Location issues have become more prominent in recent years due to the increased pace of economic reforms in several countries and consequent globalization of markets. The globalization of markets opens up new opportunities to Multinational Corporation on issues related to location, which they have not faced before. For instance, ABB decided to identify factories that could produce world class products at internationally competitive prices. More over the factories needed to have high level of technical capability and domain expertise. This resulted in selecting plants at Vadodra and Nasik for circuit breakers of range above 72.5 KV. Similarly, their motor division in Faridabad, the one available east of the Suez Canal is capable of making variable drive motors for global market. These examples amplify the close relationship between globalization and operations and new dimensions to the location of manufacturing facilities. Therefore, in the paragraphs we shall examine the factors that have caused globalization of operations their influence on location decisions.
Regulatory Issues: The most significant factor that drives globalization is ongoing economic and regulatory reforms in several developing countries. In India, beginning 1991, we embarked on a set of regulatory changes that has made our country much more attractive in terms of locating a manufacturing facility. Two events have been broadly responsible for this. First is the reduction in customs and excise tariffs and move towards a single point value added tax (VAT) regime. The other is deli censing of several sectors of the industry and progressively removing the cap on foreign direct investment. Further, there is a progressive simplification of the procedural aspects of setting up operations and running them on a day to day basis.
These changes have several implications for location choices for multinational firms. Removal of entry barriers and reduction in cost of manufacture due to tariff reduction will make India an attractive destination for shifting manufacturing base. In the case of multinational firms with manufacturing facilities already located in India these facilities will be attractive candidates for further development and growth.
Another issue of relevance for location planning with respect to regulatory issues is the emergence regional trading blocs a trading bloc is essentially of geographically separated nations that have advantageous access to markets, manufacturing facilities and technologies within the member countries. If required, it could also have a common currency, as in case of the European Union. Such an organization operating in such markets, India is a member of two trading blocs, SAARC, and ASEAN.
Factor Advantage: Globalization manufacturing is also triggered by factor advantages that an organization can enjoy by operating in specific location. .Generally, developed countries in Europe and in the US are characterized by high cost of labor. On the other hand, developing countries offer significant advantage to a firm due to availability of cheap labor. Therefore, in location planning these advantages are likely to be considered. The recent shifting of manufacturing base to China and India and the large scale shifting of BPO activities to India are primarily related to the factor cost advantages that these countries offer to firms in the western world. For a similar reason, the bulk of semiconductor and electronic appliances manufacturing has been shifting to countries such as South Korea, Taiwan and Malaysia.
Factor advantage also accrues to a firm on account of availability of skilled labor and other resources required in plenty for manufacturing. The other resources may be power and water, in case of chemical processing industries and availability of technical infrastructure in the form of well developed ancillary industries. Essentially, when these resources are available in plenty, firms develop confidence that the location of their facilities will benefit them in the long run and enable them to make further enhancement in product offering without much difficulty. Moreover, the plentiful availability of these resources will introduce a healthy competition among them, paving the way for the cost reduction and overall improvement in quality and delivery and availability. These factors may significantly influence the location decisions of a firm and may encourage the firm to globalize its operation.
Expanding Markets in Developing Countries: Another phenomenon promotes globalization of operation and provides more alternatives for location decisions. This is related to the growth rate of the economy in developed and developing countries. Developing countries such as India and China are growing at an annual rate of 6% and above. In contrast, most developed countries witness very little growth, amounting to less than 2 percent. Moreover, developing countries (primarily in Asia) have very high populations. In several of these countries, the middle income group is larger than the entire population of most developed countries. Clearly, such a scenario means expanding markets in developing countries and the desire multinational firms has been to capture a market share in these regions. Therefore, several firms have been considering new locations in these markets for their manufacturing facilities in recent years.
The factors that drive globalization of operations is aptly summarized in the study on world competitiveness rating done by the Geneva based World Economic Forum shows that various factors that make a country (location) attractive for firms. There are three tiers of competitiveness:
- First, include certain factors that make a country attractive. These include the quality of judicial economic and financial institutions, openness to international trade and finance and the role of its government in creating an environment Conducive for business
- Second, the sartorial competitiveness determines how attractive a location is, covering issues of quality and availability of manpower and associated infrastructure for the sector.
- Thirdly, the firm level issues contribute to the attractiveness of the location. This basically pertains to the ability of the firm to compete effectively in the market by operating in a particular location
General Procedures for Facility Location Planning
The preliminary Screening: A preliminary screening to identify feasible sites begins the planning process. For some kinds of facilities, particular environmental or labor considerations are crucial. Breweries, for example, require an adequate supply of clean water. Aircraft manufacturers must be located near a variety of subcontractors; primary aluminum producers need electrical power.
Resources Local Conditions
|ü Labor skills and productivity. ü Land availability and cost ü Raw materials ü Subcontractors ü Transportation facilities (highways, rail, air, water ü Utility availability and rates||ü Community receptivity to business ü Construction costs ü Organized industrial complexes ü Quality of life: climate, housing, recreation, schools ü Tasks|
Sources of information: After identifying several key location requirements, management undertakes a search to find alternative locations that are consistent with these requirements. Where does this information come from? Local chambers of commerce provide literature promoting expansion possibilities in various state and local communities. The wall street Journal and numerous trade publications contain advertisements placed by cities and communities hoping to attract new commerce. The national Industrial Conference Board, the U.S. Department of Commerce, the U.S. Small Business Administration, and the U.S. Census of Manufactures are among the many sources that provide both general and detailed location information. Data include geographic breakdowns of labor availability, population, transportation facilities, types of commerce, and similar information.
Detailed Analysis: Once the preliminary screening narrows alternative sites to just a few, more detailed analysis begins. At each potential site a labor survey may be conducted to assess the local skills. Where community or consumer response is in question, pilot studies or systematic surveys may be undertaken. Community response is important, for example, in deciding where to locate a nuclear reactor, recreation area, commercial bank, state prison, or restaurant. For assessing community attitudes and for developing strategies to gain acceptance, survey research techniques can be very helpful. Among all the many considerations, each company must identify which ones most pertinent for their location strategies?
Factor Ratings: Factor ratings are frequently used to evaluate location alternatives because:
- Their simplicity facilitates communication about why one site is better than another;
- They enable managers to bring diverse location considerations into the evaluation process;
- They foster consistency of judgment about location alternatives.
Typically, the first step in using factor ratings is to list the most relevant factors in the location decision (column 1 in Table 5.1). Next, each factor is rated, say from 1 (very low) to 5 (very high), according to its relative importance, (column 2 in table 5.1). Then, each location rated, say from 1 (very low) to 10 (very high), according to its merits on each characteristic (column 3 in Table 5.1). Finally, the factor rating is multiplied by the location rating for each factor, (column 4 in Table 5.1), and the sum of the products yields the total rating score for that location. The total scores indicate which alternative locations are most promising, considering of all the various location factors.
Table 5.2 Factor ratings for location alternative
|Factor||Factor Rating||Factor Rating||Product of ratings|
|Suitability of labor skills||3||2||6|
|Proximity to customers||3||6||18|
|Proximity to suppliers||5||2||10|
|Adequacy of water||1||3||3|
|Receptivity of community||5||4||20|
|Quality of educational system||4||1||4|
|Access to rail and air transportation||3||10||30|
|Suitability of climate||2||7||14|
|Availability of power||2||6||12|