Locational factors 2

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LOCATIONAL FACTORSFOR INDUSTRIES

NEED FOR LOCATION DECISIONS

• Marketing Strategy

• Cost of Doing Business

• Growth

• Depletion of Resources

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NATURE OF LOCATION DECISIONS

• Strategic Importance of location decisions• Long term commitment/costs• Impact on investments, revenues, and operations• Supply chains

• Objectives of location decisions• Profit potential• No single location may be better than others• Identify several locations from which to choose

• Location Options • Expand existing facilities• Add new facilities• Move

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TYPES OF INDUSTRIES

• Primary industry - Extractive • Secondary industry - Manufacturing • Tertiary industry -Services• Quaternary industry

• In this section, we are only confined with the “manufacturing industry”.

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Types of industries

Quaternary industry - The portion of an economy that is based on knowledge applicable to some business activity that usually involves the provision of services. For example, the quaternary sector might include: information gathering, distribution and technology; research and development; vocational education; business consulting; and strategic financial services.

MAKING LOCATION DECISIONS

• Decide on the criteria• Identify the important factors• Develop location alternatives• Evaluate the alternatives

• Identify general region• Identify a small number of community alternatives• Identify site alternatives

• Evaluate and make selection

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FACTORS AFFECTING INDUSTRIAL LOCATION

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LOCATIONAL FACTORS

Physical Factors• Land• Raw materials• Power / Energy

Human Factors:• Labour• Transport• Market• Technology• Capital• Behavioural

factors• Government

Policy

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LOCATION DECISIONSLOCATION DECISIONS

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Country DecisionCountry Decision Critical Success FactorsCritical Success Factors

1.1. Political risks, government Political risks, government rules, attitudes, incentivesrules, attitudes, incentives

2.2. Cultural and economic issuesCultural and economic issues

3.3. Location of marketsLocation of markets

4.4. Labor talent, attitudes, Labor talent, attitudes, productivity, costsproductivity, costs

5.5. Availability of supplies, Availability of supplies, communications, energycommunications, energy

6.6. Exchange rates and currency Exchange rates and currency risksrisks


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Region/ Region/ Community Community

DecisionDecision

Critical Success FactorsCritical Success Factors

1.1. Corporate desiresCorporate desires

2.2. Attractiveness of region Attractiveness of region

3.3. Labor availability, costs, attitudes Labor availability, costs, attitudes towards unionstowards unions

4.4. Costs and availability of utilitiesCosts and availability of utilities

5.5. Environmental regulationsEnvironmental regulations

6.6. Government incentives and fiscal Government incentives and fiscal policiespolicies

7.7. Proximity to raw materials and Proximity to raw materials and customerscustomers

8.8. Land/construction costsLand/construction costs

MN

WI

MI

IL INOH


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Site DecisionSite DecisionCritical Success FactorsCritical Success Factors

1.1. Site size and costSite size and cost

2.2. Air, rail, highway, and Air, rail, highway, and waterway systemswaterway systems

3.3. Zoning restrictionsZoning restrictions

4.4. Proximity of services/ Proximity of services/ supplies neededsupplies needed

5.5. Environmental impact issuesEnvironmental impact issues

Heavy industries: A large area of cheap low flat land.

Light industries: Small apartments are also OK.

LEVELS OF DECISIONS.

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Market Region

Subregion

Community

Sites

Market PotentialMarket Share

Operating Cost

Transport Cost (RM)Taxes

Raw material costsLabor Cost and Availability

Access to market/materialsMaterial Cost

Labor Cost and AvailabilityTaxes

Availability of public servicesAvailabilty of sites

Community amenities

Access to transport NetworkSite Characterics

TaxesAvailability of public services

Land and acquisition costsConstruction Costs

RAW MATERIALS

Raw materialsUbiquitous

Water, Air, Soil……

LocalizedIron ore, coal, gold, tin, ……

Decreasing importance of raw materialsImprovement in TransportImprovement in industrial techniquesOthers:

New raw materials / SubstitutionRecycling

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RAW MATERIALS

Characteristics of Raw Materials• Weight loss or Weight gain• Degree of perishability• Value per unit of weight• Availability of substitute materials• Number of materials involved in production• Source of supply

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Raw materials oriented / Market oriented

POWER / ENERGY

Type of Power• Water• Fossil fuel

• Coal• Oil• Natural

Gases• Nuclear

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Electricity

Aluminum Smelting as a Power Oriented Industry

LABOUR

• Cost of Labour – Wage Level• Skills of Labour

• Highly skilled, Semi-skilled, Unskilled

• Labour Mobility• Highly skilled (highly mobile)• Semi-skilled (fairly mobile)• Unskilled (least mobile

• Reputation

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LABOUR

• Declining in importance• Machines / Robots

• Still very attractive for labour-intensive industries

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Labour-oriented Industries

TRANSPORT

Mode of transport

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TRANSPORT

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ModeLong distance

Short distance

Speed Goods Type

WaterCheapest

Highest SlowBulky, low value,non-perishability

Rail Cheap High Fast Bulky

Road HighestCheapest

FairDoor to door, light

Air High ------Fastest

High value, fragilePerishability

MARKET

Markets are where the finished products will be finally go.

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Markets attract many industries to locate–Good infrastructure

Transportation, Electricity supply, water supply, drainage system, communication…….

–Large population size–Large labour force–Skilled labour–Obtain advanced technology –Industrial agglomeration

MARKET

Some industries are more likely to be located near markets

Perishable products: eg. Bread, cakes….Fragile products: eg. Bottled drinks, porcelain…..Bulky and low value products: eg. Brick-making…..Labour intensive industries: eg. Toy-making,

electrical goods….Keep close contact with consumers: eg. Jewellery,

printing…Involve large quanities of raw materials: eg. Electric

Appliance..Specialized products:

eg. Automobile parts manufacturers located near auto making centre

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TECHNOLOGYTechnology is very importance

It change the production process completely

It is a localized factorWays to obtain technology

From advanced countries (developed world)Universities Research Centre

Technology-intensive industry and Capital-intensive industry

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GOVERNMENT POLICY

• Promote overall economic growth• Promote the growth of a particular

industry• Diversify the economy• Ensure regional economic balance• Ensure efficient ultilization of resources

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Indirect role of governments

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FACTORS THAT AFFECT FACTORS THAT AFFECT LOCATION DECISIONSLOCATION DECISIONS

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Labor productivityLabor productivity Wage rates are not the only costWage rates are not the only cost

Lower production may increase total costLower production may increase total cost

Labor cost per dayLabor cost per day

Production (units per day)Production (units per day)= Cost per unit= Cost per unit


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Exchange rates and currency risksExchange rates and currency risks Can have a significant impact on cost structureCan have a significant impact on cost structure

Rates change over timeRates change over time

CostsCosts Tangible - easily measured costs such as utilities, Tangible - easily measured costs such as utilities,

labor, materials, taxeslabor, materials, taxes

Intangible - less easy to quantify and include Intangible - less easy to quantify and include education, public transportation, community, education, public transportation, community, quality-of-lifequality-of-life


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Political risk, values, and culturePolitical risk, values, and culture National, state, local governments attitudes toward National, state, local governments attitudes toward

private and intellectual property, pollution, private and intellectual property, pollution, employment stability may be in fluxemployment stability may be in flux

Worker attitudes towards turnover, unions, Worker attitudes towards turnover, unions, absenteeismabsenteeism

Globally cultures have different attitudes towards Globally cultures have different attitudes towards punctuality, legal, and ethical issuespunctuality, legal, and ethical issues


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Proximity to competitorsProximity to competitors Called clusteringCalled clustering

Often driven by resources such as natural, Often driven by resources such as natural, information, capital, talentinformation, capital, talent

Found in both manufacturing and service Found in both manufacturing and service industriesindustries

CLUSTERING OF COMPANIESCLUSTERING OF COMPANIES

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IndustryIndustry LocationsLocations Reason for clusteringReason for clustering

Wine makingWine making Napa Valley (US) Napa Valley (US) Bordeaux region Bordeaux region (France)(France)

Natural resources of Natural resources of land and climateland and climate

Software firmsSoftware firms Silicon Valley, Silicon Valley, Boston, Bangalore Boston, Bangalore (India)(India)

Talent resources of Talent resources of bright graduates in bright graduates in scientific/technical scientific/technical areas, venture areas, venture capitalists nearbycapitalists nearby

Race car Race car buildersbuilders

Huntington/North Huntington/North Hampton region Hampton region (England)(England)

Critical mass of talent Critical mass of talent and informationand information


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Theme parks Theme parks (Disney World, (Disney World, Universal Universal Studios)Studios)

Orlando, FloridaOrlando, Florida A hot spot for A hot spot for entertainment, warm entertainment, warm weather, tourists, and weather, tourists, and inexpensive laborinexpensive labor

Electronics Electronics firmsfirms

Northern MexicoNorthern Mexico NAFTA, duty free NAFTA, duty free export to USexport to US

Computer Computer hardware hardware manufacturersmanufacturers

Singapore, TaiwanSingapore, Taiwan High technological High technological penetration rate and penetration rate and per capita GDP, per capita GDP, skilled/educated skilled/educated workforce with large workforce with large pool of engineerspool of engineers


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Fast food Fast food chains chains (Wendy’s, (Wendy’s, McDonald’s, McDonald’s, Burger King, Burger King, and Pizza Hut)and Pizza Hut)

Sites within 1 mile Sites within 1 mile of each otherof each other

Stimulate food sales, Stimulate food sales, high traffic flowshigh traffic flows

General General aviation aircraft aviation aircraft (Cessna, (Cessna, Learjet, Boeing)Learjet, Boeing)

Wichita, KansasWichita, Kansas Mass of aviation skillsMass of aviation skills

Orthopedic Orthopedic devicesdevices

Warsaw, IndianaWarsaw, Indiana Ready supply of skilled Ready supply of skilled workers, strong U.S. workers, strong U.S. marketmarket

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INDUSTRIAL LANDSCAPE:

Some Basic Problems of Industrial Location

1. Distribution Pattern Not evenly distributed around the

earth, with some manufacturing industries typically concentrated in certain localities.

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2. differences in the types of industry

• e.g. light industry such as textiles make strong demands for labour.

• Heavy industry such as oil refining and petroleum results little labour but much capital.

3. differences in special needs:

• need to be close to other industries• need to lower transportation costs by cheap sea

transport • others

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4. DIFFERENCES IN THE MOTIVES OF THE INDIVIDUAL ENTREPRENEUR IN CHOOSING A

LOCATION:

• some are likely to be motivated by a desire to maximise profits and will take risks in doing so.

Other may want simply “satisfactory” profit and safe existence.

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DESPITE THESE DIVERSIFYING FACTORS OF LOCATION, THERE ARE COMMON REQUIREMENTS

TO ALL INDUSTRIALISTS: • 1. the purchase of raw material or semi-

processed materials

• 2. the processing or assembling of these raw materials or semi-processed materials whereby value is added to them.

• 3. the sale of the finished products.

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• 4. the payment of transportation costs involved in the assembly of the raw materials or semi-processed materials and the distribution of the finished products.

• 5. labour supply

• 6. energy resources

• 7. capital

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LOCATIONS – MANUFACTURING AND SERVICE

• Manufacturers – cost focused• Service and retail – revenue focused

• Traffic volume and convenience most important• Demographics

• Age• Income• Education

• Location, location, location• Good transportation• Customer safety

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COMPARISON OF SERVICE AND MANUFACTURING CONSIDERATIONS

Manufacturing/Distribution Service/Retail

Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Customer access/parking

TRENDS IN LOCATIONS

• Foreign producers locating in U.S.• “Made in USA”• Currency fluctuations

• Just-in-time manufacturing techniques• Microfactories• Information Technology

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TRENDS & FUTURE STRATEGIES

• Most of the Facility Location factors vary with time:• The accelerated changes in the economic

environment are impacting the frequency of Facility Location decisions.

• Changes in the economic environment:• International level competition among companies.• Location in countries different than the origin of the

company are a common situation for big companies.• Appearance of new markets and unification of others.• Increase of competition pressure.• Logistics factors are more important and complex.• Companies are reviewing their facility locations in order

not to loose competitiveness.

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TRENDS & FUTURE STRATEGIES

• Changes in the economic environment:• Industry processes automation.

• Labor costs become less important: countries with lower labor costs become less attractive.

• Labor qualification, flexibility and mobility become more important factors.

• However, labor costs are still a main factor in some industries and in certain manufacturing processes of others: Relocation to Mexico, Taiwan, Singapore, etc.

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TRENDS & FUTURE STRATEGIES• Changes in the economic environment:

• Transportation and IT development.• Helps in the internationalization of the operations: higher

geographical diversity in location decisions.• Tendency to localize close to the markets: emphasis in

customer service, direct customer contact, fast development of new products, fast delivery…

• Due to flexible technologies, companies have the possibility of starting up more plants at a smaller size.

• J.I.T. Systems.• Some industries are forcing their suppliers and

customers to locate their facilities in a close area to reduce transportation costs and supply at a higher frequency.

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GLOBAL LOCATIONS

• Reasons for globalization• Benefits• Disadvantages• Risks• Global operations issues

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GLOBALIZATION

• Facilitating Factors• Trade agreements• Technology

• Benefits• Markets• Cost savings• Legal and regulatory• Financial

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GLOBALIZATION

• Disadvantages• Transportation costs• Security• Unskilled labor• Import restrictions• Criticisms

• Risks• Political• Terrorism• Legal• Cultural

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Foreign Government

a. Policies on foreign ownership of production facilities Local Content Import restrictions Currency restrictions Environmental regulations Local product standards Liability laws

b. Stability issues

Cultural Differences

Living circumstances for foreign workers / dependents Religious holidays/traditions

Customer Preferences

Possible buy locally sentiment

Labor Level of training and education of workers Work ethic Possible regulations limiting number of foreign employees Language differences

Resources Availability and quality of raw materials, energy, transportation infrastructure

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PHYSICAL REQUIREMENTS :

• 1. flat land with deep and well-drained soils

• 2. completely (frost-free) - mean monthly temperatures (should not fall below 18 ℃ for optimum growth.

• 3. annual rainfall: 2000mm per annum but it is also necessary to have a slightly dry period (75mm)

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PROCESSING CANE INTO RAW SUGAR :

1. crushing the cane to extract juice. (The remaining cane fibber is a dry material called 'bagasse'. This is used as fuel.

2. cleaning dirt out of juice in settling tanks.

3. boiling juice twice to form syrup-coated sugar crystals.

4. spinning off syrup from crystals.

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5. A thick syrup, called molasses is also spun off in this final centrifuging and this is then sent to distilleries to be made into industrial alcohol, rum

6. It is also sold to farmers for stock feed and fertilizer.

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RAW MATERIAL1. Perishability of harvested cane

2. Cane, is an extremely bulky, and cumbersome crop of low specific value, i.e. 'value per unit weight is low.

• As a result, cane is difficult and costly to be transported.

• Therefore, the transport system focusing on each mill has to be both fast and capable of handling very large quantities.

• Also, it is more economical to keep the haul as short as possible. Thus, mills have to located in the midst of their assigned cane areas.

•

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3. Weight lose material:

• Each 7 tonnes of cane brought in from the fields yields only 1 tonne approximately of raw sugar in the milling process.

• Thus, the overriding consideration in siting sugar mills is to locate them as close as possible to the fields with efficient bulk transport system

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MANUFACTURING INDUSTRIES CAN BE ALSO

DIVIDED INTO:

• a. Processing industries :

- A material may undergo a change in physical state, chemical composition, volume or mass, in creating a product more useful to man.

- e.g. Steel making is one of the example. It change state during process.

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TWO KINDS OF PROCESSING INDUSTRY :

1. Initial Processing industries :

- A single raw material is converted into a more concentrated or useful form.

For example: (1)sugar milling (2)dairy processing (3)fruit and vegetable canning (4)meat packing (5)grain milling (6)brewing and wine making etc.

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• In some cases, the output of the processing factory becomes available for immediate consumption, e.g. butter, cheese, wine, beer and canned fruit.

• In other cases, some treatment of mineral ores, the output must pass through other manufacturing for processing before a final product results.

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2. COMPLEX PROCESSING INDUSTRIES :

• Some types of processing involves more than a single raw material inputs.

• Raw materials are frequently obtained from several different sources, and often subjected to a series of lengthy and complex processes that involve a high degree of organisation and advanced technology.

• In some cases, the complex processing industries may result in a product available for immediate consumption, or the required further processing or fabricating,

• e.g. steel making, aluminium production, petroleum refining, sugar refining.

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B. FABRICATING INDUSTRIES : • Fabricating involves a change in the physical

form but not the state of the raw materials used.

• Fabricating is basically the assembly of

finished or semi-finished product from other primary or secondary manufacturing industries

• e.g. steel making industry, to produce a finished products.

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• Examples :

The manufacture of automobiles, aeroplanes, ships, all other types of machinery, furniture, and clothing are examples of fabricating industries.

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Locational factors 2

Education

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