Location decisions

Where a manufacturing business locates

A factory is choosing a site that keeps the total cost of getting materials in and finished goods out as low as possible, while giving it the space, power and people it needs.

Where a service business locates, and why it is different

The difference between the two lists is the examinable point, and it comes from one fact. A factory sends its product to the customer, so it can sit on cheap land far from anybody. A service usually needs the customer to come to it, so it has to be where the customers already are.

The two lists overlap on labour and on cost. They part on the customer. Any answer that gives a shop the same reasons it gave a factory has missed what the question was asking.

Choosing a country

• Wage costs and labour skills. Low wages only help if the workforce can do the job to the standard required, and a country with cheap labour but no relevant skills means training costs and delays.
• Size and growth of the market. Locating inside a large or fast-growing market puts the business next to its customers and cuts delivery times.
• Import tariffs and quotas. Producing inside a country avoids the tariff on goods brought into it, which is one of the most common reasons a business builds a factory abroad.
• Transport and infrastructure. Ports, roads, power supply and telecommunications that actually work.
• Government incentives. Grants, tax rates and support offered to attract investment.
• Exchange rate stability. A currency that swings makes costs and export prices unpredictable, which makes planning harder.
• Political stability. Investment is safest where the rules and the government are not about to change.
• Language and culture. They affect how easily the business can manage the site, recruit and sell to local customers.
• Availability of raw materials. Still decisive for a business processing something heavy or perishable.

Recommending a location

Every factor above is a reason to choose somewhere. A recommendation only earns its marks when it says which reason wins here, and that depends on the business in the stem.

• Match the factor to the business. A bakery selling to local customers lives or dies on footfall. A steel plant does not care about footfall at all, and cares enormously about transport and power.
• Compare cost against revenue. A cheaper site is not better if it is cheap because nobody passes it. Ask what the extra rent buys in sales.
• Use the numbers you are given. If the question hands you two rents and two customer counts, the comparison is the answer, and ignoring the data throws away application and analysis marks together.
• Think about the long run. A site with no room to expand is a site the business will pay to leave in five years.
• Say what would change your mind. Naming the condition under which the other site wins is evaluation, and it is the part most answers leave out.

Set it out as a chain: the factor, the reference to this business, then what it does. "Site B is on the main road [k], and since 60 per cent of this cafe's customers walk in without planning to [app], the passing trade there would raise sales enough to cover the higher rent [an]."

Common mistakes

• Giving factory factors for a service business, or the reverse.
• Listing factors without saying which matters most for this business, which leaves the evaluation marks unclaimed.
• Saying a business should choose the cheapest site, with no mention of what the cheap site costs it in customers.
• Treating "near raw materials" and "near the market" as alternatives that apply equally. Which one wins depends on whether the inputs or the finished goods are more expensive to move.
• Ignoring the data in the stem and answering from memory.
• Saying low wages abroad are always an advantage, without checking the skills, the transport cost of shipping goods back, or the exchange rate.
• Writing a recommendation that repeats an advantage already explained instead of weighing the options against each other.

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