Facilities Location Decision Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Facility comprises the physical resources such as land, plant, machinery, and equipment that are brought together at one geographic location for the purpose of producing particular goods and/or services. Decisions on these resources are therefore of paramount importance for firms, not least because they involve large capital investments; once made, these decisions cannot be easily or cheaply undone. Overall, facilities decisions are concerned with, inter alia, where to locate the organization’s production facilities, how large each should be, what goods or services should be produced at each location, and what markets each facility should serve.

Since these decisions aim to generate more profit for profit-oriented organizations or achieve a balance between costs and the level of customer service they provide for not-for-profit organizations, much time and effort needs to be put into identifying and assessing the key variables that make up these decisions because the size and binding nature of the investments make relocation hard to justify. The magnitude of these decisions is such that some organizations may be committed indefinitely to a location once it has been chosen.

The overall objective of choosing one location over alternatives is to secure the best net gains for an organization now and in the long term. In essence, such an overall objective can be achieved through establishing an appropriate balance between three related issues: (1) the spatially variable costs of the operations or costs that change with geographical location, (2) the service the firm is able to provide to its customers, and (3) the revenue potential of the firm. Of these, the last two issues are more related to for-profit organizations simply because of the assumption that the better the service the firm can provide to its customers, the better will be its potential to attract customers and therefore generate revenue. In not-for-profit organizations, however, revenue potential might not be a relevant objective and so cost and customer service are often taken as the twin objectives of the facilities location.

In order to achieve the aforementioned objectives of the facilities location, a number of factors that are believed to influence facilities location decisions need to be taken into account. These are labor factors, exchange rate and currency risk, location costs, attitudes and culture of government and worker toward location decisions, proximity to markets, proximity to suppliers, and proximity to competitors. With regard to labor factors, the primary labor considerations are the costs and availability of labor, wage rates in an area, labor productivity and attitudes toward work, and whether unions are a serious potential problem.

Although wage rates and productivity may make a country seem economical, unfavorable exchange rates may negate any savings. As a result, the values of foreign currencies and their changes need to be taken into account in location decisions. Location costs that are tangible and intangible certainly affect a location decision and therefore should be rigorously calculated. National and local government policies can also facilitate the siting of a new business by how easy or difficult they make the process involved. Cultural variations in punctuality by employees and suppliers make a marked difference in production and delivery schedules.

For many firms, it is extremely important to locate near customers. Firms also like to locate near their raw materials and suppliers, not least because of perishability, transportation costs, and bulk. Furthermore, companies like to locate, somewhat surprisingly, near competitors. This tendency (also called clustering) often occurs when a major resource is found in that region. Italy may be the true leader when it comes to clustering, with northern zones of that country holding world leadership in such specialities as ceramic tile (Modena) and gold jewelry (Vicenza). In addition to the aforementioned factors, selecting a facility location is becoming much more complex with the globalization of the workplace. That is, because of market economies, better international communications, more rapid and reliable travel and shipping, and high differences in labor costs, many firms now consider operating outside their home countries.

Having considered the critical factors influencing facilities location decisions, the question remains as to how to choose the optimal location. Although the facilities location decision is often based on opportunistic factors such as site availability and cost benefits such as government grants and favorable tax rates, a quantitative analysis brings an important perspective to the decision and helps identify the optimal location based on the key benefits an organization is seeking.

Some of the more commonly used techniques regarding the choice of optimal location are weighted factor method, center of gravity method, location break-even analysis, and transportation model. In the weighted-factor method, a variety of relevant criteria (also called critical success factors) are included in choosing a location. Locational break-even analysis relates to the use of cost-volume analysis to make an economic comparison of location alternatives. The center of gravity method is a mathematical technique used for finding the location of a distribution center that will minimize distribution costs. Finally, the objective of the transportation model is to determine the best pattern of shipments from several points of supply (sources) to several points of demand (destinations) so as to minimize total production and transportation costs.

Bibliography:

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