1.0 INTRODUCTION This note emphasizes
the importance of site selection in a firm’s operation and looks into many factors that need to be taken
into consideration before a sites election
decision
is made. The note looks into the importance of markets, labour costs and other human-resource -
related issues. Emphasis is also placed
on inherent local conditions, the infrastructures of a region, subsidies
by government and accessibility to
resources. Attention is also given to
quantitative methods for site selection. The methods include weighting,
breakeven, probability and
centre-of-gravity methods.
2.0 OBJECTIVES
At the end of this note, you should be able to:
(i) Understand the meaning of site selection
(ii) Understand the factors that need to be considered before
site-selection decisions are made
(iii) Know the interrelationships among relevant factors of site
selection
(iv) Use quantitative methods to decide on site-selection.
3.0 MAIN CONTENT
3.1 Definition of Site Selection
Site selection is deciding on a location for constructing,
expanding or acquiring a physical entity
of a firm in order to reach new markets, increase production capacity of serve customers better. It is
otherwise called facility location and it
could be for either a manufacturing or a service organisation. Site selection decision may be for a small
regional company of a large
multinationals. Depending on the size of the location, the ease of the
decision making process varies from
small companies to a large - multinationals. In
other word, it could be domestic or international.
Domestic Example
1. Lever Brothers, based in Lagos, Nigeria selects to have another
branch in Gbongan, a town in Ayedaade
Local Government Area of Osun State,
Nigeria.
2. Eleganza (Nig) Plc,
based in Lagos selects to have a distribution centre in Osu, Atakumosa L.G.A., Osun State,
Nigeria.
International Examples Lever Brothers, based
in Lagos Nigeria decides to have a distribution centre in Detroit, Michigan, USA
Eleganza (Nig) Plc, based in Lagos, Nigeria selects to have a new
plant in Watford, north of London, Great
Britain.
However, site selection is always based on the cost of operating
the new facility, or on the returns
expected to be realised.
3.2 Factors in Site Selection
3.2.1 Staffing
This includes the availability of all the types of personnel
needed to run a facility, direct and
indirect operating personnel and management. Labour cost is an essential criterion that should be
considered under staffing. It helps to
explain why many companies based elsewhere have built facilities away
from their own countries. The reason
might not be unconnected with the fact that
labour costs enter directly into the cost of manufactured products or
the cost of rendering a service.
The cost includes basic salary, wages as well as all social and other charges paid to the employee or
paid to government by employer in the
form of taxes Social laws with the
accompanied social charges affect labour flexibility and cover areas such as basic work week, overtime
permitted, weekend working living and
termination laws. This is very important in deciding where a company should be located. For example, a great impediment to sitting
companies in France and Italy is the
consideration of introducing a 35 hour working week, which is lower than
what operates in many other
countries
Availability of skilled labour is also important. There must be a
good pool of labour which can be trained
for the type work. Choosing a place where there is high unemployment level confirms labour
availability e.g IBM of USA locating in
Glasgow Scotland because of significant labour availability in the areas.
Productivity of labour should also accompany the availability of labour.
Productivity (absolute) is measured as the output divided by the
input of resources. For example,
companies tend to locate in South Korea and Hong Kong because of their high labour
productivity. Strong Trade - Union power
in a country can also contribute to unwillingness to locate a firm in the region: This
manifests in the conditions attached to
Union membership and the frequency of industrial actions in the region. This explains why many trade memberships are
declining and companies avoid strikes
celebrated regions.
Education level of the available work force is also important.
This has a direct relationship with how
much training would be required and the training facilities available. For example, North
Caroline, USA, because of her high
education level is attracting many companies. Local labour should also be able to handle
sophisticated plant technology.
Sometimes sitting a company or a facility where the labour lacks
the required sophistication may compel
the reduction of the complexity of the plant to adapt to the level of the local labour. Labour mix which affects reputations
governing the percentage of local labour
that must be used in either the construction of a new firm or the
subsequent operation is also an
important factor in staffing a company or a facility. The consideration of the specification of some
countries stating the minimum levels of
local labour that should be in a company is important.
3.2.2 Inherent Local
Condition
Inherent local conditions include factors such as climate, culture
and language. Climate may present
attractive locations for facilities if associated with many days of sunshine and good weather. This is because
people prefer to live in regions with
good weathers and it is easier to recruit personnel in such a place. This explains the rapid growth of Florida and
Texas in USA to the detriment of some
other areas in the country. Culture of a
region may present difficult situation for the expatriates. Expatriates are nationals of the country
where the head office is located, who
are sent overseas on a time-limited contract.
They receive a premium on their
salary according to the “difficulty” of the location. Using expatriates
is very costly, not only because of the
salary premium but because housing and
transportation have to be provided for the. For example, South Arabia
would be considered more difficult than
England. Ethics of certain regions may
not match those of others and therefore acting as a deterrent to siting a facility or company
in some regions.
For example, in Europe,
Italy puts itself at a disadvantage for possible invertors because of its Mafia dealings. Language should also be a subject of
consideration under inherent local
conditions. Common language among regions is an asset for the
establishment of firms or facility. One
reason why UK is attractive to US companies is the common language. Japan and UK are also
attracted because English is the common
language of Japanese. The same is true of Nigeria and the USA
3.2.3 Infrastructure
This comprises the physical facilities put in place by the region,
business environment, and laws enacted
by the government. It also includes “family
services” such as housing, schools, University, shops, medical services
as well as telephone, fax lines,
computer net work facilities and video conferencing. Other aspects of infrastructure include: Environmental regulations cover local
regional and national rules for air, water,
land and noise pollution. For instance, locating a facility in an area
where the environmental laws are strict
can be costly.
In California U.S.A., an
environmental impact statement has to be prepared before, a company
can construct. The document should
address all the possible effects that
construction and operation will have on the environment. This is lengthy
and constitutes a delay in constructing
a plant in such a location. Legal
framework is another important factor. Litigation laws are not the same among countries. Damage claims for
infringement, such as faulty products,
faulty operation, environmental spills can cost huge some of money. In
some countries like USA, companies are
expected to have programmes that stress the
living and promotion of less privileged individuals.
Transportation is another consideration under infrastructure. It
covers the transportation facilities and
networks for raw materials, finished goods and
personnel. A good road network and rail services are advantageous. Transportation costs can add in great measure
to the cost of finished products. Rental
costs also play an important consideration in the location of site. Because rental costs add to the price of
customers, it may influence companies in
sitting at adjacent towns where the costs are lower instead of capital
where they ought to use.
In Europe, for example, Paris and London are most expensive.
Living costs is also an aspect of infrastructure. It covers all the
expenses for employees to live in an
area. High living costs are limiting factors in recruiting the appropriate personnel because intending
employee may find relocation extremely
difficult. For instance, personnel find it expensive to relocate to Tokyo because of high living costs in the
place except if the recruiting company
can shoulder the responsibility (financial).
Stability of a country may also affect site location by presenting
a high risk to companies because of the
fragility of the government, the threat of civil strife or local intolerance to foreign companies.
Iraq is one the riskiest countries in
the world as a result of great instability in the country. Other
countries considered as being risk are
Russia, Venezuela, Nigeria, Mexico etc.
3.2.4 Construction
Construction costs can reduce the profitability of the
facility. Land cost is often high where
land is scarce and this could be of limiting factor in sitting a company Europe, for example is
considered high relative to many other
regions. Construction labour which
refers to the pool of construction labour available.
Getting this pool of labour is difficult, many a time, in
developing regions necessitating the
import of labour for the duration of the construction - local regulation may also stipulate the proportion
of local labour in the construction
crews. Land preparation involves
the work necessary to prepare land for constructing of the facility. Some regions require little
land preparation while other regions
require great land preparations.
For example Industrial
Parks, created by regional districts for
the purpose of attracting companies require little land preparation and often all the utilities look
ups are in place as well. This
characterises developing countries such as Brazil, Philippines and the
Middle East. Expansion possibilities are also relevant
needs to be given to whether expansion
possibilities exist. Non existence of such a factor may hinder companies from being sited in a place. Zoning regulations which involve laws
regarding construction in particular area
is an important consideration.
In some regions, an area has to be designated as an industrial zone before plant can be
constructed in such a place. The
operation phase of the company should also be considered. Availability of materials for construction
must also be considered. Construction
materials such as cement, fibre board, wood and construction steel may
not be available locally and have to be
imported. And this adds to costs.
3.2.5 Factors Affecting Cash Flows
Some factors directly affect a firm’s cash flow. The importance of
such factors is looked into under the
factors that impact cash flows.
Fluctuating exchange rates impact cash flow. Stability of currency is
important in site for an operating
company.
Currency of the country of the parent company can affect the revenue realized, the
cost of raw materials, operating costs
and investment amount needed. In developed countries the German Mark, the Swiss France and the Dutch Guilder have
increased in strength over 20% relative
to the US dollar during the period 1994 to March 1995. The revenues acrued to the US in US dollars have increased
by some 20 per cent.
The changes in operating cost and raw material
cost depend on the currency on which the
costs are dominated. Repatriation of
funds is the ability of the parent company to repatriate the funds to the country where the headquarters are
located. Where strict exchange control
exists transfer is not easy.
Taxes on operations levied by government on companies will diminish
the net return to the corporation. For
example in California, USA, there is a longrunning noteary taxation situation concerning the
ability of the state to tax not only the
operation of a foreign company in the state, but also income generated by worldwide operations. This tells on the
profits of the company establishing in
that region.
3.2.6 Financial Aid
This includes direct cash grants or tax incentives on the land,
operation or product produced. Example
of a case where the financial aid influenced the citing of company occurred when in 1993
Mercedez-Benz of Germany planned to
build US 300 million dollar plant somewhere in USA to produce a new four-wheel drive sports utility vehicle. A
detailed analysis of the states in the
country reduced the states to three: North Carolina, South Carolina
and Alabama. These three all presented
the attractions of a relatively low-cost but
skilled and abundant work-force, anti-union sentiments, affordable
housing, attractive life style and good
transport links. In addition, the governments of the states were willing to throw money at
companies ready to locate in their state
3.2.7 Proximity of Resources
Raw materials are very important and particularly their closeness
to the process-flow plants is critical
factors in site selection. This informs reason
behind locating Oil refineries, which produce gasoline, kerosene and
diesel close to oil field and the
finished products are shopped to customers. Coal power stations, are often located close to coal
mine.
Process and utility water should be close to some companies
especially companies like oil refineries
and metal processing plants use a large quantity of utility water for cooling and / or in the
process itself. The same is also true of
food-processing plants particularly brewing and soft drinks industry;
the water supply is integral part of the
product and therefore should be located close to water supply. The quality of the water is
also very important.
Reliable power supplies are also important. Countries in Africa
have unreliable power supplies. In cases
like this, back-up power facilities need to be
constructed close to the facility. These add to the cost of
operation. Supplier or subcontractor of
companies which depend heavily on their services should be located also close to one another.
This is important because reliability in
delivery of goods is necessary if a just-in-time production criterion is used at the company.
3.2.8 Quantitative Approaches to Site Selection
Four quantitative
methods might be used as a basis for site selection if parameters and variables related to site
selection can be estimated with some
certainty. These includes: weighting the site criteria; breaking even
analysis; probability analysis; centre -
of - gravity method. These methods quantitatively determine the best location.
Weighting the Selection Criteria
This method applies weighting factors to the criteria for site
selection. The site that has the highest
overall value would be the preferred location.
The procedure
includes:
(a) Select the site criteria that are considered the most
important for the site. These might be,
for example, cost, labour availability, transport etc.
(b) Assign a weighting factor F to all the site criteria according
to their importance in the selection.
The total weighting will be equal to notey.
(c) Apply a numerical score S / Out of 100, for example, for all
the site criteria for each possible
location being considered
(d) Multiply the weighting factor by the numerical score, F x S
for each site and for each
criterion.
(e) Sum the total F x S
(f) The value £ (F x S) that is the maximum indicates the
preferred site.
. 4.0 CONCLUSION
In this note, you have learnt a number of important issues that
relates to site selection. The
importance of site selection factors and the methods (quantitative) to determining preferred
locations were brought into limelight.
Apart from knowing the relevant factors that should be considered in
site selection and the implications on
the company in question, you should have
used the basic quantitative techniques to establish the preferred
locations for some indigenous companies
such as Cadbury (Nig) Plc, Liver Brothers (Plc)
etc. you should have known how the same technique especially under uncertainty and risk could give different
preferred locations for site selection
depending on the criterion used by the management. You need also, to
know that there are some levels of
interrelationships among the factors that need to be put into consideration before site
selection decisions are made.
5.0 SUMMARY
What you have learnt in this section concerns the meaning of site
selection, the relevance of different
relevant factors in selection decision and methods of determining the preferred location. The factors considered include staffing with
conditions which embraces the influence
of labour costs, labour productivity, and availability of good training facilities as well as cultural implications
on expatriates. The role of language
differentials was also accentuated.
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