Location Strategy

Location Strategies

Strategic Importance of Location

Firms across the world are using various concepts and techniques to address the location decision because location greatly affects both fixed and variable costs . Location also has a major impact on the overall risk and profit of the company . Transportation costs play a significant role in determining the product 's profit . Around , one-fourth of a firm 's expenses like raw materials and delivery of finished products . Other costs that may be influenced by location include taxes , wages and rents By selecting a proper location such

expenses can be minimized . Locations options include

1 ) Expanding an existing facility instead of moving

2 ) Maintaining current sites while adding another facility in some new location

3 ) Closing the current facility and move to another location

Location decisions are also affected by the type of business . For- example for industrial location decisions , minimizing cost is important While for retail chains like Walmart focus is more on maximizing the revenue . Warehouse location strategy may be driven by a combination of cost and speed of delivery

Basic Location Strategies

The bottom line of an economic activity is the relationships between the costs of its inputs and the revenue from the sale of its outputs Two major location strategies can be considered

Costs minimization mainly considers location problems where income (sales ) is generally constant and costs vary , which is particularly the case for manufacturing and resources that tend to service large markets The goal is consequently to find an optimal location that minimizes costs and maximizes profits . Such a location can be "bounded , implying that a certain geographical area due to its lower costs would incur profits for an activity wherever its location within this area . There is a potential positive feedback effect as a low cost location enables to increase profits , which can be passed down the supply chain and likely improve the market share , demand and income

Revenue maximization on the other hand deals with constant costs , but varying income . This is particularly the case for retail activities whose inputs tend to be constant (such as labor , but whose income (sales ) can increase at locations accessible to potential customers There is an optimal location insuring the highest access to customers which can be bounded

Both strategies can be reconciled in a profit maximization perspective where both costs and income varies according to location

Factors Affecting Location Decisions

Due to the advent of globalization , many companies are expanding out of their origin country . Few reasons for the expansion include- good outsourcing opportunities , high differences in labor costs , more reliable communication and speedy transport . Whenever a company decides to open an office , a factory , retail store or a warehouse it has go through a particular sequence of decisions

Location Decision Process

1 ) Country Decisions- The country to be decided depends on the factors like political stability , trade barriers , location of markets , exchange rates and currency risks , availability of supplies etc . For example - India and China have become very economical IT outsourcing...