Location Methods in Business Economics, Diapositivas de Dirección de Empresas

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UNIT 4 :: BUSINESS LOCATION

Jonathan Calleja Blanco

Business Economics

UB

Fall 2019

1 :: Concept of Location

Location! Location! Location!

Choosing a place were to produce/sell.

Location affects the costs of production and sell. We need to assess

the demand side (acquiring the materials) and the supplyside (selling

the product).

Well studied. I cannot be easily reversed (it is an investment ).

Location is a long term decision, which costs are split over time. The

decision is one of the most important.

2 :: Location Factors

Costs of materials, transport, demand proximity, land price, land

conditions, accessible workforce, qualified workforce, tax advantages,

agglomeration, complementarities, rents, legal framework, competition, …

No scientific method to link all of them. Then, main variables are:

1. Raw materials: price/cost and acquisition place
2. Energy: price and feasibility
3. Workforce: qualification and dynamism
4. Consumption market: necessary stock and after sales
5. Land: price, industrial parks, communications
6. Capital investment: first investment
7. Tax advantages
8. Social environment
9. Agglomeration economies
10. Components supply and services
11. Waste removal infrastructure
12. Business Dynamism
13. Big suburbs

2 :: Location Factors

1. Raw materials: price/cost and acquisition place

Locating closer to the source of materials makes transport cheaper.

Specially important for expensive materials or perishable goods

2. Energy: price and feasibility

If production needs standard energy, this factor is not important. But in

case there are special needs, this is very relevant (e.g. metallurgy)

3. Workforce: qualification and dynamism

A very important factor for some industries (e.g. research). But

qualification goes together with labor costs. It needs equilibrium

2 :: Location Factors

7. Tax advantages

Some locations provide tax or labor advantages to attract businesses

8. Social environment

Some areas are more labor-unstable (e.g. industrial protests)

9. Agglomeration economies

Advantages of highly populated and industrialized areas

• Internal economies: due to higher production (better conditions)
• Location economies: easy access to resources and markets
• Urbanization economies: development of the are (if demand is absorbed)

2 :: Location Factors

10. Components supply and services

To run a business many complementarily services are needed (e.g. lawyer)

11. Waste removal infrastructure

Waste space needs, removal infrastructure, damaging substances (e.g.

close to a city), legal restrictions or recycling.

12. Business Dynamism

More businesses around generate more opportunities

13. Big suburbs

Big city means higher costs. Suburbs (‘no city’) are an option. Some

businesses start there and progressively move to the main city

3 :: Location Methods

A. Break even point based-method

• Location may affect income. For some service firms, the place

they offer the service determines the demand

• Location may affect costs of construction, renting (fixed) or

labor, materials, transport (variable)

Difficult to find a location with the best income and costs

conditions. Generally, high income goes in hand with high costs

or variable and fixed costs are also divergent (high vs. low)

3 :: Location Methods

A.1. BEP. Income dependent on location

i) Assume 2 alternatives, A and B ii) A lower fixed costs but higher unit variable cost iii) It is a service firm. Same income function but higher expected sales in A

q

TRA = TRB

CTA

CTB

salesB salesA

Difference in income is higher than difference in costs so alternative A is preferable in terms of profits

3 :: Location Methods

A.2. BEP. Income non-dependent on location

q/CT A B C D 0 900 1300 1600 1250 50 1950 2150 2350 2200 100 3000 3000 3100 3150 150 4050 3850 3850 4100 200 5100 4700 4600 5050

q

CTA

CTD

CTC

100 150

900

1250

1300

1600

CTB

Three different best locations (A, B and C) depending on the level of production

3 :: Location Methods

B. Weighted factors

It mixes cuantitative and cualitative criteria

• Identifying the factors relevant for the location
• Establishing the weight. The relative importance
• Grading each alternative and factor in an established scale
• Obtaining a grade per location as the product of each grade

and its weight.

3 :: Location Methods

C is the best option

B and C are surely better than A (this one can be rejected). B and C

offer a very small difference. C offers proximity to supply but it is very

bad in terms of installation costs (high costs). In the other items, they

are quite similar.

In this vein, it could be said that B and C are almost equally good so

the final decision (in a real situation) could be based in other factors.

C offers a better weighted average but there is a very weak point

(installation) thus the election on the location will eventually depend on

the decision-maker criteria.

3 :: Location Methods

Example 2

Possible Locations Factor Weight A B C D Land costs 20% 10 6 5 5 Transport 30% 3 9 7 6 Labor costs 15% 9 6 6 2 Supply Proximity 25% 9 6 7 8 Taxes 5% 6 3 5 3 Environmental Policy 5% 7 7 9 6 Global grade 7.15 6.8 6.45 5.

A is the best option

A and B are better options than C and D, being A the best alternative. A offers lower costs of land but the transport, a very important factor, seems very weak. B is more homogeneous, being the taxes the worst item (but its weight is lower).

3 :: Location Methods

C. Center of Gravity

This method only considers location: the cost of transport

Specially used for the location of production plants in terms of origin and destination.

The methods aims to minimize the total costs of transport (TCT), which is proportional to the distance and the amount/weight of materials

ci = unit cost of transport to point i vi = volume/weight of materials from or to point i di = distance between point i and the chosen location

ci*vi = wi , which is the weight, or importance of each point i to the chosen location. Bigger w means higher proximity would be desired (higher costs)

3 :: Location Methods

Most used measures of distance

• Rectangular: movements of 90º (e.g. horizontal and vertical movements in a city).
• Euclidean: straight line between the point i and the location

Both of them are approximations to the real distance. We need to calculate the center of gravity , which corresponds to this coordinates (x, y):