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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
LOCATION DECISIONSLOCATION DECISIONS
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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
LOCATION DECISIONSLOCATION DECISIONS
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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
FACTORS THAT AFFECT FACTORS THAT AFFECT LOCATION DECISIONSLOCATION DECISIONS
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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
FACTORS THAT AFFECT FACTORS THAT AFFECT LOCATION DECISIONSLOCATION DECISIONS
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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
FACTORS THAT AFFECT FACTORS THAT AFFECT LOCATION DECISIONSLOCATION DECISIONS
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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
CLUSTERING OF COMPANIESCLUSTERING OF COMPANIES
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IndustryIndustry LocationsLocations Reason for clusteringReason for clustering
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
CLUSTERING OF COMPANIESCLUSTERING OF COMPANIES
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IndustryIndustry LocationsLocations Reason for clusteringReason for clustering
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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