5.4 Location
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The decision that a business makes on where to locate its production facilities, will affect costs and thereby profitability. There are numerous reasons why a firm may chose one location over another and the dynamics of a competitive globalized, technology driven world, affect these decisions dramatically.
The reasons for a specific location of production
The reasons for a business choosing a specific location to manufacture can be driven by numerous elements and ultimately the benefits must outweigh the costs.
Labor
A primary driver for the decision made by a business being cost based, invariably leads us to the highest factor input cost all companies face, namely labor. If a company is labor intensive it will be best advised to seek out a location where the cost of labor is cheapest. This has been the trend for businesses deciding to relocate to places like China, India and countries in Africa and South America.
However, labor requirements such as specialization in the skills of workers may be the reason for a firm to locate to high-cost high-skill regions such a Silicon Valley, USA.
Infrastructure Connections
Another sound reasons for a firm to select its location is accessibility to airline transportation hubs, highways, railways and ports. A business that depends of these infrastructures for the delivery of its goods will benefit for the close proximity in terms of timeliness and costs. In many cases we will find industrial parks with railway links and infrastructure providing external economies of scale.
Raw Material and resources
The location of industries in the business of extracting raw material such as oil or other minerals from the earth will inevitably need to be located at the extraction points. Natural resources such as energy based carbons and fossil fuels being a critical component of the national economy will lead to entire regions where these recourses are located being dedicated to extraction. Areas such as the Ruhr in Germany, the Niger Delta in Nigeria or the Oil Sands of Canada are fraught with political and economic histories.
Markets
In some instances the location chosen by a business will provide more than one sound reason for a decision to establish a geographic presence. The China market, for example provides not only the low cost labor advantage but also access to the worlds largest consumer bases.
However, the decision for a business to be closer to its market will depend on the nature of the business, and its targeted consumer. For example, services need to be accessible to people, while suppliers need to be accessible to businesses. Countries such as Luxembourg and London have become financial centers and in turn attract businesses in the financial sector.
The following ways of re-organizing production, both nationally and internationally:
Outsourcing/ subcontracting
Remember we said that a business could increase profitability by either cutting costs or increasing sales revenue. Some of the strategies adopted by business in achieving greater efficiency have been optimized by the rapid changes that have taken place in technology. Outsourcing is the process of having another business or a contractor complete the manufacturing process for the business. To subcontract the work as simply stated is to have someone else complete it for you. Having your homework done by someone else is technically subcontracting but not advisable.
In general, a growing number of production or service related work is conducted by the businesses, which do not require the geographic presence. For example a hospital may electronically transmit x-rays of patients to radiologists in India to them compile reports so that these are retransmitted ready the next day in the USA. Another popular form of outsourcing is the “call centers” of Bangalore. By calling a Citibank number for customer service, you will be automatically placed with a call center in India, whose operators will respond to you in not only an accent that is American but also a name that is western of origin.




Call centers are a popular form of outsourcing complete with movies that have been produced to signify the trend (Insert data and Movie clip)
Offshoring
When a business moves its manufacturing base to a different country this is known as offshoring. The idea behind offshoring is that, similar to the reasons to select a location, there are benefits related to the labor costs, the market or the raw material resources. The process of offshoring manufacturing invariable will invariably mean that the company headquarters remains in a separate location. As you can imagine, this therefore presents different challenges in decision-making. Therefore the question that is naturally raised is whether the benefits outweigh all the costs associated with the challenges. It is not therefore unusual for companies in this situation to be decentralized, meaning that they are semi-autonomous and have the ability to make independent decisions within set parameters. In order to ensure that the company that has made the decision to offshore does not suffer a loss in quality control, supervisors and a host of other manages and lead employees are routinely sent from the country of origin to ensure that the standards are maintained.




The process of offshoring is replete with examples of companies in China, Africa, and South America. Consider the factors of production that were mentioned in the opening pages of this section and decide for yourself which factors are being pursued by the international companies in: China, Africa, and South America.
Insourcing
The exact opposite of outsourcing is insourcing and implies that the business has decided to no longer subcontract its operations. This is an ongoing trend in countries where the costs now outweigh the benefits. In other words, labor may have gotten more expensive. Transportation costs are prohibitive or tax credits have been provided by the local government to incentivize companies to bring back the manufacturing and therefore jobs. Therefore, as you have probably guessed, the opposite of Offshoring is also insourcing.
The other primary reasons for a business to decide to insource may also lie with shrinking markets as the other domestic companies in the foreign country compete for the same market