Business and Management

Module 5: Operations Management

Unit 5.5: Location of Production

Content
Location of production
National
International

Learning Outcome
Explain the causes and consequences of location and
relocation, and consider the effect of globalization.

Reading Focus
Hall, Jones and Raffo, Business Studies, 3rd
Edition, Unit 88.
Stimpson, AS and A Level Business Studies,
Chapter 20, pages320 325.
Barratt and Mottershead, AS and A Level
Business Studies

Context
Anyone involved in the surveying/property business will tell you that
the three most important factors affecting the success of a business
are location!, location! and location! Consider the issue facing Shell
the oil company , when deciding where to locate its oil refineries. It
must consider a multiplicity of factors, e.g., how easily the crude oil
can be transported to the refinery, which obviously depends on
where the oil has been found; then it must consider the availability of
suitably qualified labour within a particular area, along with the cost
of building the plant and hiring the labour. It must also consider the
location of its customers, in that the petrol retailers will need to gain
access to fuel at short notice. Shell might even consider that the
government provide finance for the refinery, but with the condition
that it locates in a particular area of high unemployment.

Context
Shell will arrive at the decision only by balancing the various benefits
and cost of available sites and evaluating each factor in terms of its
importance within the overall decision. For example, access to the
North sea oilfields may well be more important that being close to its
retailers, because the cost of transporting from the oilfields to the
refinery may be much cheaper per mile traveled than the cost of
moving the petrol in road tankers to the petrol stations.
Alternatively, if the government is providing grants for creating jobs, but
the unemployed do not possess the technical skills, and the training
cost out weigh the government grant, this will also affect the
decision.

Location Decisions
The decision about where to locate is crucial to many businesses. It can affect their
sales, costs, profitability and perhaps even their survival. Why might a company
need to make a decision about where to locate?
New businesses will need to carefully consider where to locate their initial
premises.
Existing businesses may need to expand, but may be unable to do so on their
present sites.
The modernisation of a business may involve moving to more up to date
premises.
A business aiming to cut its costs might achieve this by relocating.
Multi-national companies aiming to set up a new plant in another country for
the first time may evaluate a variety of possible locations worldwide.

Location Decisions
Location decisions will have an impact on all aspects of the profit
equation:
Fixed costs of different sites, such as purchase or rent of land can
vary greatly.
Variable costs, such as labour wage rates, and transport costs of
raw materials, will depend greatly on location.
Revenue earned by the business, especially if in a service industry,
will be influenced by location proximity to market.

Quantitative Factors influencing the location decision

Site costs: These are the most important fixed costs of location. They
include purchase or rent of land and property as well as conversion of fitting
out costs.
Regional incentives: Certain regions of most countries are able to offer
financial and other incentives to businesses which decides to locate there.
Transport costs: These are particularly significant for manufacturing
businesses as they need to transport both raw materials and components
as well as finished products.
Labour costs: The quality and productivity of staff should be important
considerations in this area.
Revenue generation: Certain location gives businesses the opportunity to
both increase sales volume due to market proximity and to add value to
sales on account of t the prestige of the area such as, a lawyers office in a
city centre location.

Qualitative Factors influencing the location decision

Infrastructure: The quality of the local infrastructure, especially transport
and communication links, will influence choice of location.
Environmental and Planning Considerations: A business might be
reluctant to set up in an area that is particularly sensitive from an
environment view point as this could lead to poor public relations and
actions from pressure groups.
Management Preferences: Senior managers often influence a location
decision if there is an opinion to set up in an area with substantial quality of
life benefits.
Clustering: The benefits of the businesses in the same industry locating in
the same region are well recognised but are difficult to quantify. For
example, the computer industry in the USA is heavily clustered around
Silicon Valley in California. These benefits include proximity to existing and
potential customers and suppliers and the availability of well-qualified staff.

Other issues
The state and public opinion often have a very strong influence over
some industries, particularly power stations and sensitive defense
industries, but location has another strategic importance for
governments. It needs to ensure the stable economic development
of the nation and that requires it to divert businesses away from
some areas and attract them to others.
It is difficult to have good policy in this respect, simply because the
areas that are not the most attractive usually costly to locate in and
even short-term gains from government grants and tax relief will
rarely overcome this problem.
Many firms want the same facilities and the same labour skills, and
they can gain from specialist training provision and useful general
facilities. This lead them to localise-locate in the same areas. Often
is has been development over time that has led to this clustering
and new industries often gravitate naturally towards the same areas.

What factors influence location of production? - Summary

Transport Links
Source of power and
raw materials

Land

LOCATION

Labour

DECISION
Markets

Government Influence
Industrial Inertia

Mini Cases
Cases: Questions 2&3
Source: Barratt and Mottershead, AS and A Level Business
Studies, Unit 24, pages278-279
Cases: Questions 3&4
Source: Jones, Hall, Raffo, Business Studies, Unit
88,pages 645-646

International Location- Globalisation offers additional

opportunities
Location decisions for many businesses are no longer merely national
decisions. Most large business organisations now have the option of
establishing sites in more than one country- and even relocating
existing sites into other nations. The reduction in barriers to the
movement of capital which is such a feature as globalisation means
that international options are now a real possibility for many firms.

What factors should managers consider when

deciding to locate overseas

Exchange rate risks

Trade barriers
Ethical considerations
Political, legal and language
considerations
QUESTION FOR YOUR CONSIDERATION
Why do business organisations relocate to areas in which
they were once established?
What consequences can arise from a firms decision to
relocate?

MAXI Case Study

Case: Motorola plans Scottish software plant
Source: Stimpson. AS and A Level Business Studies, Chapter 20,
page 323

QUESTIONS Module 5
1. a) Differentiate between production levels and levels of productivity.(5marks)
b) Examine three ways in which a manufacturer of hand made wooden toys
might increase productivity. (10)
c) Outline the factors that this business should take into account before
deciding whether to relocate. It is currently operating from a small town
centre site with high rental costs. All workers currently live nearby(10 marks)
2. a) Assess the view that high labour productivity guarantees business
success. (10 marks).
b) Discuss the factors that a manufacturing firm should consider when
deciding on the most appropriate method of production. (15 marks)

MAXI CASE STUDY

Case: Business location in Cumbria

Source: Jones, Hall, Raffo. Business
Studies, 3rd Edition, Unit 88, page 648

END OF UNIT