requirements a company must consider are:

• Size. A company must determine what size property or facility it needs.
• Traffic. If it is in the service business, a company must obtain statistics on the amount of traffic or the number of pedestrians that pass by a prospective location each day.
• Population. Whether a service or manufacturing operation, a company must examine the population of prospective locations to ensure that there is a sufficient number of potential customers (if a service business) or a sufficient number of skilled or trainable workers. In addition, manufacturers also benefit from being close to their customers, because proximity to customers reduces shipment time and increases company responsiveness to customers.
• Total costs. Companies must determine the maximum total costs they are willing to pay for a new location. Total costs include distribution, land, labor, taxes, utilities, and construction costs. More obscure costs also should be considered, such as transportation costs to ship materials and supplies, and the loss of customer responsiveness if moving further away from the customer base.
• Infrastructure. Companies must consider what their infrastructure requirements will be, including what modes of transportation they will need and what kinds of telecommunications services and equipment they will need.
• Labor. Companies must establish their labor criteria and determine what kind of labor pool they will need, including the desired education and skilled levels.
• Suppliers. Companies must consider the kinds of suppliers they will need near their locations. In addition, having suppliers nearby can help companies reduce their production costs.

Besides these basic requirements, companies must take into consideration their unique requirements of prospective locations. These requirements may correspond to their overall corporate strategy and corporate goals and to their particular industries.

LOCATION SELECTION TECHNIQUES

MANUFACTURING.

Several techniques exist that can be used as part of a location strategy to determine the merits of prospective sites. Location strategists often divide assessment of prospective locations into macro analysis and micro analysis. Macro analysis encompasses the evaluation of different regions and communities, whereas micro analysis includes the evaluation of particular sites. The main macro analysis techniques are factor-rating systems, linear programming, and center of gravity.

Factor-rating systems are among the most commonly used techniques for choosing a location, because they analyze diverse factors in an easily comprehensible manner. Factor-rating systems simply consist of a weighted list of the factors a company considers the most important and a range of values for each factor (see Table 1). A company can rate each site with a value from the range based on the costs and benefits offered by the alternative locations, and multiply this value by the appropriate weight. These numbers are then summed to get an overall "factor rating." Then a company can compare the overall ratings of alternative sites. This technique enables a company to choose a location systematically based on the best rating.

Table 1
Sample Factor-Rating System

Linear programming provides a method for evaluating the cost of prospective locations within a production/distribution network. This technique uses a matrix of production facilities and warehouses that shows the unit shipping costs from a manufacturing location designated by a variable, such as X, to prospective destinations, such as warehouses designated by other variables— E, F, and G —and the total amount of goods the prospective manufacturer, X, could produce. Other prospective manufacturing locations and the same information for each are also included in the matrix. After computing the total costs for each prospective location, a company can determine which one has lower total costs in terms of the entire production/distribution network.

The center of gravity method is useful for identifying an individual location by considering existing locations, the distances between them, and the volume of products to be shipped. Companies use this method mostly for locating distribution warehouses. To use this technique, companies plot their existing locations on a grid with a coordinate system (the particular coordinate system used does not matter). The idea behind this technique is to identify the relative distances between locations. After the existing locations are placed on the grid, the center of gravity is determined by calculating the X and Y coordinates that would have the lowest transportation costs.

SERVICES.

Since service businesses generally must maintain a number of sites to remain close to customers, the location selected should be close to the targeted segment of the market. The market also can influence the number of new locations, as well as their size and features.

A simple technique for determining service locations is to establish a set of minimum criteria for opening new outlets. These criteria should be developed so that the locations selected have strong chances of success. A company could assess the potential of prospective locations based on primary criteria such as:

• The population of the community should more than 100,000.
• The annual per capita income should be more than $35,000.

After selecting locations that satisfy these criteria, a company might further evaluate the potential locations based on a set of criteria that considers the location's industrialization, person/car ratio, labor availability, population density, and infrastructure.

TRENDS IN LOCATION STRATEGY

Globalization and technology have been the biggest drivers of change in the location decision process over the last thirty years. Location activity has been very high in recent decades as a result of technology improvements, economic growth, international expansion and globalization, and corporate restructuring, mergers and acquisitions.

The top five location factors for global companies are costs, infrastructure, labor characteristics, government and political issues, and economy. Key sub-factors are the availability and quality of the labor force, the quality and reliability of modes of transportation, the quality and reliability of utilities, wage rates, worker motivation, telecommunication systems, record of government stability, and industrial relations laws. Other sub-factors—protection of patents, availability of management resources and specific skills, and system and integration costs—are of increasing importance.

Whereas wages and the industrial relations environment are significant factors in multinational location decisions, by far the main determinant is the host country market size. Furthermore, global economic considerations have become paramount in location strategy as companies contemplate the advantages afforded by various locations in terms of positioning in international markets and against competitors.

When companies seek new sites they generally strive to keep operating and start-up costs low, and so they often choose locations in collaboration with economic development groups to achieve these goals. Companies also now expect to move into new facilities more quickly than in the past, so they tend to focus more on leasing facilities than purchasing land and building new facilities. Also, by leasing facilities, companies can relocate every few years if the market requires it.

Technology, especially communications technology, has not only been a driver of change, but has facilitated the site selection process. Managers can obtain initial information on alternative locations via the Internet and promotional software. Site selections agencies increasingly use geographical information system (GIS) technology, and e-mail has become a dominant mode of communication in location research and negotiation.

Location databases have enabled companies to do initial screening themselves, hence reducing their need to rely on economic developers to providing only very specific information and details on locations—such as commuting patterns and workforce characteristics.

Telecommunications technology has created the "virtual office" of employees working from remote locations. The growth of the virtual office has impacted location strategy in that some companies no longer need as much workspace because many employees work from remote sites. When these employees need to work at the office, they can call and reserve office space for themselves. The decrease in facility size can lead to millions of dollars worth of savings each year, while increasing productivity.

Karl Heil

Revised by R. Anthony Inman

FURTHER READING:

Bognanno, Mario F., Michael P. Keane, and Donghoon Yang. "The Influence of Wages and Industrial Relations Environments on the Production Location Decisions of U.S. Multinational Corporations." Industrial and Labor Relations Review 58, no. 2 (2005): 171.

MacCarthy, B.L., and W. Atthirawong. "Factors Affecting Location Decisions in International Operations—A Delphi Study." International Journal of Operations and Production Management 23, no. 7 (2003): 794–828.

Spee, Roel, and Wim Douw. "Cost-Reduction Location Strategies." Journal of Corporate Real Estate 6, no. 1 (September 2003): 30–38.

Talley-Seijn, Margaret. "30 Years of Location Strategies." Plants, Sites and Parks 31, no. 3 (July 2004): 26–29.

Which method is used for location decision?

What is location evaluation method?

Which method listed below is used to determine a location alternative that minimizes distribution costs?

Which location decision method is most suitable for nationwide distribution decisions?