LOCATION DECISION FOR MULTINATIONAL COMPANIES
...cation is where the business seeks to be low-cost producer. If the business seeks to be the low-cost competitor, the choice of niche or global strategy still needs to be made. A niche strategy, limited to one country or a region, may be appropriate if transportation costs or selling costs are high and economies of scale are low. For example, the business produces a relatively bulky or heavy standard product such as glass jars, or automobile batteries. The business seeks to compete by charging the lowest prices among competitors and low-cost niche strategy is desired. Even though manufacturing costs are higher in certain countries, the business should locate facilities around the world near the customers due to high transportation costs. This could include, for example, plants in each country in which the company operates. A business choosing a low-cost strategy for a global commodity market will face a somewhat situation. If transportation costs are low and economies of scale are high, it is likely that the firm will have one or a few centralized locations to serve the world. The business will seek to find the lowest-cost mix of input factors. Over a relatively long time period, industries may move from one country to another in search of the lowest-cost combination of factors. The deciding factor for the low-cost producer will be the total cost of designing, producing, distributing, and selling the product. A value chain approach can be used to think about where various value activities should be located to achieve minimum cost. Each of these value activities is located in that part of the world which results in overall lowest cost. The second case for location is differentiation strategy. There are several ways to differentiate, including: 1. Product innovator: This business will often be first in the market and will have many new products. 2. Flexibility: to meet changing product requirements, special customer requests, or volume changes. 3. Fast delivery: Shortest lead time to supply the product from customer request to delivery. 4. Most dependable delivery: The product is delivered when promised. 5. Best product features: Outperforms all other products or has features that the customer desires. 6. Consistent quality: the product consistently meets customer requirements. Some of the differentiation strategies can only be achieved by a geographical niche strategy. For example, the first differentiation strategy favors local R&D close to the customer because customers often help to generate many innovative ideas. The second strategy favors the firm which can change quickly. Small firms that are in close touch with their customers typically have the most flexibility. A large firm with centralized marketing and production would not be as competitive. The third strategy, fast delivery, favors plants close to customers or economical air shipment of products. The forth, fifth and sixth strategies probably do not depend on location and can be executed from anywhere in the world. A more recent trend in supply chain management is to allow suppliers to work on-site and handle the restocking of parts themselves; this system is called JIT II (just-in-time). JIT deserves a special word of consideration here. JIT suppliers must usually be close to customers in order to assure frequent, small shipments. One exception to this is where the product can be economically transported by air freight. Despite there exceptions, JIT affects the location decisions of international firms. JIT delivery is a form of differentiation. Like the low-cost producer strategy, the differentiation strategy should be analyzed on value chain basis. Value activities are considered in terms of how much differentiation is provided by each activity. The question of where to locate each activity is analyzed in terms of how that activity can best provide differentiated value. Location of facilities requires consideration of a broad range of quantitative and qualitative criteria. The criteria go beyond cost and include legal, political, and social factors. Many of these considerations directly affect cash flow, the risk of foreign investment, or the feasibility of given location. LOCATION CONSIDRATIONS The selection of the site of the facility will be the final stage of a sequence of decisions which begins with the selection of an appropriate region, then involves the selection of appropriate area in the region, etc. for international organization, it is possible to identify at least four stages in the locational choice process: o First : Regional decision. o Second : Area decision. o Third : Community decision. o Fourth : site decision. Different factors will influence decisions at each of these levels. The relative importance of some of these factors will depend on the type of operation or business which is to be located. A number of factors keep location decision from being analyzed based solely on cost. The following are some of the factors that might influence a businesses location decision: „X sources of power: Plants that have unusual power needs should be located in areas where energy is less expensive or near sources of hydroelectric power. „X Proximity to supplies and resources: The decision about where to locate plants in certain industry is based on the location of resources. For example, firms producing wood or paper products must be located near forests, firms producing processed food near farms. „X availability and cost of land „X Availability of labour: The appeal of low wage rates often provides an enticement to particular locations, domestic or foreign; but an analysis that focuses on wage rate is inadequate if it does not also consider the availability of labor force with the required specification of the particular skills needed. „X Transportation Needs: Depending on the nature of the product produced and the requirements for raw materials, the plant may have to be located near major highways or rail lines. „X Unionization: A motivating factor for a firm considering expanding an existing facility, as opposed to one considering building a new facility, is the potential for eliminating union influence in the new facility. A fresh labor force may be more difficult to organize. FACTORS INFLUENCE INTERNATIONAL LOCATION Quantitative location criteria can be directly measured or quantified. These quantitative factors include the costs for labor, materials, overhead, shipping, and any special packaging or insurance required for overseas operations. In addition to normal manufacturing costs, the firm must take into account taxes, duties, inventory carrying costs, and foreign currency rates. As a matter of fact, many locations hinge heavily on these additional costs or on incentive given by foreign governments to attract investments. The firm must also consider the ability to repatriate profits earned. For example, returns from investments in China today cannot be translated into hard currency and profits cannot be taken out of the country. This is true, to varying degrees, in other countries too. There are also a large number of qualitative factors which need to be considered. These include political and economic stability, degree of government regulation, and specific laws. One of the most important factors in plant location is political and economic stability. Why invest in country where the plant might be seized by foreign government or the currency can change to point where the plant worthless? Decision makers also should consider the regulatory policy of the government and the specific laws which affect the business. Firms cannot ignore the effect that offshore production might have on domestic union relations or the image of the company. Finally, the business must consider the need for international coordination facilities. Coordination across borders presents a formidable cost and challenge to the novice firm. Some of the common problems are language difficulties, differences in operations philosophy, and cultural differences. The following are some of the factors which influence international location decision: „X Location overseas to avoid trade barriers „X Impact of exchange rate fluctuations: Sometimes exchange rates allow for exporting from one country to another where the unit of exchange is less dear. However, management needs to question the stability of such exchange rates. „X political stability „X language and cultural barriers „X Tax treatment: Tax consideration is an important variable in the location decision. Favorable tax treatment is given by some countries, such as Ireland, to encourage new industry. There are significant differences in tax laws designed to attract manufacturers. „X Quality of life in the region: When other issues do not dictate the choice of a location, choosing a site that will be attractive to employees may help in recruiting key personnel. This is especially true in high-tech industries that must compete for workers with particular skills. METHODS OF SOLVING LOCATION PROBLEM There are four major methods for solving location problems: WEIGHTED METHODS It is the most widely used location technique. It is useful for service and industrial locations. The weighted method is popular because a wide variety of qualitative factors can be included. Managers can also consider the results of more quantitative approaches when taking a final decision. The six steps in weighting methods are: 1. List relevant factors 2. Assign a weight to each factor to reflect its importance in the company's objectives. (0 - 1) 3. Develop scale for each factor (1 - 100) 4. Score each location using factor scale 5. Multiply scores by weights for each factor & total the score for each location. 6. Make a recommendation based on the maximum total score. Example 1: Two refineries sites (A and B) are assigned the following range of point values and respective points, where the more points the better for the site location. LOCATIONAL BREAK-EVEN METHODS Locational break-even analysis is the use of cost-volume analysis to make an economic comparison of location alternatives. By identifying fixed and variable costs and graphing them for each location, we can determine which one provides the lowest cost. This method can be done mathematically or graphically. The graphic approach has the advantage of providing the range of volume over which each location is preferable. The three steps to locational break-even analysis are: 1. Determine fixed & variable costs for each location 2. Plot total cost for each location, with costs on the vertical axis of the graph and annual volume on the horizontal axis. 3. Select location with lowest total cost for expected production volume Example 2: A manufacturer of automobile carburetors is considering three locations -Akron, Bowling Green, or Chicago- for a new manufacturing plant. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best location for an expected volume of 2,000 cases per year? Total cost for Akron = $30K + ($75)(2000) = $180,000 Total cost for Bowling Green = $60K + ($45)($2000) = $ 150,000 Total cost for Chicago = $110K + ($25)($2000) = $160,000 With an expected volume of 2,000 units per year, Bowling Green provides the lowest cost location. It is clear from the chart shown in figure 1 that for a volume of less than 1,000 units, Akron would be preferred, and for a volume greater than 2,500 Chicago would yield the greatest profit. Figure 1: Crossover chart for locational Break-even analysis. CENTER OF GRAVITY METHOD The centre of gravity method is a mathematical technique used for finding a location for a single warehouse that services a number of retail stores. The method takes into account the location of markets, the volume of goods shipped to those markets, and shipping costs in finding a best location for a central warehouse. This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria stated ab...