Location Economies
Location decision for Manufacturing –
Concentrate or Decentralise
Whether the manufacturing company wants to
concentrate or decentralize depends on 3 factors which are country factors,
technology factors and product factors.
Country factors
Firms locate manufacturing activities in those
locations where the political, economic, legal, cultural environment and
relative factors costs are most conducive to performances of that activity and impact
on business.
Labour skills and supporting industries are
referred as externalities.
Decentralise. If the impact is high which
required customisation
Concentrate. If the impact is low which does
not required to customisation
Concentrate. If it is rare, unique or found a
few places in the world
Decentralise. If it is common
Decentralise. Volatility Foreign exchange
Concentrate. Stability Foreign exchange
Decentralise. Formal and informal trade
barriers high
Concentrate. Formal and informal trade barriers
low
Technology factors
The 3 characteristics of manufacturing
technology are fixed cost, minimum efficient scale and flexibility of
technology
The level of fixed cost of setting up a
manufacturing plant is high, it is appropriate to serve the world market from a
single location or from a few location. When fixed caost are low, multiple
production plants may be possible, multiple location production allows firms to
responds to local markets and reduces dependency on a single location. The type
of technology used can affect the location decisions.
Concentrate. Operating on high fixed cost
Decentralise. Operating on low fixed cost
Minimum Efficient
scale
The larger the MES of a plant, the more
concentrate production in a single location
The low MES allows the firm to respond to local
market demands and hedge against currency risk by operating in multiple
locations.
Concentrate. Minimum efficient scale high which
requires less location to produce
Decentralise. Minimum efficient scale low which
requires more location to produce
It is referred to reduce set up times for
complex equipment, increase the utilisation of individual machines through
better scheduling and improving quality control at all stages of the
manufacturing process.
Concentrate. High Flexible technology which
could mass customise more
Decentralise. Low Flexible technology which
could mass customise less
Flexible manufacturing technologies can produce
a wide variety of end products at a unit cost that at one time could be achieved
through the mass production of a standardised output.
Mass customisation implies that a firm may be
able to customise its product range to meet the demands of local markets yet
still control costs
Flexible machine cells allow firms to increase
efficiency by improving capacity utilisation and reducing work in progress.
Concentration production at few choices
locations makes sense when fixed costs are substantial, MES is high and
Flexibility technologies are available
Product factors
The 2 product factors that impact location
decision
The product’s value to
weight ratio
Concentrate. Product’s value to weight ratio is
high – export – (Electronics goods)
Decentralise. Product’s value to weight ratio
is low – manufacture – (FMCG)
Products serve universal
need
Concentrate. Products can serve universal
needs, local responsiveness falls
Decentralise. Products cannot serve universal
needs, Local responsiveness increase
In Academic
Argument
CONCENTRATE location
decision is preferred when:
Political stability exists
Economic environment does not play a big role
Cultural environment does not impact
Foreign exchange is stable
Skills and labour is rare
Related supporting industries is unique
Formal and informal trade barriers are low
Fixed cost is high
Minimum efficiency scale is high
High flexible technology
High value to weigh ratio
Serve universal needs
In reality, companies faced environment and
market imperfection. (OLI and Market imperfection) This means that for example,
if the technology and product factors direct them to concentrate but the
environment factors direct them to decentralise. Companies must decentralise as
environment factors are uncontrollable. For example is when the value to weight
ratio is high or serve universal needs or high fixed cost, companies cannot
export if the informal and formal trade barriers are distorted Thus,
concentration becomes a difficulty.
Automotive and electronic industries are faced
these problems. Pharmaceutical industries are supposedly to concentrate, but
because of high trade barriers which makes it impossible concentrate. Trade
offs are present when deciding to concentrate or decentralise.
The final decision
when benefits outweigh cost
Manufacturing has 4 objectives
1) Low cost
Firms disperse production to those locations where
activities can be performed most efficiently and managed global supply chain
efficiently to better match supply and demand
2) High quality
Firms eliminate defective products from the
supply chain and the manufacturing process and improved quality reduced costs.
3) Able to response to local
differences
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