Factors influencing Plant Location

Costs: Tangible and Intangible

Cost is a primary driver in location decisions, but costs are not always easy to quantify. They are generally divided into two categories:

Tangible Costs

• Definition: Tangible costs are those that can be readily identified and measured with precision. They are typically financial and have a direct impact on the company's bottom line.
• Examples:
  • Utilities: Electricity, water, gas, and other essential services.
  • Labor: Wages, salaries, benefits, and other compensation.
  • Materials: Raw materials, components, and other inputs.
  • Taxes: Property taxes, income taxes, sales taxes, and other government levies.
  • Depreciation: Wear and tear on assets, including building, equipment, and machinery.
  • Transportation: Inbound transportation of raw materials and outbound transportation of finished goods.
  • Site Construction: Costs associated with building facilities or preparing land.
• Characteristics:
  • They are easily tracked and recorded by the accounting department.
  • They are generally predictable and can be calculated with a reasonable degree of accuracy.
  • They provide a concrete basis for comparing the cost-effectiveness of different locations.

Intangible Costs

• Definition: Intangible costs are those that are difficult to quantify or measure precisely. They are more subjective and often relate to non-financial factors.
• Examples:
  • Quality of Life: Factors like climate, recreation opportunities, cultural amenities, and lifestyle.
  • Quality of Education: Availability and quality of schools for the employees and their families.
  • Public Transportation Facilities: Access to reliable public transportation networks.
  • Community Attitudes: The local community's perception of the industry and the company.
  • Prospective Employee Attitude & Quality: The skill set, work ethic, and attitudes of the local workforce.
  • Climate and Sports Teams: Factors that can influence employee satisfaction and retention.
• Characteristics:
  • They are often subjective and difficult to measure in monetary terms.
  • They can significantly impact employee morale, productivity, and the organization's ability to attract talent.
  • While hard to quantify, they should not be overlooked as they are equally important as tangible costs

Political Risk, Values, and Culture

Location decisions are not solely about costs and logistics; they are also influenced by political, social, and cultural factors.

Political Risk

• Definition: The potential for instability or negative changes in a country's or region's political climate that could impact business operations.
• Aspects:
  • Government Attitudes: The stability and consistency of policies related to private property, intellectual property, zoning regulations, and environmental protection.
  • Policy Shifts: Changes in political power may lead to changes in business-related laws and regulations.
  • Employment Stability: Government attitudes towards labor unions, worker protections, and employment security.
• Considerations:
  • Evaluate the political stability of potential locations.
  • Assess the potential for changes in regulations and their impacts on business operations.

Worker Views

• Definition: The attitudes, values, and behaviors of the local workforce.
• Aspects:
  • Turnover Rates: The frequency with which employees leave the company.
  • Unionization: The presence and influence of labor unions.
  • Absenteeism: The frequency with which employees are absent from work.
• Considerations:
  • Understand how worker attitudes can impact operational efficiency and productivity.
  • Assess the impact of relocation on current employees.

Culture

• Definition: The shared values, beliefs, norms, and behaviors of a group of people.
• Aspects:
  • Punctuality: Differing views on timeliness and their impact on production and delivery schedules.
  • Ethical Standards: Varying attitudes towards bribery, corruption, and other forms of unethical business practices.
  • Communication Styles: Differences in communication can lead to misunderstandings and inefficiencies.
• Considerations:
  • Be aware of cultural variations and their impact on operations, especially in global contexts.
  • Build supply chains that can effectively navigate cultural differences.
  • Ensure ethical practices are maintained across cultures

Proximity to Markets

• Definition: The geographical distance between a business and its customers.
• Importance:
  • Service Organizations: Locating near customers is essential for businesses like drugstores, restaurants, and barber shops. Demographics and market accessibility are the main drivers of location decisions for these businesses.
  • Manufacturing Firms: Proximity to customers is crucial for firms that have high transportation costs due to bulky, heavy, or fragile finished goods.
• Examples:
  • Foreign-owned auto giants locate in India to serve the large Indian market.
  • Just-in-time production systems demand suppliers to locate near the end-users.
  • Bottling plants for products like Coca-Cola are located in many cities to minimize transportation costs for the heavy product.

Proximity to Suppliers

• Definition: Locating near the source of raw materials and supplies.
• Reasons for Proximity:
  • Perishability: Businesses that use perishable raw materials like bakeries, dairy plants, and seafood processors often locate close to their suppliers.
  • Transportation Costs: Companies that use heavy or bulky raw materials like steel producers locate near their suppliers to minimize inbound transportation costs.
  • Bulk Reduction: Operations that significantly reduce the bulk of raw materials during production locate near their suppliers to cut transportation costs.
• Examples:
  • Lumber operations tend to locate near forests due to bulk reduction.
  • Industries that consume large amounts of water or energy might prefer to locate near water resources or power grids.

Proximity to Competitors (Clustering)

• Definition: The tendency of businesses to locate near their competitors.
• Reasons for Clustering:
  • Resource Availability: Clustering occurs when major resources are located in a specific region, like natural resources, information, capital, or skilled labor.
  • Shared Resources: Businesses that cluster can sometimes access shared resources like talent pools, supplier networks, or infrastructure.
  • Competitive Advantage: Clustering can create a competitive environment that encourages innovation and growth.
• Examples:
  • Tech companies clustering in Silicon Valley due to the availability of talent and venture capital.
  • Retailers grouping together in shopping malls to increase customer traffic.
  • Car dealerships locating near each other to benefit from shared customer traffic.