Embedded Files
"Real estate is the key cost of physical retailers. That's why there's the old saying: location, location, location"
--Jeff Bezos--
--REASONS FOR LOCATION CHOICE--
--REASONS FOR LOCATION CHOICE--
--INTRODUCTION--
--INTRODUCTION--
--QUANTITATIVE REASONS--
QUANTITATIVE REASONS refers to those factors that impact the location decisions of a firm BASED MOSTLY ON COSTS and REVENUE and therefore ARE CONSIDERED EASY(ish) to MEASURE such as labour and transportation costs and the quantity of paying customers. These factors raise questions such as....
"Is the rent on the land/building affordable?" (Cost-saving)
"Are wages lower in this region?" (Cost-saving)
"Must we build a new facility or are there existing facilities?" (Cost-saving)
"Do we locate near our customer to lower transport costs?" (Cost saving)
"Should we locate close to our main supplier to lower deliver costs?" (Cost saving)
"Should we locate where we get the most gov't funding?" (Cost saving)
"Shouldn't we locate in an affluent area?" (Revenue)
"Is the foot-traffic high!" (Revenue)
Etc....
--QUALITATIVE FACTORS--
--QUALITATIVE FACTORS--
'QUALITATIVE REASONS refers to those factors that impact the location decisions of a firm that are NON MEASURABLE and relate to aspects such as FEELINGS, PERCEPTIONS or OPINIONS, and often feature phrases like "I think we should..", or "We ought to..." These factors raise statements such as....
"We ought to locate away from the public, in case of an accident" (Opinion)
"I think we should locate where there is room for future expansion" (Perception)
"In my opinion we should locate close to our families and personal ties" (Feelings)
"I want to locate where the weather is nice all year round" (Feelings)
"It would be a good idea to locate near a pool of appropriately skilled labour" (Opinion)
"It looks bad if we locate overseas, and make domestic workers redundant" (Opinion)
"It is unethical to locate where worker welfare is low"
"Should we locate where environmental damage is caused"
"Should we locate where transport/IT infrastructure is good?"
"Should we locate where parking is easily available?"
"Should we locate so we have a 'flagship' store?"
"Must we locate near the airport/coast/tourist spots to get customers?" (Revenue)
etc...
Quantitative decision supported by a qualitative rationale.
Quantitative decision supported by a qualitative rationale.
The statement:
"We should move to a location where there is a large supply of talent so we can save on recruitment costs."
is a mix of both, but here's the breakdown:
"Large supply of talent" = Qualitative
→ This refers to the availability and suitability of skilled workers, which is not easily measurable and is based on judgment or perception.
"Save on recruitment costs" = Quantitative
→ This refers to measurable financial savings, which can be calculated in terms of how much is spent on hiring.
--GREATER CAR OWNERSHIP--
--GREATER CAR OWNERSHIP--
Given the steep rise in car-ownership it is now the need to locate where parking is accessible
--GOVERNMENT RESTRICTIONS--
--GOVERNMENT RESTRICTIONS--
Other locational issues
The pull of the market
This is less important than it once was due to the development of transport and communication industries and with the world becoming increasingly a single market. The internet has helped to make the location of a retailing business less important. But the market is still very important for some consumer service industries. The increase in car ownership has led to many of these being located out of town and city centres and on ring roads. The cinema is a good example. Once the centre piece of a town, cinemas are now often located away from town centres on sites that offer plenty of parking. Superstores and other retail stores have relocated in a similar way.
Planning restrictions
Local authorities have a duty to serve the interests of their populations. On the one hand, they want business and industry because they provide employment. On the other hand, they want to protect the environment of the towns and villages. In some areas, large development corporations have been set up to develop a town or city into a much more successful combination of dwellings and industrial activity. In most countries, local or central government has set up industrial estates and business parks that both businesses and consumers find very attractive.
External economies of scale
These are cost reductions that can benefit a business as the
industry ‘clusters’ and grows in one region. It is common for firms in
the same industry to be clustered in the same region. Silicon Valley
in the USA and Bangalore in India have very high concentrations of
IT-focused businesses. All IT firms in these regions will benefit from
the attraction of a pool of qualified labour in the area, local college
courses focused on IT, and a network of suppliers whose own
economies of large-scale production should offer lower component
costs. In addition, it will be easier to arrange cooperation and joint
ventures when the businesses are located close to each other.
--EXTERNAL ECONOMIES OF SCALE--
--EXTERNAL ECONOMIES OF SCALE--
Other locational issues
The pull of the market
This is less important than it once was due to the development of transport and communication industries and with the world becoming increasingly a single market. The internet has helped to make the location of a retailing business less important. But the market is still very important for some consumer service industries. The increase in car ownership has led to many of these being located out of town and city centres and on ring roads. The cinema is a good example. Once the centre piece of a town, cinemas are now often located away from town centres on sites that offer plenty of parking. Superstores and other retail stores have relocated in a similar way.
Planning restrictions
Local authorities have a duty to serve the interests of their populations. On the one hand, they want business and industry because they provide employment. On the other hand, they want to protect the environment of the towns and villages. In some areas, large development corporations have been set up to develop a town or city into a much more successful combination of dwellings and industrial activity. In most countries, local or central government has set up industrial estates and business parks that both businesses and consumers find very attractive.
External economies of scale
These are cost reductions that can benefit a business as the
industry ‘clusters’ and grows in one region. It is common for firms in
the same industry to be clustered in the same region. Silicon Valley
in the USA and Bangalore in India have very high concentrations of
IT-focused businesses. All IT firms in these regions will benefit from
the attraction of a pool of qualified labour in the area, local college
courses focused on IT, and a network of suppliers whose own
economies of large-scale production should offer lower component
costs. In addition, it will be easier to arrange cooperation and joint
ventures when the businesses are located close to each other.
--TASK--
--TASK--
In pairs or as a group, discuss the factors that might have
affected the location of your school. Structure your discussion
in the following way:
• quantitative factors
• qualitative factors
• market pull-factors
• other factors.
1 Produce a list of the top five location factors and try to
rank them in order.
2 Present the reasoning for your top five factors to the rest
of the class.
--ORGANISING PRODUCTION--
--ORGANISING PRODUCTION--
--OUTSOURCING--
--DEFINITION--
OUTSOURCING (also called 'Subcontracting') is when A BUSINESS HIRES AN EXTERNAL COMPANY ('THIRD PARTY') TO COMPLETE SPECIFIC TASKS or provide services instead of doing them in-house. In other words, Outsourcing means someone else does the work for you — but not your own staff. Note that the location can be either domestic or international.
--EXAMPLE--
--EXAMPLE--
Apple hires a US-based call centre
Apple hires Foxconn in China
--PROS--
"We have big orders and we don't have the production capacity to meet demand so we can outsource"
"We are not specialists at this aspect of the production process, so rather than make costly mistakes it makes sense to outsource to the experts"
"They have a lot of scale already so their average costs are much lower than if we were to do it ourselves, so we can save money ad be more competitively priced"
"Outsourcing overseas, means the labour costs are much cheaper, which will lower out costs and we can offer a more competitive price to the consumer"
"Its much more flexible as we do not have to build any expensive fixed facilities that we may not need to use permanently"
"Its much easier to simply cancel a contract with a third party rather than have to go through a very ugly plant closure"
"This Shamrock structure means our core workers can focus on developing the product and brand, rather than the actual production"
"As a small firm we could never get access to this type of process without outsourcing"
--CONS--
--CONS--
"If we outsource it may mean we may have to reduce the workforce, which is going to be very unpopular"
"If our remaining staff see that we are outsourcing jobs, they may fear for their job security and lose motivation impacting productivity"
"If we outsource overseas we may get bad publicity for replacing domestic jobs with low paid, poorly treated overseas labour"
"The quality of our products may decline impacting reputation, unless we spend heavily on quality control"
"There could be security concerns related to customer data is we outsource this aspect overseas"
etc...
--OFFSHORING--
--DEFINITION--
OFFSHORING occurs when A BUSINESS EITHER HIRES AN EXTERNAL COMPANY ('THIRD PARTY') or USES IT'S OWN 'IN-HOUSE' RESOURCES TO COMPLETE SPECIFIC TASKS 'OVERSEAS'.
--EXAMPLE--
--EXAMPLE--
Apple builds a factory in India
Apple hires Foxconn in China
--PROS--
"If we move some production overseas we can benefit from lower labour costs, which means higher profits and a more competitive price for our domestic customers"
"If we move some production overseas we can benefit from lower compliance costs, in terms of working conditions, insurance, worker compensation etc..."
"If we offshore in developing countries, we will find it easy to recruit both unskilled or semi-skilled workers, many of whom speak good English as they have higher levels of unemployment"
--CONS--
--CONS--
"If we move operations overseas, it may require us to build new plants and factories which will mean very expensive set up costs"
"If we move some production overseas to countries with low-English skills we will likely encounter language barriers which could result in costly production errors"
"If we move some production overseas we could encounter some work-culture differences, as some workers may not be used to team work, or Kaizen for example"
"...furthermore If we move some production overseas to countries that have specific religious practices we will have to amend our own, which could impact our operations such as time-delays on religious holidays"
"Also, if we are moving offshore and selling in that country we will need to make sure all our marketing etc.. is culturally sensitive, which means extra training"
If we are offshoring and employing overseas staff we will need to spend heavily on training and making sure they
"If we are offshoring in countries where quality standards are below ours then we will need spend more heavily on quality control, or risk ruining our reputation"
"If we are offshoring then we will have to deal with supply-chain problems related to the reliability of deliveries and the impact of geopolitical issues in that region on shipments etc..."
"If we offshore in countries with low wages and worker abuse issues then it will be very bad publicity and despite the cost savings our reputation and sales might fall as customers and talent will boycott us"
--OFFSHORING + OUTSOURCING--
--Can they happen together?--
"Duh Yeah..!" In fact the vast majority of cases involve a mix of both as it is more and more common for a domestic firm to hire a company in another country to do work for them, as such it is OUTSOURCING as it is done by someone else, and it is also considered OFFSHORING as it is done in another country.
Real Example: Apple + Foxconn
Apple outsources iPhone assembly to Foxconn (a separate company)
Foxconn builds the iPhones in China and Vietnam (so it’s offshored)
--INSOURCING & RESHORING--
--DEFINITION--
INSOURCING is when A BUSINESS BRINGS A TASK/FUNCTION PREVIOUSLY OUTSOURCED to a third party either DOMESTICALLY or OVERSEAS (In this case it's called 'RESHORING') BACK 'IN HOUSE'.
--DEFINITION--
RESHORING is the reverse of the offshoring process with TASKS 'RETURNING HOME’, however not necessarily in house but certainly done domestically.
--Why reshore?--
"But why would firm's choose to return?"
...RISING FACTOR COSTS IN ASIAN COUNTRIES has made the original cost advantages of offshoring less appealing.
...BETTER QUALITY CONTROL/LESS DEFECTS as recalls of defective products are not only highly damaging to the reputation of the business but are also very expensive and could lead to legal action.
...REDUCED LEAD TIMES & FASTER DELIVERY as being closer to your main customers should ensure quicker delivery and lower delivery fees, as well as enhanced reputation.
...UPHOLD ETHICAL & ENVIRONMENTAL IMPACT REPUTATION as many of the off-shoring is focused in low-cost labour hubs, which are known to disregard labour and environmental regulation to ensure lower costs. This can reflect very poorly on the firms reputation, especially with raised awareness and CSR.
...NO SUPPLY CHAIN DISRUPTIONS when Global crises like pandemics and port delays have occurred it has clearly highlighted the vulnerability of offshore supply chains.
...LESS FEAR OF IP VIOLATIONS as many firm's have seen their intellectual property rights violated by countries that they have produced the goods in.
...EARN GOVERNMENT INCENTIVES such as lower taxes, low interest grants etc, such as the US Chips and Science Act of 2022, which gave reshoring chip-making firms incentives such as government funding and tax credits. Note that this is often given to either large employers or industries that produce STATEGICALLY SIGNIFICANT products such as microchips, weaponry etc...
...AVOID HIGHER TRADE BARRIERS by producing in the country, firms will avoid any external tariffs that are imposed. As is the aim of the Trump tariffs.
...NATIONAL PRIDE GOOD FOR REPUTATION as many citizen's prefer to buy
....US SHALE PRODUCTION has lowered energy costs in the US, thus this large saving in the cost of producing in the US may make it cost-effective to reshore.
Etc....
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