Choosing the best location is a crucial decision for a business. Location can affect costs and profit.
Likewise, business location affects access to recruit external talent to work with and sources for their raw materials. Moreover, it also affected demand and image. It all ultimately affects competitiveness.
Reasons for choosing a production location
Where the best location can vary between businesses. For example, it depends on which sector they operate in. Businesses in the primary sector consider proximity to resources when selecting locations.
Meanwhile, businesses in the secondary sector, such as manufacturing, need to balance labor costs, proximity to raw materials, and proximity to markets. Labor costs are critical, especially if their operations are labor intensive.
Meanwhile, proximity to raw materials is essential for manufacturers to save on transportation and input costs. Then, their proximity to customers is critical for selling products quickly, mainly when producing nondurable goods.
Then, businesses in the service sector usually consider a location where customers can easily access their services. Some also consider proximity to a skilled workforce as their business is knowledge-based.
Choosing a location considers several factors. They are generally divided into two, namely:
- Qualitative aspects
- Quantitative aspects
Qualitative aspects include:
Local knowledge. Businesses usually sell products or recruit a local workforce. Thus, local knowledge is the key to choosing a business location. In addition, the right location allows them better access to customers and the crew.
Management preferences. Top-level management is the decision maker in choosing the location. So, the choice can be subjective and depends on management’s discretion.
Infrastructure. Infrastructure support such as transportation networks, electricity, and communication is vital for effective and efficient operations. Transport networks can include road, rail, and air, each with advantages and disadvantages.
For example, air transportation is the fastest way. But, it is more expensive than road and rail transportation.
Competitor. Some businesses choose to operate in locations away from competitors. If many competitors are around the same area, they may find it challenging to attract customers and turn a profit.
However, in some cases, the business and its competitors are located close together, such as a downtown retailer. They benefit because the same location makes it easier for customers to shop and select multiple products, potentially attracting many visitors.
Government influence. Governments may not grant location permits for factories for public health reasons.
On the other hand, the government may encourage investment in certain areas to promote growth and job creation. For example, they may provide incentives such as tax breaks if the company agrees to operate in the area.
Political stability. Multinational companies consider political stability when they choose a target country. They evaluate the political and legal landscape.
For example, stable politics support smooth operations. Conversely, political instability can bring problems through sudden changes in policies or regulations.
Meanwhile, the quantitative aspects include:
Financial condition. For example, a small business might rely on home production as a location. Although close to customers, operating in the city center or near highways can be expensive, exceeding their financial resources.
Price, availability, and geographic location. Downtown may be an option for retailers because it is close to customers. But, it might not be an option for manufacturing companies.
Labor availability and costs. Some companies are relocating their production facilities to developing countries in pursuit of lower labor costs. Conversely, some may operate in developed countries because it provides a skilled workforce.
Market access. The location close to the market allows the company to reach customers more quickly. In addition, it saves on shipping costs.
For example, a restaurant operates in the city center because it is close to customers, allowing more to come amidst their busy lives.
Proximity and access to raw materials and components. Proximity to raw materials affects costs. Transporting them becomes expensive if the business is located far from sources of raw materials. For example, mining for oil can only be done where reserves are found.
Utility supplies. Electricity and water are essential to support operations. For example, steel manufacturing requires it to operate its electric furnaces. Likewise, retailers need electricity for lighting, ventilation, and air conditioning.
The advantages of choosing the optimal location
Optimal location is the key to supporting smooth operations. It is also a source for achieving competitive advantage. Several reasons explain how an optimal location benefits a business, including:
Lower costs. This includes rent, raw materials, labor, and transportation costs. Lower costs lead to higher profits.
Support company competitiveness. The lower cost structure allows companies to lower prices to attract more consumers to buy, leading to higher sales volumes. Meanwhile, closeness to the customer enables the company to sell more.
Attract suitable job candidates more easily. The right location allows companies to have access to qualified job candidates at the right time. Thus, when they lose employees, they quickly find new candidates to replace them.
Overcoming trade barriers. Companies are expanding and choosing overseas locations for several reasons.
Besides being closer to raw materials and cheap labor, another reason is to overcome trade barriers such as quotas and tariffs. Such barriers make their product uncompetitive when it arrives at the destination country as it becomes more expensive.
Get government incentives. For example, the government imposes lower taxes if the company operates in a designated area.
Such tax breaks are a boon for businesses. Lower taxes allow them to save money, which they can use for investments or distribute as dividends to shareholders.
Relocation means moving production or business operations to a different location. It can be within the same city or other areas within the same country. Or the business moves overseas. In addition to cost, the effort and time required to set up at a new location is usually a consideration.
Reasons for relocation
Several reasons explain why businesses are relocating their operations, including:
- Increased demand/expansion. The current location no longer has enough space to meet the need for expansion and cannot be developed. So, the company moved to a new location.
- Better alternatives are available. For example, other locations offer lower labor costs, such as relocating production facilities from developed to developing countries. Or the company can move to another location to benefit from the infrastructure development, which makes the location more strategic.
- Changes in objectives and business strategy. The business strategy changes, possibly due to cost or competitive factors. For example, a retailer chooses a suburban location to avoid dealing head-to-head with more established competitors.
- Changes in suppliers’ or customers’ locations, encouraging companies to also move to continue to be close to them.
- Changes in government policy, for example, the government force companies to move from specific locations to minimize the worst impact on public health and the environment.
- Economic conditions, such as a recession, force businesses to increase efficiency, which is possible by relocating their operations.
Relocation involves costs, whether money, time, or effort, including:
- Preparing the site for operation
- Buying new land or buildings
- Looking for new customers and suppliers
- Developing new distribution channels
- Adjusting employee benefits with the cost of living around
- Managing administration related to relocation
- Adjusting to new regulations
In addition, there is industrial inertia where companies are reluctant to move from a location even though the location has become unattractive.
For example, a location is close to raw materials. One day, raw materials run out. However, the company is reluctant to move to another location.
The reason for this reluctance could be due to high fixed costs. Thus, relocating exposes higher costs than remaining operating there.
Opportunities and problems when a company relocates operations overseas
Relocating operations to foreign markets offers several benefits, including:
- Bigger market size. For example, a company may shift operations to a country with a large population.
- Sales growth. New markets offer higher growth potential, for example, because the domestic market has matured.
- Increased profits. Operating overseas allows companies to generate more profit by boosting sales and decreasing costs.
- Cheaper inputs. Companies shift production facilities to countries with low wages. Or they offer closer access to natural resources.
- Government support in the destination country. Developing countries often attract foreign companies to invest there. They offer waivers and other incentives.
- Tax advantages. Companies relocate overseas for low tax returns to keep more profits.
But, relocating operations overseas also exposes potential problems. Among the challenges are the following:
- Cultural differences. Different cultures can significantly affect operations because, for example, a company has to recruit local workers or sell products in local markets.
- Differences in legal matters. Different countries have differences in regulations and enforcement. Political stability is another critical factor for changes in laws.
- Minimal knowledge. Businesses may lack knowledge about new markets, such as consumer profiles and competition maps.
Suppliers provide inputs to companies, including:
- Raw materials such as metal and agricultural commodities
- Intermediate goods, such as components
- Finished goods such as office equipment
- Capital goods such as machinery and equipment
- Services such as consulting, banking, and insurance services
The inputs above affect the company’s operations in producing goods or providing services. For example, a company expects suppliers to deliver raw materials on time and according to specifications. Delivery delays can disrupt production schedules.
Why suppliers are important to the business
Effective supply is the key to business success. This is the reason why choosing a reliable supplier is critical. Four reasons explain why suppliers are important to business:
- Strategic competitiveness
- Customer satisfaction
Cost. Suppliers directly affect production costs. For example, cheaper inputs allow for a lower cost structure. Meanwhile, punctuality helps companies to minimize interruptions in production, which exposes costs to them.
Strategic competitiveness. Cost leadership requires companies to achieve a lower cost structure than competitors. It requires them to get cheaper inputs. Likewise, differentiation builds uniqueness, which quality inputs must also support.
Customer satisfaction. Producing quality output requires quality input, creating satisfaction for customers. In addition, customer satisfaction can also come from lower output prices. On-time delivery is also vital to ensure customers get goods when needed, which requires companies to reduce lead times for their inputs.
Reputation. Suppliers with shared values support companies in building their reputations. For example, environmentally friendly companies require their suppliers to share the same values. Otherwise, their reputation could be damaged.
Factors to be considered in selecting a supplier
Several factors influence the decision to select a supplier, including:
- Input quality
- Supplier capacity
Price. Lower input prices lower production costs and vice versa. Therefore, if a company can find a cheaper supplier, it can increase profits.
But, the price must be compromised with quality. Often, low price correlates with lower quality. Thus, companies should not chase prices and ignore input quality.
Input quality. Input quality has a direct impact on output quality. Quality products require quality inputs.
So, it is important not to underestimate quality over price. Quality output creates customer satisfaction and, therefore, requires companies to set high standards for their inputs.
Reliability. A reliable supplier will deliver inputs on time, leading to faster lead times. In addition, they also send input according to specifications.
Conversely, unreliability leads to delays, which can hurt production. Or, they come in below agreed-upon specifications, which could damage the output.
Reputation. Suppliers build a reputation over a long time. If they have a good reputation, they should be reliable. Reputation reflects the supplier’s quality, which is valued and recognized by other companies when using their services.
Supplier capacity. This affects the supplier’s ability to meet increased orders. This factor is important for optimizing the company’s sales while avoiding problems in production when the company increases output.
Orders can increase at any time due to surges in consumer demand. And suppliers with large business sizes can easily meet demand when the company grows orders.
In addition to the factors above, other considerations may involve:
- Discounts offered
- Credit facilities provided
- Additional fees apply
- Alternative suppliers available
- Shared values
- Supplier location
- Previous experience
Production reorganization may involve:
Outsourcing is a business practice of handing over some work or activities to external parties. So, businesses can focus more on activities where they are experts (core activities). Also known as subcontracting.
Outsourced activities are generally non-core activities. They are considered less strategic and not the company’s core business. Examples are payroll, call centers, or materials or components manufacturing.
Outsourcing advantages and disadvantages
Outsourcing aims to reduce costs and focus resources and capabilities on the core business. Other advantages are:
- Streamline operations by focusing on critical activities
- Reduce labor by eliminating unnecessary areas
- Improving quality with a more effective organizational structure and operations
- Get low prices because partners specialize and have higher economies of scale in outsourced activities
However, companies can become highly dependent on external suppliers. It can disrupt operations if partners cannot perform work according to contract or standards. Other limitations are:
- Low-quality control, hanging on partners
- Uncertainty and decreased staff morale due to restructuring and redundancies
- Difficulty in finding a reliable partner, where a wrong choice can be disastrous
- Requires effective communication and coordination with partners
Offshoring refers to relocating business activities to other parties overseas. It may involve operational processes such as manufacturing. For example, a company based in Japan produces goods in Indonesia. Or it is for business support services such as accounting and call centers.
Offshoring is outsourcing to companies overseas. When a company subcontracts its business processes to another company in the same country, it becomes outsourcing, not offshoring.
Offshoring aims to focus more on core competencies and save costs by outsourcing jobs to low-wage countries.
- Increase profitability through lowering costs by offshore countries with lower wages or closer to raw materials
- Gaining access to qualified personnel overseas
- Reduce marketing time and costs by getting closer to the targeted market
- More difficult to control and guarantee quality than to outsource to other domestic companies
- Vulnerable to changes in the business environment in partner countries, for example, political and economic instability.
- Government constraints due to offshoring reduce domestic job creation
Reshoring is the opposite of offshoring. In reshoring, companies move their business processes from overseas to domestic. For example, a Japanese automotive company is closing manufacturing facilities in other countries and opening new facilities in Japan.
This practice is usually carried out when production costs become cheaper in the country than abroad. Other reasons explain reshoring include:
- More quality control
- Protect intellectual property
- Incentives by the government to create more domestic jobs
Insourcing is the opposite of outsourcing. The company takes over the outsourced business processes or activities in-house.
Management may appoint related departments to work on it. Alternatively, it involves creating a new department. In other cases, large corporations may assign business units to do so.
If done by an internal department, it may require the company to recruit external specialists to handle it. They may also have to train employees to become proficient at the new job.
Insourcing offers several advantages. First, companies have more control over business functions. Second, it enables better employee empowerment and motivation through increased job variety (job enrichment).
However, insourcing can add to the workload. As a result, it can increase stress because there is more work to be done by existing employees.
In addition, insourcing can make a company less focused on its core business. Companies also need more money to train employees or buy equipment.
Explore More #OPERATIONS MANAGEMENT
- Introduction to Operations Management
- Production Method
- Lean Production
- Quality Management
- Business Location, Supplier, and Production Reorganization
- Production Planning
- Research and Development
- Inventory Management
- Ethical Behavior, Crisis Management, and Contingency Planning