10.3 Location, Location, Location: Where Do We Make It?

Choosing where to set up shop is crucial for businesses. Factors like proximity to materials and customers, labor costs, infrastructure, and government policies all play a role. These decisions impact efficiency, costs, and market access, shaping a company's competitive edge.

Facility layout is equally important. Process, product, cellular, and fixed-position layouts each have pros and cons. The right choice depends on production volume, variety, and flexibility needs. International locations offer benefits like lower costs and new markets, but come with challenges like cultural differences and political risks.

Factors in Production Facility Location Decisions

Factors in production facility location

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• Proximity to raw materials and suppliers
  • Reduces transportation costs by minimizing distance between facility and suppliers (e.g., steel mill near iron ore mines)
  • Shortens lead times for receiving materials, enabling quicker production and response to customer demand
  • Ensures reliable access to necessary inputs, mitigating risks of supply chain disruptions (e.g., semiconductor fabrication plants near silicon wafer suppliers)
• Proximity to customers and target markets
  • Lowers distribution costs by reducing shipping distances to end customers (e.g., consumer goods manufacturing near population centers)
  • Improves responsiveness to customer needs, enabling faster delivery and better service
  • Facilitates better understanding of customer preferences and market trends through local presence and engagement
• Labor costs and availability
  • Considers wage rates, skill levels, and labor regulations in potential locations (e.g., manufacturing in countries with lower labor costs)
  • Balances labor cost savings with productivity and quality considerations, ensuring a competent and reliable workforce
  • Assesses availability of skilled labor pool, including proximity to educational institutions and training programs
• Infrastructure and utilities
  • Assesses access to reliable power, water, and transportation networks, critical for uninterrupted operations (e.g., data centers near reliable power grids)
  • Evaluates quality and capacity of road, rail, and port infrastructure for efficient logistics
  • Considers telecommunications and internet connectivity, essential for modern manufacturing and communication
• Government incentives and regulations
  • Evaluates tax breaks, subsidies, and other financial incentives offered by local or national governments to attract investment
  • Assesses regulatory environment, including permits, licenses, and compliance costs (e.g., environmental regulations)
  • Considers potential impact of regulations on operations, costs, and future growth prospects
• Political and economic stability
  • Analyzes risks associated with political instability, corruption, and economic volatility in potential locations
  • Assesses potential impact on operations, supply chains, and market access, such as trade restrictions or nationalization risks
  • Considers long-term stability and predictability of business environment for strategic planning and investment decisions

Economic and Geographic Considerations

• Economic geography: Studies the spatial distribution of economic activities and their impact on location decisions
• Agglomeration economies: Benefits firms derive from locating near each other, such as shared infrastructure and knowledge spillovers
• Industrial clusters: Geographic concentrations of interconnected businesses, suppliers, and institutions in a particular field
• Location theory: Analyzes how geographic location affects economic activity and decision-making
• Comparative advantage: A country's ability to produce a good or service at a lower opportunity cost than other countries, influencing international production decisions

Facility Layouts and Operational Efficiency

Impact of facility layout types

• Process layout
  • Groups similar equipment or functions together (e.g., all milling machines in one area)
  • Suitable for low-volume, high-variety production, such as job shops or custom manufacturing
  • Allows for flexibility in production processes and accommodates a wide range of products
  • May result in longer lead times and higher work-in-process inventory due to increased material handling and setup times
• Product layout
  • Arranges equipment in a linear sequence based on the production process (e.g., assembly line)
  • Ideal for high-volume, low-variety production, such as mass production of standardized goods
  • Minimizes material handling and work-in-process inventory by optimizing flow and reducing distances between operations
  • May be less flexible in accommodating product changes or variations, requiring significant reconfiguration for new products
• Cellular layout
  • Organizes equipment and workstations into cells dedicated to a specific product or product family (e.g., cell for manufacturing a specific car model)
  • Combines benefits of process and product layouts by grouping similar products and processes
  • Improves efficiency by reducing setup times, material handling, and work-in-process inventory within cells
  • Enhances flexibility by allowing cells to operate independently and adapt to product variations or demand changes
• Fixed-position layout
  • Keeps the product stationary while workers, materials, and equipment move to the product (e.g., aircraft assembly)
  • Used for large, bulky, or immobile products that are difficult or impossible to move through a production process
  • Requires careful coordination and scheduling of resources to ensure efficient utilization and minimize delays
  • May involve specialized equipment and skilled labor to perform complex assembly tasks at the fixed location

International Location Decisions

International location decision considerations

• Benefits
  • Access to lower labor costs in countries with lower wage rates, reducing overall production costs (e.g., manufacturing in Southeast Asia)
  • Proximity to growing markets and new customer segments, enabling market expansion and revenue growth (e.g., setting up production in emerging economies)
  • Diversification of supply chain and production risks by distributing operations across multiple countries
  • Potential for tax advantages and government incentives, such as reduced corporate tax rates or subsidies for foreign investment
  • Opportunities for learning and innovation through exposure to different practices, technologies, and market demands in international locations
• Drawbacks
  • Higher transportation and logistics costs due to longer distances and complex international supply chains
  • Longer lead times and potential supply chain disruptions due to increased complexity and reliance on international transportation (e.g., shipping delays, customs clearance)
  • Cultural and language barriers affecting communication, management, and collaboration with local workforce and partners
  • Differences in legal and regulatory environments, requiring compliance with local laws and navigating unfamiliar bureaucratic processes
  • Political and economic risks, including currency fluctuations, trade barriers, and geopolitical instability that can impact operations and profitability
  • Challenges in maintaining quality control and intellectual property protection across international borders and different legal systems
  • Potential negative impact on domestic employment and community relations, as offshoring production may be perceived as job losses in the home country
  • Complexities in supply chain management across international borders, requiring coordination of multiple suppliers and logistics providers

Foreign Direct Investment

• Involves establishing or acquiring business operations in a foreign country
• Can take the form of greenfield investments (building new facilities) or acquisitions of existing companies
• Allows companies to gain direct control over foreign operations and access local markets more effectively