Factory Location as a Cost-Minimising Exercise

By Peder Martin Floe Fejerskov and Katherine Reid

Agenda

i. Key Conceptsii. Historical theories iii. Transportationiv. Labourv. Access to marketsvi. Short and long-term planningvii. Differences between small and large firmsviii. Conclusionix. Thoughts for discussion

Key Concepts

• Neo-Classical Economic Theory

• Homo Economicus

• Cost-Minimising Theory

Historically

• Weber: Transportation as the most general princible of location

• Waterways• Railways• Highways• Example:

– Ruhr area along the Rhine

Example: European waterways

Source: http://www.sustainablelogistics.org/Inland_Shipping

Transportation

• Transportation costs lower today– Offshoring to minimize production costs

• Important factors of location: – Production inputs:

• Labour• Capital• Raw matreials

• Factor in determining optimal location:• In increqasingly competitive global economy

companies locate in low wage regions– Guangdong, China

weight of localized raw materials Weight of final productsMI:

Labour

• Access to low-wage labour

• Firms must make compromises between transportation costs and labour costs (Weber) ‘Weberian’ Triangle

Access to Markets

• Demand will decrease with distance from factory

• In a market with two sellers, both will locate in the middle (Hotelling)

Predicting the future

• Difficult to predict future conditions for manufacturing locations

• Assumptions for the investment might change– Changes in economic and political environment– Technological innovation and rival behaviour= Decision process of manufacturing location

difficult

Differences between SPFsand MPFs

• Responces to change• Short term:

– SPFs have limited options, increase labour or overtime– MNCs can shift oders from one company to another

• Medium term:– SPFs limited options– MNCs possibly expansion

• Long term:– Geographical expansion and new site locations

Conclusion

• Main cost-minimising concerns: Transportation costs, input costs (labour) and access to markets

• Firms must always compromise to achieve the right balance between different costs

• Planning for the future is always difficult

Things to take away

• A firm can make a profit without necessarily being in the ultimate cost-minimising position

• No two firms will ever have the exact same cost-minimising position

Discussion

• Earlier, transportation costs played a key role in cost-minimizing, today transport is of less importance

• Global warming and transportation costs

• What might the consequences be if there will be a price on CO2 emissions in the future?