A2 Operations Management

1. A2 Operations Management Regional and International location

2. Focus of subject: • This section will look at regional and international location of business • It will link with the accounting and finance module as break-even and investment appraisal accounting methods will be used to make location decisions in addition to qualitative factors

3. Location • When setting up, businesses will usually look to locate in the least-cost site, to allow lower prices to be charged for their goods • Other factors may come into the consideration such as the reputation of the company related to its location

4. Student activity • Think of as many factors as you can that may influence where a business decides to locate. Briefly discuss this with the person next to you.

5. Factors determining the location of businesses 1. Costs of factors of production • Wage levels vary between regions, more expensive the nearer to London • Availability of skilled workers • Land costs 2. Resources • Location of raw materials, very important for primary industries, • Location of suppliers (JIT), • Special requirement e.g. airports need large areas of flat land

6. Factors determining the location of businesses(contd..) 3. Infrastructure • network of utilities, such as transport links, sewerage, telecommunication systems, health service and educational facilities • Transport links - moving raw materials and finished goods, workers getting to work 4. The market • Where they sell their goods to the consumer. • Customers demand convenience and easy access • Transport costs lower if close to market

7. Factors determining the location of businesses(contd..) 5. Government intervention • The UK government, in line with EU policy, provides assistance to areas of low economic activity and high unemployment • The Gov.. provides grants to firms to set up in these assisted areas • e.g. Nissan locating in Sunderland Additional reading: AQA textbook Pg.. 305 - 306, DTI web-site 6. Qualitative factors • e.g. where the owners live, the quality of life in the area

8. Questions to consider • Why do you think Dixons closed many of its inner city stores and moved to out-of-town locations in April 2004? • Why may a company such as Rolls Royce decide to keep its engine production facilities in UK rather than moving overseas? • Why do Governments provide grants to businesses for locating in certain areas? • Why does the clothes retailer Zara continue to produce most of its clothes in Europe rather than in a country with low wage levels? • Why do fashion houses choose to locate in the cities of Paris, Milan and London when the land cost is expensive?

9. Industrial Inertia • The tendency for firms to remain where they are, even though the original reasons for location no longer apply • This can also influence location • Once established firms may be reluctant to relocate • One reason is that firms may benefit from external economies of scale

10. External economies of scale • Student task using the AQA textbook Pg.. 307 define external economies of scale and list the main types (5 minutes)

11. Student Activity (15 minutes) • In pairs complete Group exercise Pg. 312 AQA textbook • Task 1: Decide which square you feel is the least-cost site. Work out the cost per unit for both of the assisted areas as well as the ones you feel would be most suitable. • Task 2: Consider other factors that may be important? • This activity clearly demonstrates that transport costs can be very important in location decisions

12. A2 Operations Management Location (Lesson 2)

13. Recap • Main factors when considering location • 1. Costs of factors of production • 2. Resources • 3. Infrastructure • 4. The market • 5. Government Intervention • 6. Qualitative factors

14. External economies of scale Recap The benefits gained by a firm as a result of the concentration of an industry in one location Main types: • Labour supply with right skills • Specialist training • Local suppliers and customers • Infrastructure geared towards the needs of that industry • Reputation of an area allows premium price to be charged

15. External diseconomies of scale • Firms should be aware of the disadvantages arising from a concentration of firms in one location. These are known as external diseconomies of scale. • Congestion • Pollution • Shortages of resources - land, skilled labour • Other factors preventing relocation include - poor morale, loss of skills developed in existing workforce, redundancy payments, damage to firms image

16. Factors influencing international location All of the factors previously discussed will be considered when making world-wide location decisions. In addition to: • Political and economic stability • Exchange rates • Local legislation • Local culture • Demand for product/service • Access to free trade areas

17. Factors influencing international location contd. There are two more factors of particular importance • Achieving high economies of scale - moving abroad gives firms access to larger markets and often cheaper labour e.g. China • Avoiding protectionism - • Task: Read Page 309 of the AQA A2 textbook and produce notes on protectionism, include the definition of protectionism, types, why its used, the WTO and free trade areas

18. Location decisions using break-even analysis • Break-even analysis lets a firm see how many units it needs to produce and sell in order to avoid making a loss. • Market research allows a firm to estimate future sales figures when setting up in a new location

19. Student activity • A restaurant is seeking to set up in a new location. The financial forecasts for setting up and operating the new restaurant are as follows: • Fixed costs: £120,000 • Average price: £18 per meal • Variable cost per meal: £8 Task: 1. Calculate the restaurant’s contribution per meal and the necessary break-even output for the year, month and each day. 2. Is this realistic to achieve? How might the owners judge if this sales figure is achievable?

20. Answer • Contribution = Selling price - Variable cost per meal • Contribution = £18 - £8 = £10 per meal • Break-even = Fixed costs / Contribution • Break-even = £120,000 / £10 = 12,000 meals per annum • 1,000 meals per month, 33 meals per day

21. Student activity • Flybe. are wondering whether to set up base in Newcastle or Teeside International Airport. • Using the forecasts given above calculate the break-even point and the margin of safety for each airport to discover which airport Flybe. should locate to.

22. Answer • Newcastle: • BE = £48 million / £12,000 = 4,000 flights • MOS = 4,400 - 4,000 = 400 flights • Teeside: • BE = £47.3 million / £11,000 = 4,300 flights • MOS = 3,800 flights - 4,300 flights = - 500 flights • Therefore Flybe.com should locate to Newcastle Airport. • However qualitative factors should also be considered.

23. Location decisions using investment appraisal • Investment appraisal can be used to see if a location gives a quick payback, yields a high average rate of return, or gives a positive net present value • Investment appraisal will be a more useful approach to aid making decisions on location

24. Student Activity: • Argos is considering opening a new store in Liverpool • Initial cost (year 0) - £800,000 • Argos has targets of : • Payback - 3 years Average Rate of Return (ARR) - greater than 12% • Net Present Value (NPV) - positive based on a 10% discount rate • Is Liverpool a good location based on investment appraisal?

25. Answer • Payback period = 2 years + (300/360 x 12 months) = 2 years 10 months • ARR =Net return/ Number of years x 100 Initial cost Annual return = £840,000 / 5 years = £168,000 per annum ARR = £168,000 / £800,000 x 100 = 21% NPV = Therefore when comparing with Argos’ targets the location is a good option using investment appraisal NPV = £408,600

26. Student Activity • Complete Practice exercise 2 Page 317 AQA A2 Textbook

27. WELL DONE