CHAPTER EIGHT

Location Planning and Analysis

Supply Chain Considerations

Location Options
Managers of existing companies generally consider four options in location planning.

Expand an existing facility. This option can be attractive if there is adequate room for
expansion, especially if the location has desirable features that are not readily available
elsewhere. Expansion costs are often less than those of other alternatives.

Add new locations while retaining existing ones. This is done in many retail operations. In
such cases, it is essential to take into account what the impact will be on the total system.
Opening a new store in a shopping mall may simply draw customers who already patronize an
existing store in the same chain, rather than expand the market. On the other hand, adding
locations can be a defensive strategy designed to maintain a market share or to prevent
competitors from entering a market.

Shut down at one location and move to another. An organization must weigh the costs of
a move and the resulting benefits against the costs and benefits of remaining in an existing
location. A shift in markets, exhaustion of raw materials, and the cost of operations often
cause firms to consider this option seriously.

Do nothing. If a detailed analysis of potential locations fails to uncover benefits that make
one of the previous three alternatives attractive, a firm may decide to maintain the status
quo, at least for the time being.

GLOBAL LOCATIONS
Facilitating Factors
There are a number of factors that have made globalization attractive and feasible for
business organizations.
Two key factors are 1. trade agreements and 2.
technological advances.

Trade Agreements. Barriers to international trade such as

Benefits.
Markets. Companies often seek opportunities for expanding
markets for their goods and services, as well as better
serving existing customers by being more attuned to local
needs and having a quicker response time when problems
occur.

Cost savings. Among the areas for potential cost saving are
transportation costs, labor costs, raw material costs, and taxes. High production costs in Germany have
contributed to a number of German companies locating some of their production facilities in lower cost
countries. Among them are industrial products giant Siemens, AG (a semiconductor
plant in Britain), drug makers Bayer, AG (a plant in Texas), and Hoechst, AG (a plant in China), and
automakers Mercedes (plants in Spain, France, and Alabama) and BMW (a plant in Spartanburg, South
Carolina).

Legal and regulatory. There may be more favorable liability and labor laws, and less-restrictive
environmental and other regulations.

Financial. Companies can avoid the impact of currency changes that can occur when goods are produced
in one country and sold in other countries. Also, a variety of incentives may be offered by national,
regional, or local governments to attract businesses that will create jobs and boost the local economy.
For example, state incentives, and workforce
and land availability and cost, helped convince Nissan to build a huge assembly plant in Canton,
Mississippi, and Mercedes to build an assembly plant in Vance, Alabama. An added benefit came when
suppliers for these plants also set up facilities in the region.

Other. Globalization may provide new sources of ideas for products and services, new perspectives on
operations, and solutions to problems.

Disadvantages
Transportation costs. High transportation costs can occur due to poor infrastructure or having to ship
over great distances, and the resulting costs can offset savings in labor and materials costs.
Security costs. Increased security risks and theft can increase costs. Also, security at international
borders can slow shipments to other countries.
Unskilled labor. Low labor skills may negatively impact quality and productivity, and the work ethic may
differ from that in the home country. Additional employee training may be required.
Import restrictions. Some countries place restrictions on the importation of manufactured goods, so
having local suppliers avoids those issues.
Criticisms. Critics may argue that cost savings are being generated through unfair practices such as
using sweatshops, in which employees are paid low wages and made to work in poor conditions; using
child labor; and operating in countries that have less stringent environmental requirements.
Risks
Political. Political instability and political unrest can create risks for personnel safety and the safety
of assets. Moreover, a government might decide to nationalize facilities, taking them over.
Terrorism. Terrorism continues to be a threat in many parts of the world, putting personnel and assets
at risk and decreasing the willingness of domestic personnel to travel to or work in certain areas.
Economic. Economic instability might create inflation or deflation, either of which can negatively
impact profitability.
Legal. Laws and regulations may change, reducing or eliminating what may have been key benefits.
Ethical. Corruption and bribery, common in some countries, may be illegal in a company’s home country
(e.g., illegal in the United States). This poses a number of issues. One is how to maintain operations
without resorting to bribery. Another is how to prevent employees from doing this, especially when
they may be of local origin and used to transacting business in this way.
Cultural. Cultural differences may be more real than apparent. Walmart discovered that fact when it
opened stores in Japan. Although Walmart has thrived in many countries on its reputation for low-cost
items, Japanese consumers associated low cost with low quality, so Walmart had to rethink its strategy
for the Japanese market.