Supply Chain Management Factors in Location Decisions
Question :
The following sub-sections would describe the different types of cost considerations in location decisions. While cost is the most important factor in location decisions there are several other significant factors to be taken into account. Here, location can refer to any place within a single country or different countries across the globe. Additionally the impact of government grant policies would also be considered.
Answer :
1.1 Costs Involved in Location Decisions
Costs controls have the capacity to make or break a business. If not completely, profits are largely dependent on costs. Cost related decisions are primary considerations while selecting a location. Following are some of the types of costs to be considered:
1. Labour Costs- There is a huge difference between the labour costs of developed and developing countries. Companies tend to considered locations where low wage rates are prevalent. In the figure below, shows the minimum wages in various countries. Studies have revealed that companies tend to move out of locations where minimum wages are increasing and shift to locations with lower wages.
Figure 1 Minimum Wages in Different Countries (Dixit, et al., 2019)
2. Land and other Fixed Costs- Land costs form major portions of fixed costs irrespective of purchased land or rentals. Building facilities, plants and machinery are capital expenditures which constitute fixed costs. However, the effects of fixed cost are not as much as compared to labour and transportation costs.
3. Transportation Costs- Transporting raw materials of business to production facilities and delivering goods to customers constitute transportation costs. Location depends on procurement costs of raw materials or delivery costs. Higher the cost, closer will be the facility.
4. Energy Costs- Energy costs fluctuate across different regions within the same country as well as across borders. For example, in May 2018 Hawaii had the highest electricity costs while Washington had the lowest electricity costs in the U.S. The energy consumption magnitude of the firm also determines energy cost.
1.2 Other Factors to Be Considered
Besides cost, there are few other important factors to be considered while deciding on a location:
Figure 2 Factors Affecting Location Decisions (Dr. Lu, 2011)
The figure above denotes some of the supply side and demand-side factors while deciding operational locations. These are a combination of financial and non-financial factors. The community factors also include political issues besides government assistance and local amenities. Customer convenience has to be considered as customers would only consider locations in close proximity. Location could also depend on customers’ perception of the brand image. Some brands are considered to be area specific by the customers. The site should be able to strike a balance between profit generation and customer satisfaction. Besides, the possibility of future business expansion should also be considered. Single facilities would not help in growth of the business unless operations are expanded.
1.3 Effect of Government Grants on Location Decisions
Government grants play dual roles in benefitting the companies as well as the government. While it serves as an incentive to location decisions for companies, it might benefit the government in the long-run to reduce income inequalities and create employment opportunities (Kim, 2018).
Grant approval process varies across regions and companies tend to choose locations with less complex grant approval processes. As setting up operations in a new locations becomes costly for a company government grants encourage companies to take up the business initiative. Governments of developing countries are specifically interested in companies which set up facilities in rural areas (Giovannini, et al., 1993). Hence direct subsidies like cheaper raw materials and machinery and indirect grants like service cost reduction help companies to select appropriate locations.
1.4 Conclusion
Integral factors to be considered while making a location decision comprises of the above mentioned points but the list is not exhaustive. These could be extended to security and competition related concerns as well. The safety of the location matters because it affects the insurance premium. Competition concerns relate to the companies perception or need of competition as competition can be both beneficial and a barrier to growth.
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