LOCATION

Index

1. Introducción.................................................................................................................. 2
2. Localization Strategy............................................................................................ 2
2.1. The importance of location decisions. Facts that
condition...
2.2. Factors affecting localization ........................................................... 4
2.3. General procedure for location decision making............... 9
2.4. Location decisions with multiple facilities .............................. 10
2.5. Location of service companies................................................... 12
2.6. International localization........................................................................... 12
2.7. Localization in developing countries ........................................... 16
2.8. Future trends and strategies in localization ..................................... 19
3. Quantitative methods for evaluating location alternatives................ 21
3.1. Introduction.................................................................................................. 21
3.2. Classification
3.3. Volume, revenue and cost graphs: break-even analysis.......... 23
3.4. Center of Gravity Method .................................................................... 24
3.5. Transportation Method ................................................................................. 25
3.6. Weighted Factors Method .............................................................. 26
4. Conclusiones............................................................................................................... 27
5. Bibliography................................................................................................................ 28

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1. Introduction
What kind of facilities are needed? What size should they be? Where should they be located?
locating a service facility or a plant? These are some of the issues
fundamentals in the strategic agendas of contemporary service firms and
manufacturing, particularly in this era of production and global markets.
Companies relate their operations in facilities of various types: plants of
transformation and/or assembly, warehouses for materials and components or for products
finished, sales points and/or post-sale assistance such as offices, etc.
The type of facilities is determined, fundamentally, based on the product (to be manufactured, to
store or sell in it) or the service to be offered, as well as the productive process or the
technology to be used. On the other hand, the size of the facilities will depend on the quantity of
product or service to obtain; ultimately, to the necessary capacity. An additional question
related to the facilities is the choice of the location where they will be located, thus
like the layout.
In practice, the topic of localization is closely related to two aspects that have to do with
see with competitiveness:
The need to produce close to the customer due to shipping costs,
commercial agreements and competition based on time.
2. The need to position oneself near the appropriate source of labor to take advantage
low labor costs and/or high technical skills.
Location decisions are part of the strategic formulation process.
company. A good selection can contribute to the achievement of business objectives,
while an incorrect location can lead to inadequate performance of the
operations.
The site selection task is the responsibility of the company's senior management, assisted
by advisors in economics, engineering, and business management, since the characteristics of
The location will have a great influence on the layout of the factory and therefore on its efficiency.
production.
There are many theoretical methods, based on operational research, to reach a
optimal location from a purely theoretical economic perspective.
These approaches need to be combined with other objective and non-measurable elements,
being the appropriate combination of both data that leads to the optimal selection of the
location of our plant.
The problem of the site selection for an industrial plant does not have a unique solution anymore.
that not all industries are the same; on the contrary, they are so different that even when dealing with
the manufacturing of the same product by two companies, each will have certain conditions
different.

2. Localization Strategy

2.1. The importance of location decisions. Facts that condition them.

The selection of the location where the company's operations will take place is
a decision of great importance. The significance of its impact and the implications that arise
they derive from it justify adequate attention and consideration from the Management.
Moreover, its uncommon nature means that many managers are not used to facing this.
type of issues (many of them have never done it or perhaps only once throughout their

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career), and the interrelationships with other decisions, already complex in themselves, complicate the
understanding of their true importance.
This importance is justified by two main reasons. First of all, the decisions
The localization of facilities involves a considerable immobilization of resources.
long-term financing, as facilities are generally expensive, especially if it involves
of sophisticated manufacturing plants. Once built, the investment made is not
recoverable without suffering serious economic damages (some of the costs incurred do not
feasible), and that in addition to the time and effort expended. Therefore, it is about a
rigid decision that commits the company for a long period of time; however,
in some cases, the company may opt for less expensive facilities or to rent them, which
which allows to lessen the rigidity of this decision.

Secondly, they are decisions that affect the company's competitive capacity; thus a
Good decision will favor the development of operations efficiently and competitively.
while an incorrect one will impose considerable limitations on them. All areas
the company can be affected by location, not only the Operations area, but
also the Commercial function, the Personnel one, the Financial one, etc. On the other hand, it is necessary to have
It is present that the negative consequences of poor location do not always result.
evident, as they usually manifest as opportunity costs and, therefore, do not come
collected in the traditional reports of companies. The influence of location on the
competitiveness not only arises from its influence on costs, but also on
company income.
It is evident that, for service companies, proximity to markets is critical for
determine the ability to attract customers; in manufacturing companies, the location of the
facilities in relation to the market influence the delivery time of products and the
service level to consumers, which in turn affects the volume of sales. Therefore,
Regarding costs, location can influence a wide variety of them (such as
for example, the derivatives of the land, labor, raw materials or
distribution and transport.
The above considerations clearly show that the selection of the place where they are going to
locating the operations is not a trivial matter, but requires due attention for
part of the Management and the different business areas involved, which must analyze
all the consequences that can be derived from them.
There are a series of events whose presence at a given moment can lead to the
need to make a decision related to the location of the facilities
productive, among them, the following stand out:
Insufficient or excessive production capacity. In the first case, it may be a
expanding market, which raises the need to expand the current factory, close the
build and construct another new one with greater capacity or maintain the current factory and install
a new one. A contraction in demand may lead to the closure of facilities,
having to decide which ones remain in operation.
Launch or elimination of products. On one hand, the launch of a new
the product may require changes in the location of the production plants in order to
to have the necessary resources to serve the markets of the new product.
On the other hand, the elimination of products may involve the closure of the facilities.
where the product had been manufactured until then.
Technological changes. The emergence of a new processing technology that causes the
obsolescence of what the company currently uses often translates into the
creation of a new, more modern plant whose location must be decided by the company.
Changes in inputs. The cost or location of labor, of materials
cousins and other resources can change, which forces the company to reconsider its

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 current location. This situation is typically faced by, for example, companies
extractors of natural resources.
Geographical displacement of demand. As markets change from
place and/or new demand arises, it may be desirable and, at times, essential,
modify the location of the facilities or open new facilities.
Mergers or acquisitions of companies. Sometimes, company mergers require
the closure of facilities due to overcapacity, which raises the question of what to choose
Which facilities will remain open and which must be closed.
Globalization of the economy. In the past, industries tended to concentrate in
specific areas. Currently, geography and distance are becoming more and more
less relevant in location decisions. The term globalization describes the
trend among companies to source goods and services from various
locations around the world to take advantage of national differences
cost and quality of production factors. On the other hand, the expansion of the
large and sophisticated foreign markets force leading manufacturers to be
present in the global market.
Competition. The pressure of competition, which is aimed at increasing the level of service
offered, may lead to the creation of more facilities or to the relocation of some
existing.
The reasons mentioned are just a few of those that can provoke the taking of
decisions about the facilities or, at least, lead the company to reexamine them
location of the same. Regardless of what the reasons that lead to it are,
The location alternatives can be of three types, which should be evaluated by
the company before making a definitive decision:
. Expand an existing installation. This option will only be possible if there is sufficient
space for it. It can be an attractive alternative when the location where it
find has very suitable or desirable characteristics for the company.
Generally incurs lower costs than other options, especially if the expansion
it was anticipated when the facility was initially established.
. Add new facilities in new locations. Sometimes this can turn out to be an option.
more advantageous than the previous one (for example, if the expansion causes problems of
overdimensioning or loss of focus on operational objectives.
At other times it is simply the only possible option; in any case, it will be necessary.
consider the impact it will have on the total system of the company's facilities.
. Close facilities in one location and open others in other sites. This option may
generate high costs, so the company must weigh the benefits of the
relocation with the consequences of remaining in the place
currently busy.

2.2. Factors that affect localization

There are a large number of factors that can influence location decisions,
varying its importance from one industry to another and for each particular company, depending on
his circumstances and specific objectives. Therefore, one of the first tasks of the team that
The localization study is the determination of those factors that are to be
taken into account at each level of analysis, which, in general, will be very numerous.
There can be many types of classification of factors, but in this case, they will be classified.
taking into account reasons of didactic convenience:

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A. The sources of supply:
The location of the inputs that the installation needs is an important issue. Certain
companies are located near the places where they obtain their raw materials or to their
suppliers. This type of localization may be explained by different reasons:
Due to the need to ensure supply. This is the case for companies that exploit or
they extract natural resources (for example: mines, agricultural exploitations,
fishing grounds, farms or forestry operations.
When the inputs are perishable. Therefore, they cannot be transported over long distances.
distances before being processed (for example: in canning or preservation of
agricultural products or in the daily processing of fresh products.
For transportation reasons. When it is easier or more economical to transport the outputs.
than the inputs. This happens, for example, with those processes in which there is a
loss of volume or weight of the products, so that the inputs are more
voluminous or heavy than the outputs, generating a lot of waste material (due to
example: the production of paper from trees). It is also convenient
locate near the supply source when there is only one mode of transport
difficult or expensive, many outputs are obtained, easy to transport economically
(analytical processes).
When the transportation costs of tickets are the most important factor and there are many
different sources will have to consider the degree of dispersion of them; if it is large, the
a convenient location can be found in the geographic center or, in case of it
the relative importance of the sources may be very different, in the center of gravity.
In any case, when judging a certain location from the point of view of
this factor, not only should the availability of supplies be taken into account, but also,
among other considerations, its cost (which can vary between different places) its quality, thus
such as the reliability of deliveries.

B. The markets
The location of customers or users is also an important factor in many cases.
being various the reasons that can justify such importance. These can be, for
example, reasons of a competitive nature when location determines the market to which it
you can access, which is very common in services (for example, bank branches,
clinics, restaurants, cinemas, supermarkets, etc.). Public services, such as fire departments,
police, post offices, hospitals, etc., also look for (or should look for) locations near the
market you intend to serve, although attention to needs must prevail in them
in light of economic considerations, without disregarding the latter.
This factor is also important when the quick delivery of products is a condition.
necessary for sales, with a close relationship or connection with customers being fundamental
(as occurs in the case of items made to order).
The location of the competition is also part of the strategic considerations.
especially for services. Thus, the existence of a competitor in an area can make it
inadequate; at other times, however, companies seek to locate near their competitors,
or from other complementary firms, in order to strengthen their customer attraction power. Thus,
It is common to find areas where shoe stores or cinemas are concentrated, or with small
stores or services within large distribution surfaces.
Another possible reason may come from the fact that the final products are perishable or fragile.
which therefore do not allow many transports and storages (for example: pastry shops,
fish markets that sell fresh products, etc.)

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Economic reasons can also arise, linked to the transportation costs of the products.
finished when those are very important. This happens with very heavy products or
voluminous items that come from processes where various easy transport inputs are added.
cheap (synthetic type processes or those where products increase in weight or volume)
thanks to the addition of basic resources such as water or air (for example: companies that
they manufacture plastic containers or beverages). An analytical process may also be advisable
a location near the market when the transportation of multiple products becomes more
numerous and difficult due to the existence of many different markets and/or the use of distribution channels
heterogeneous. This would make this transport cost more important than that of a single supply,
coming from a single point, whose transport would be more homogeneous and uniform.
In other cases, the client can decide the location of production when the company
carry out projects such as the construction of buildings, dams, roads, etc. The
the impossibility of moving the output requires moving the inputs to the place where it is located and
to carry out almost all the operations there.

C. Means of transport and communication

There are four general means of transportation:
Water transport. It is generally the cheapest for long distances, resulting
suitable for bulky or heavy products (for example: oil, bulk goods,
iron), but, in turn, it is also the slowest, and it is very rigid due to its
limited accessibility.
The railway. It is more versatile than water transport, as it allows access to areas
where this does not reach. In addition, it can transport both heavy or bulky products.
like other smaller ones; although their unit cost is higher, it provides a greater
shipping speed.
Road transport. It is usually carried out by trucks and is the most versatile.
flexible, both in terms of the places it can reach and the schedules.
disadvantage, presents a higher cost and a lower load capacity. It is suitable.
for transporting smaller volumes to specific places or for the final phase of
transport to a specific destination combined with other means.
Air transport. It is the fastest of all and allows for covering large distances in
much shorter times than any other means. Its drawback is being the most expensive.
of all, so it is only suitable in specific cases, such as products with high
added value, need for very fast deliveries, perishable products, etc.
Since different materials may require different means of transportation, the company
you must ensure that the chosen location has what you need. The availability of
a wide range of them can facilitate and make transportation more flexible, while
minimize your cost, as the corresponding unit cost may vary from one location to
another. In many cases, these costs represent a significant component of the costs.
totals.
However, availability and cost are not the only considerations related to the
transport that must be taken into account; load capacity is also important,
versatility of the medium, the security of the goods, the delivery time, etc. When
they analyze specific places, the ease of access to airports, ports, or stations, so
like the main road networks, it will be another important factor.
For international companies, the considerations to take into account are even more numerous.
and more complex; in this sense, tariffs constitute an additional element that can
make it advisable to locate in free trade zones.

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D. The workforce
The human factor is undoubtedly one of the main inputs, having also been one
of the components that have traditionally been most important in costs of the
companies, although this aspect is losing weight in technologically productive environments
developed. It is not surprising, then, that it is often still regarded as one of the most
important in location decisions, especially for labor-intensive companies.
There are many aspects related to labor that can be relevant and deserve to be
valued. The first of them is the availability of sufficient resources to cover the
needs of businesses. Most of them rely on workers from the area where
are located and, although some try to avoid being the largest employers, as this
some strongly tie it to the community, while others, on the other hand, judge this fact positively.

Another factor to consider is that the employees' capabilities or skills are the required ones.
for the company; otherwise it will be necessary to train and form them, with the corresponding cost and
consumo de tiempo. En base a ello, por ejemplo, las empresas de alta tecnología están
interested in locating near research centers, where they find the staff
technical and scientific that they need.
Another fundamental piece of information, especially for the localization of intensive work facilities,
it is the cost of labor (level of wages and other additional benefits). This is the
the main reason why many companies set up assembly plants in low-cost countries
wage (for example: Mexico or Asian countries). The cost of labor can therefore be,
a discriminating factor between countries or regions, although it should be interpreted in relation to the
productivity of workers, which can vary greatly between different places. A cost
very low labor can be countered by worse training, a
lower productivity or worse quality.
The degree of associationism or unionization is sometimes another important factor for the
companies as it can translate into power of pressure and a potential for hostility. Others
significant aspects of the workforce are the level of absenteeism, employee turnover
employees and their attitudes towards work (for example, urban center workers
they may have different attitudes than those in rural areas.

All these considerations allow us to determine the most favorable areas according to this
criteria, which, as we have seen, do not necessarily have to coincide with those of salaries
lower.

E. Basic supplies
Any installation requires basic resources, such as energy and water, but this is
especially critical in manufacturing plants. The availability and cost of the various
energy sources can influence location, especially when the quantities
required by the installation are very high. Other necessary considerations are the
reliability of supply and other useful services for the company that can be offered by
the suppliers (for example: night rates, assistance and installation services).
Similarly, the facilities where processes that require a lot take place
water can be affected in its location by the availability and cost of it.
Likewise, when the process requires water of a certain level of purity, quality will be a factor.
important, therefore, if this is not sufficient, the company will have to address and control it, with the
consequent cost.

F. The quality of life

It is a highly valued factor and considered by companies in the location of facilities.
it influences the ability to attract and retain personnel (especially managers, technicians and

7
skilled labor), becoming more critical in high-tech companies or in the
dedicated to research. Although it is difficult to measure quality of life, some aspects of the
the same are: education (existence of schools and universities with a good level), the cost of
life (housing, food, clothing, etc.), cultural and leisure offerings, low crime rate,
adequate health care, public transport, climate, etc.

The weather conditions of the area

The production process can be affected by temperature, the level of humidity
precipitation measurement, etc., so they can be data to consider. Thus, for example, an area with
Harsh winters or heavy rains could prevent activity on some days of the year, causing outages.
of energy supply or phones, delay deliveries, etc. Likewise, the conditions
climatic conditions may make it necessary to install heating or cooling, and with that,
increase costs.

H. The legal framework

Community, national, regional, and local regulations impact companies, being able to
vary with the location. A favorable legal framework can be a good aid for the
operations, while an unfavorable one can hinder and complicate development of the
same. Among the legislation to consider includes: labor, which impacts the cost,
unionization and other aspects of the workforce; that of the land, which establishes restrictions
for certain areas regarding the facilities that can be located in them or to the
conditions to be met in the facilities; the environmental one, very important for companies
whose processes generate waste, odors, gases, noise, or any other form of pollution
or inconvenience (very strict legislation may require extra expenses for disposal or
treatment of these problems can be resolved in the medium or long term). The level of
bureaucratization of administrations can also be an obstructive element if the
administrative procedures (such as building permits) are lengthy and
complex

L. Public taxes and services

The tax burden varies between different nations, but also between different
localities (local taxes); if this is high, it reduces the appeal of a place, both for the
companies (as it affects their costs and profits) as well as for employees. The incentives
Tax incentives are a weapon in the hands of authorities to attract companies to their territories. Now
Well, very low rates can be synonymous with poor public services (firefighters,
police, roads, drainage, etc.; when that is the case, it may be preferable to accept taxes
taller.

J. Attitudes towards the company

The attitude of the authorities may be unfavorable to the location of certain companies in their area.
territory (for example: polluting or hazardous industries). If this is the case, it will be an important
obstacle to consider, if on the contrary, there is a favorable attitude, the development of the
operations will benefit greatly. In general, authorities try to attract companies to their
domains, as they are a source of wealth, employment, and tax contributions; this attitude is reflected
many times in incentives, not only fiscal, but also in financial aid (loans,
subsidies, interest rate reductions), infrastructure construction and others
benefits (such is the case of technology parks or industrialization zones).
It also accounts for the attitude of the community, which may not align with that of the authorities.
public opinion can be very opposed to the installation of certain types of industry, although not

8
there is legislation against them and the public authorities appear to be in agreement, which could lead to
many problems if this reaction is not modified.

K. The land and the construction

The existence of land to locate at reasonable prices, as well as moderate costs of
construction, are additional factors to consider, as both aspects can vary greatly
depending on the location. Sometimes, acquiring an existing building may be the only option or
it can turn out to be the most convenient. It is also important to consider the availability of land
extra in anticipation of future expansions.

L. Other factors
Without a doubt, many other factors could be mentioned that may influence the
localization. Thus, for example, aspects such as language, culture, political stability and
social, the currency, customs barriers, etc., can be very important for companies
that operate in the international field.
In a location study, these factors could be grouped according to different levels of
geographical analysis, for example, as analyzed in the following section.

2.3. General procedure for site selection decision making

Although for some companies the location is determined by a dominant factor,
from those explained in the previous point -which restricts the number of alternatives-, in general,
the number of factors and places involved in the analysis is enormous. It is more complex as
larger is the operational radius of the company. It is common for small firms to tend to
situate in the residence of its founder and tend to expand in its local environment or
regional, with these location decisions being subjected to very simple studies. Without
embargo, large companies usually consider many more alternatives and the decision of
localization is carried out through formalized processes, based on extensive studies
rigorous. There are even occasions when any type of study is dispensed with, this happens,
for example, when political interests intervene or when they are used as a reference
industrial background of the area, so the location of the company is chosen
because other similar companies are located in that place and they are doing well.
We are going to describe a typical procedure for location decision-making,
focusing on the formal approach. To do this, we will start from the moment the need arises.
to create and, therefore, to decide the location of a new facility or to relocate an already existing one
existent. Once the need to begin the localization study has been determined and justified, the first
step will be the constitution of a multifunctional team responsible for conducting the study. This
team is sometimes made up exclusively of executives, although this reduces the
effectiveness. Typically, representatives from the main areas of the company will be included, already
that all will be affected by the decision made. In this study, it will be necessary
have access to a large amount of information, much of which will not be contained in the
company information systems and, therefore, it will be necessary to resort to other sources, such as
such as specialized publications, chambers of commerce, financial entities, consulting firms,
etc. Visits to the possible site locations should also be made, as this
allows to appreciate subjective details that will not be included in the information used and that
they can be determining for the final decision.
When potential alternatives extend to different regions or countries, the decision becomes
it will have to be systematized at geographical levels. Two or three levels are usually distinguished,
depending on the author. Those who opt for two levels talk about macroanalysis, or evaluation by
countries, regions, communities or cities and microanalysis, or site assessment

9
specific. Those who opt for three levels distinguish the regional/international level, that of the
community or city is of the specific place.

In either case, the location analysis procedure would encompass the

next phases:
1. Preliminary analysis: It involves studying business strategies and policies.
the various areas to translate them into requirements for localization of the
facilities. Due to the large number of factors that can affect the location
each company must determine what are the important criteria for it in the
evaluation of the alternatives: transport needs, land, supplies,
services, personnel, infrastructures, etc. It distinguishes between dominant factors or
keys, which are derived from the strategic objectives of the company and have a great
impact on their income, their costs, or their competitive position and factors
secondaries. A strong degree of compliance is required in the first, which limits
to a great extent the possible alternatives; however, the latter are desirable,
but not essential.
2. Búsqueda de las alternativas de localización: Se establecen una serie de
candidate locations for an in-depth analysis, rejecting those that
they clearly do not satisfy the dominant factors of the company.
3. Evaluation of alternatives (detailed analysis): All information is collected, both
internal as well as external, about each possible location to measure it based on
each of the factors considered. This evaluation may consist of a
quantitative measure, for tangible factors such as costs, or in the
issuance of a value judgment, for qualitative factors such as for example the
politics.
4. Location selection: Through these quantitative and qualitative analyses...
they compare the different alternatives to determine the
valid locations. As there is generally not a single valid alternative, but
several acceptable locations are chosen, they will be a series of subjective values
those who ultimately determine the final location.
The study is conducted at several levels and this entire sequence is repeated for each of them.
can vary the importance of different factors depending on the geographical level at which
It refers to. The possible valid locations at one level serve as a starting point.
para el nivel siguiente, por ejemplo, determino las posibles regiones y en estas regiones las
possible cities. A factor should be considered at a certain stage if it is differentiating and
significant, that is sensitive to the level of geographic aggregation being analyzed and with an impact
considerable about costs, revenues, or the strategic position of the company.

2.4. Location decisions with multiple facilities

Companies can have a single facility or multiple facilities. In this case, it may
occur that are independent of each other, so that the location of each one of
they do not affect others, although it is most common for a company’s facilities
they form a logistics network in which each facility fulfills a specific function. The
the location of the facilities is therefore interdependent and the decisions made
they will form a strongly interrelated and more complex set. In it will be given
response to questions such as: how many facilities (plants, warehouses, etc.) are there
convenient, what size each of them should have, what operations, products or
activities must correspond to, what relationships and exchanges must exist between the
same and, of course, where they should be located. Due to the analysis of all of them of

10
simultaneous form is very difficult, it is often resorted to partializing the problem in
issues that receive individualized treatment.
The localization problems we can find in these cases are diverse: to install a
plant or warehouse in relation to the other existing ones, locate several simultaneously
facilities in relation to the others or completely review the logistics system. The analysis of
these decisions can become even more complicated if we take into account other factors, such as
what:
The number of plants, warehouses, points of sale, or other facilities can be
very high, which introduces many variables and restrictions to consider.
It may also happen that said number is not predetermined.
The location alternatives can be limitless, which further increases the
number of combinations.
The company's logistics chain can have multiple levels (for example:
manufacturing plants, assembly plants, regional warehouses, distributors
locales and points of sale.
There are usually many different products involved in the analysis.
Service level policies, inventory policies, and others that affect or are affected
affected by the location may be variables to be determined, so there will be
to consider the various situations that arise with each alternative.
Consumption and demands are generally of a random nature.
It is very likely that there are various modes of transportation available.
In any case, it would be necessary to define what types of plants are desired and the existing relationships.
among them. We can distinguish four options for multi-plant strategies:
1. Product-oriented plants. One or few plants produce a certain product or
product line, which allows for high specialization, to manufacture high volumes and
take advantage of economies of scale. As a counterpoint, they generate some costs of
higher transport of raw materials and finished products and the consequences
A strike or a disaster could be very serious.
2. Market-oriented plants. A plant produces all or almost all the products that
the company sells in a specific area. The production cost may turn out to be higher,
but transportation costs are reduced and also the delivery time of goods.
3. Process-oriented plants. Plants focused or specialized in a segment.
concrete of the manufacturing process of the company or in the manufacturing of a certain
type of components. It uses quite specific technologies, which allows it a great
efficiency and significant economies of scale. However, the increase in
interrelations between plants since a final product can involve
components coming from different origins. This leads to a proliferation of the
transport and a high risk of strikes.
4. General-purpose plants. Plants dedicated to different functions (products,
markets or processes), are maintained to provide flexibility to the system.
To solve all these types of problems regarding multi-story facilities, several ...
developed, among others, the models that are presented in the headings of the operations of
localization (optimizers, heuristics, and simulation).

11
 2.5. Location of service companies
Given the inherent characteristics of services (for example: customer contact or its
(intangible nature) the user generally resorts to those locations that are closest.
to him. As a result, service facilities usually cover a restricted geographical area,
a city or a zone within it. This, combined with the great variety of existing services,
explain that facilities of this type are much more numerous than production plants
or the warehouses and, at the same time, they tend to be smaller and therefore less expensive
than those. These characteristics lead to very frequent decision-making.
localization in this context (we continuously see how they open, close, or relocate
branches, offices, stores, etc.
From all that has been said, it can be deduced that, in these cases, the dominant factors in the decisions of
Localization in services is more related to the market and demand than to the
supplies or costs. Moreover, it is often a simultaneous decision with the selection of
market in which one wishes to compete. Proximity to customers determines the conditions in
that they will be able to contact and operate with the company, which is critical for determining
how many will be attracted by the installation; two different cases are usually distinguished:
When the customer travels to the company's facility to receive the service (for
for example a store, a restaurant or a hotel). Here, the customers assume the cost and the
inconveniences of displacement, determining the situation of the installation its power
of attraction towards them
When some media, or all (mobile or roaming services), move from the
installation up to where the client is (for example: repair services or the
home delivery). In these cases, the location of the base of operations determines the
zone that can be effectively or competitively covered. Transportation costs
are assumed by the company, which incorporates them into the service price.
On other occasions, however, the service is not obligated to be located close to the users;
for example, when it is unique or has such prestige that customers are willing to
to move to him from very distant points (for example: certain specialized clinics,
fairs or exhibitions, tourist areas, etc.). This also happens when the service can reach the
client through other means, such as telephone, computer terminals, sales by
catalogs, etc.
Another factor that is critical in the localization of services is competition. In some
In cases where the area is crowded, it may be preferable to avoid it and look for clearer ones.
However, in others it may be appropriate to situate oneself close to the competition since, of that
Thus, a synergistic effect is achieved between the ability to attract clients from the different
companies. The location of establishments may also be important in these decisions.
affine or complementary (with which a "symbiotic" relationship can be established or
"parasitic"), the traffic in the area, the visibility of the site, the availability of parking spaces and
of good public transportation, the attitude of the community, etc.

2.6. International Localization

Probably no company presents an optimal location pattern and it is clear that the
relocating activities and assets such as a manufacturing plant is expensive and
unjustifiable on many occasions. Nevertheless, global administrators must have
always present where the firm's activities should be located, even when its
transfer may not be easy, as it is fundamental when planning investments
aimed at the creation, improvement, or expansion of facilities.
Strategic reasons for the localization of operations abroad:
Every decision of the company must be established without ever losing sight of the mandatory framework that
it assumes the Corporate Strategy. Moving down to a greater level of specificity, and for the case

12
specific to the location of the production facilities, we must refer to the
Operations Strategy.
We could include the different motivations that may lead a firm to locate its
operations abroad between basic or fundamental strategic reasons:
a) Localization seeking proximity to markets
b) Location motivated by access to low-cost production factors
c) Location seeking access to technological resources
In principle, a specific location decision may be based on a combination
of different characteristic elements of each of the three reasons. In this way, and without
mood of establishing close or strict relationships (a company can be located close to its
mercados simplemente para evitar elevados costes en el transporte de sus productos), se podría
to say that those companies that follow a cost leadership strategy will opt for,
probably, due to a location in search of low-cost productive resources, while
that those other oriented towards differentiation will seek locations close to
its markets or technological resources.

a) Localization seeking proximity to the markets

It is clear that proximity to a market reinforces the image of commitment of the
company with the same, the adaptation to local needs or customer service. No
However, there are many other reasons that can lead a company to locate near its
markets. There are numerous large or low-priced products (for example, bricks)
whose transportation cost makes direct export impossible, so companies that wish to
supplying the foreign market will have to be established in the respective countries.
The existence of high tariffs or other protectionist barriers imposed by governments
to limit imports and defend its domestic manufacturing, is another of the main
causes that may lead a company to locate its facilities in a foreign country.
Likewise, the propensity to primarily consume native products, for reasons
purely nationalistic, product image etc. is a reason of growing importance in
our days and justifies a large part of the Japanese investments and those of other Southeast Asian countries
Asian in the US and Europe. The feeling of invasion expressed by the citizens of these
the last countries have created a certain feeling of rejection, even admitting their superior quality.
In this way, to improve their image before end consumers, many firms have
displaced part of its production or distribution towards the destination country, dispersing
activities of their value chain.
Market proximity manufacturing also allows a company to be more responsive to signals.
of change that are generated in it. This is the case of food companies that prefer to situate their
factories near their largest or most sophisticated markets to be in a position to power
quickly gather the signals that they send to them.
Finally, we must bear in mind that when the goal of installing a plant is to gain
market access, the location decision may consist of assessing the opportunity of
to enter or not into them or in the choice of which is the most convenient among a group of alternatives.
If habitually the goodness of a market had been determined based on its
potential benefits, when considering the phenomenon of globalization can be taken into account
other considerations, such as participation in key markets for competition, with a view
to influence their behavior, or to reach a minimum global market share with the idea of
achieve production economies of scale.

13
b) Localization motivated by access to low-cost production factors.
The search for abundant and cheap production factors has been and continues to be another reason
of great importance for localization abroad. Thus, the refineries and the plants
petrochemical companies are located near oil wells or in large ports where the
the supply of raw materials is relatively easy. On their part, the low labor costs are
the reason behind numerous manufacturing plants emerging in South American countries or
from Southeast Asia.
In general, it is common practice to distribute the manufacturing of the various components that
they shape the final product of a company in such a way that each one is produced in
different countries, thus taking advantage of the possible comparative advantages that, from the point of
view of the cost and the abundance of resources (raw materials, energy, and labor cost)
mainly) offers each of them.
Vertical integration is another reason for foreign investment related to the supply of resources.
productive. In summary, it involves increasing control over the different stages of the chain
value of the company, from procurement to after-sales service.
Finally, in this section we could also include grants, incentives and
tax benefits granted by governments, as they can reduce the cost of the
investment made.
Ultimately, the search for low-cost production factors is located
closely related to the well-known explanation of international trade provided by
the theory of comparative advantage, based on which each country specializes in production
of that good or group of goods that can be produced with greater efficiency, both for
self-consumption as for export, importing those goods obtained in a way
less efficient.
However, and despite its validity in certain cases, we must keep in mind the
shortcomings that this theory presents when explaining many other phenomena of dynamics
international: thus, often this type of comparative advantage can be fleeting and attainable from
relatively simple due to competition, by imitating the location of the company. In this
the cost advantages obtained through the relocation of activities are only
sustainable if the firm a) manages to combine them with its competencies and skills
corporate in a way that is hardly imitable by competitors or b) can achieve
restrict access for these competing companies to those low-cost productive resources,
capacity, this latter one, which is often only within the reach of a very small group of large
business corporations. The first of these two possibilities can explain the greater
success achieved by Japanese firms, in comparison with Western ones, in the
establishment of their operations in China, even though both types of organizations
they pursue a similar goal, which is the reduction of their labor costs; the main one
The advantage of Japanese companies in this regard is their greater knowledge and understanding of
the Chinese culture itself. For its part, the second possibility assumes a traditional
the stance adopted by the large companies belonging to the extractive industry (Shell is
a good example), which, through exclusive ownership agreements signed in different
parts of the world can achieve sustainable advantages, at least until their
competitors manage to find another country where the price of resources is comparable.
Still, the search for reducing labor costs, to face competition
international, has led to a large number of companies leaving their countries
industrialized of origin (in which those more productive processes usually remain)
complex and capital-intensive), to locate their facilities in other countries in the process of
development. This phenomenon, known as de-localization, has resulted in an important
social problem in the countries of origin, with high unemployment figures, reaching
even to talk about a situation of deindustrialization in one of the affected sectors.

14
c) Localization looking for access to technological resources.
Access to technological resources can also be the fundamental cause underlying
a decision on the location of operations abroad, especially in the case of
sectors or companies that base their competitive advantage on technological innovation and in
those in which R&D activity plays a major role. Thus, while the major lines
Japanese automobile assembly, which requires a lot of labor, is located in countries
like the United Kingdom or Spain, where the cost of labor is comparatively lower,
High-tech automotive sector suppliers often opt for the triangle.
formed by Mulhouse - Stuttgart - Munich, where some of the best are located
European producers in the sector. For their part, several American component companies
electronics are relocating part of their facilities to Japan, where the technology of the
miniaturization is more advanced.
For this type of firms, keeping up to date with the latest advancements is essential.
for the maintenance of its competitive advantage, the proximity to the place where the
technology is "generated", it can become a priority strategic objective if desired
access it. It is clear that remote monitoring cannot achieve all the benefits
that enables a nearby physical location to the best and most advanced centers of
research and universities or to the most sophisticated clients and suppliers: mainly the
access to useful information exchange, both formal and informal, and the availability of
technical and qualified personnel.
In environments of this nature, access to an appropriate informal exchange network
information can be crucial. In this sense, stable and traditional networks could be expected.
between the technical and managerial staff of the companies located in a specific region, which
the entry of new competitors would only reduce the intensity of the exchange
information within the network itself. However, this last circumstance only
increase the inclination to cooperate and participate in the exchange of knowledge and know-
The arrival of foreign competitors puts existing companies under pressure to
continuously innovate to remain competitive. In such a situation, knowledge
Our technicians are a valuable asset to exchange for the knowledge of these.
new competitors.
On the other hand, it is worth remembering that, although the countries where the greatest progress is made
In a certain sector, they are also those who generally have the workers.
of higher technical qualification, other countries can also establish themselves as a very
importance of qualified personnel at a relatively low cost. In this sense, several countries
Asians have demonstrated this ability. Likewise, the opening of the former Soviet Union.
can contribute highly trained scientists who may actively collaborate in the effort in
R&D of certain sectors.

A classification of the factors that affect foreign location:

As we have seen, there are many factors and criteria that can influence the decision of
the location of a global company, varying its importance based on the current situation
each firm, its corporate objectives and the sector in which it operates.
Therefore, unless there is a single clearly predominant factor, which only happens in
very specific cases, each company must establish its own list of factors or criteria for
localization. Subsequently, the company will need to evaluate the scope of each of them, at least
a priori, since a factor considered decisive at first may end up resulting
insignificant if the alternatives to consider are very similar in relation to it.
Next, we will discuss some of the main location factors that
they can be considered by a firm that operates in global environments. For this,
It can be seen in the following table, we have chosen to distinguish between character factors.
economic and social and political-legal factors.

15
 Economic factors Social and political-legal factors
Availability and cost of labor
work
Availability and cost of supplies
Local government
and resources
Legal framework
The clients
Social attitudes towards the company
Implementation costs
Quality of life
Availability y cost of
Social or ethnic conflicts
communications and transportation
International reputation of the area
The behavior of the competition
Cultural differences
Exchange rates
Unionization
Inflation.
History of problems and conflicts
Need of coordination
labor
international of installations
Repatriation of benefits and the
invested capital

2.7. Localization in developing countries

The main reason companies relocate to developing countries is that of
obtain advantages derived from the reduced labor costs, in order to later sell the
production in the source markets. This alternative, while in some cases it may result
a correct decision, does not seem to be free of problems, which must be considered, along with the
potential advantages derived from that location, at the time of making this decision.
The analysis of this decision can be made by taking into account three basic aspects.
On one hand, it is necessary to analyze whether lower costs are actually achieved as a result.
from this location. Secondly, it is advisable to identify if there is any alternative advantage
derived from manufacturing and marketing the products in the country of origin advantages that, in
the consequence would be losing by manufacturing in a developing country and selling the products in
other countries. Finally, it is interesting to make other related considerations, with the
consequences arising from eliminating production plants in the country of origin and the characteristics
of the destination countries that can offset, to some extent, the advantages derived from the
lower labor costs.

Lower costs
Currently, customers are increasingly demanding products with higher added value.
quality and, to a lesser extent, lower-cost products. Therefore, the location of factories
Outsourcing abroad to save labor costs presents a partial view of the current competition.
and it may be a decision that does not really provide advantages to the companies.
On the other hand, there are studies that show that it is preferable to be located in countries
industrialized or recently industrialized, given that the economies obtained in these
they surpass those obtained by the lowest labor costs in developing countries.
In addition, a survey among manufacturers conducted by the National Consumer Association
from the United States discovered that, on average, labor accounts for only

16
15% of the manufacturing cost of a product. Even for the majority of items.
In electronics, labor represents only about 5-10% of the total cost. Therefore, it is little
it is likely that savings in wages will have a significant impact on the total manufacturing cost, as
savings are produced, not on the total cost, but, on average, on 15% of
same. In this sense, the cost structure of the products is determined
fundamentally due to the cost of materials, equipment depreciation, the burdens of
capital and the costs of support overhead. Many of these items are not
specific to the location of the plant, but rather they are more incorporated into the product through
of the technologies used and the processes employed to manufacture it.
In addition, the concern for saving on labor costs diverts attention, to a certain extent.
measure, of the other 85% of the total manufacturing cost, paying less attention to other aspects such as
administration, inventory control, marketing, R&D, and distribution.
Secondly, the net savings in labor costs are sometimes lower than the
expected. This is due to several reasons; on one hand, when relocating a factory to a country in
Development pathways must take into account that the productivity of your workforce is
habitually lower than that of a developed country (scarce qualifications, lack of habit of
I work in the industry, high absenteeism and turnover), so a linear comparison of
salaries provide an inaccurate idea of potential savings. To obtain the real value of
The savings achieved must take into account the relationship between wages and productivity,
Given that paying a low salary to a worker with low productivity can
cause, ultimately, a higher real payment in relative terms.
On the other hand, it should be taken into account that the training of the workforce in developing countries
development is generally lower than in developed countries, which leads to the
the need to invest resources in training so that workers are able to carry out
He completes the manufacturing, maintenance, and quality control tasks properly. This
this results in an increase in costs and, which can be disastrous for the company, in
a lower quality of the products manufactured for a time, at least until that
training process produces the desired effects.
If we add to all these factors the higher degree of absenteeism and the lack of work habit
in industrial tasks by the inhabitants of some countries, the net result regarding
Cost savings may not be as beneficial as initially thought.
Finally, it is true that over time some of these problems (lesser
productivity, the need for training and absenteeism, among others, are being alleviated, but
also frequently, as workers become more productive, they demand a
higher compensation and better working conditions. Moreover, they may end up suing
salaries comparable to those of their counterparts in developed countries. At the same time, the working hours
work, usually longer, ends up being reduced over time, as society demands and
the unions in developing countries have socially more advanced laws that are similar to
of developed countries.

Advantages of producing at origin

The company that wants to have long-lasting relationships with customers must maintain levels
high quality, which is achieved with much greater difficulty if the factory is located outside of
country where the products will be marketed. If it is already difficult to control quality in the
factories located in the country itself, even more difficult is doing it when there are many
kilometers of distance between the production centers and the market. Communication is the
The aspect that is most affected. The processes for engineering changes take a long time.
In this period, many units of product with deficiencies may have been sent.
without the appropriate changes from the developing country to the final market.
Likewise, although some companies consider that it is of little importance to manufacture in the
foreigner in search of lower wages, it is not always convenient to separate activities from

17
design and manufacturing, as they are closely linked. Therefore, a company that manufactures in
The foreigner can quickly lose practical knowledge for design and the ability
to innovate, because it does not receive the necessary feedback information.

In addition, in order to meet the needs of customers, there must be close contact.
between the engineering and production personnel of the manufacturing company and the representatives of the
distributing companies, something difficult to achieve when the end customer is located thousands of
kilometers away from production centers and with cultural and language barriers.
On the other hand, the search for global companies and products makes one forget the characteristics
specific to the company and the place, which are real sources of competitive advantages. To design
a complex product, even more than manufacturing it, may require complex capabilities
organizational, directive, and systems integration, precisely the kind of difficult things to
transfer abroad. The products may be global, but their production systems
they can demand how specific, which depends on the location where the factory is located,
due, for example, to the existence of suppliers with very specialized knowledge and
advanced technology, which is not found anywhere else in the world and which they are not willing to
relocate with the company.
Technologically complex productions that require interaction with clients or
strategic industries whose location is influenced by national policies are
restrictions that may also imply proximity to markets for the facilities
productive.
The delivery time is another argument that favors carrying out operations within the
country where the products will be marketed. The companies that depend on foreign sources are
slower to respond to the changes imposed by market demands. Many
clients do not want to depend on supplies that are manufactured thousands of kilometers away.
They are clients that will be lost if the decision is made to locate the factory abroad. The deadlines for
delivery to customers directly links with the delivery of raw materials and components to the
productive plant on the part of its suppliers. If the components are delayed, the deadline for
delivery to customers is extended because interruptions may even occur in the
production. Most companies do not have either the scale or the economic potential
necessary to create your own network of suppliers, but it is easier to choose a location
where it already exists. This consideration tends to favor installation in regions
industrialized, which also have advanced transportation and communication systems.
At the same time, manufacturing abroad usually requires high transportation costs (due to the
distance from the destination markets). These costs can only be reduced if they are transported
important amounts of material, which forces companies to operate with stocks
higher. Therefore, transportation costs decrease, but conversely, the
inventory levels and the possibility of obsolescence of stored products due to
a shift in demand.

Other considerations
It must be taken into account that localization decisions in a foreign country for the
the manufacturing of products and components that are sold in the domestic market contributes to
deindustrializing the country and destroying jobs. This can lead to 'companies
"hollowed out," which move all productive activities to other geographic areas,
leaving in the country of origin only the activities that generate the most value, but that create
little employment. Likewise, moving production to foreign countries may postpone the
inevitable decision to reform certain areas of the business.
Furthermore, once the company moves its production facilities abroad, the
The host government may start to pressure management to incorporate the product.
national manufacturing components, transfer technology to local companies
or include national capital in the ownership of the new factory. For all these reasons the

18
The originating company often finds itself trapped; if it wants to continue in that country, it has no other choice.
remedy that access.
An additional aspect is the lack of infrastructure in these countries, from roads and railways
from railways to airports. Likewise, the deficiencies can be extended to the network
electricity, to the supply of potable water and to the existence of urbanized land to locate
the factories.
It is interesting, in this regard, to point out that some manufacturers that set up in countries in
development routes, choose areas with more developed infrastructures and where there is a greater
availability of skilled workers, even if they are more expensive. Other significant challenges
the localization abroad are the different languages, rules and customs. Laws and
unknown regulations.
On the other hand, it must be taken into account that, when manufacturing in one country and trying to sell the products
In other markets, tariffs can raise the final cost of the product.
Finally, these location decisions face the so-called 'country risk', derived from
that in many of these potential locations, the political, social and
financial conditions are not stable, and this can cause severe damage to the companies located there,
if the country, for example, suffers an unexpected political shift or a financial crisis. The types of
change and other risk aspects are forcing companies to be flexible regarding
the capacity and locations, as well as considering their global networks in a way
coherent. In this sense, obtaining competitive advantages through exportation
from countries whose currencies are devalued to countries with revalued currencies has been a
frequent practice of executives in international companies. Now then, the
currency fluctuations are beyond the company's control and are difficult to
to predict. A good alternative today may be very bad tomorrow due to the risk of type of
change.

2.8. Future trends and strategies in localization

It is obvious that most of the locational factors do not remain unchanged over time.
No, rather, the complete opposite. The accelerated pace at which changes occur in the
environment is one of the dominant notes of the present and is causing decisions to
location shall be much more frequent today.
Some of the changes that influence location decisions today are as follows:
The growing internationalization of the economy: Companies are crossing
borders to compete at a global level. Locations in other countries different from
origins are the order of the day for large companies. New markets are emerging.
(Eastern Europe, China) and others are unified (EU, NAFTA). All of this intensifies the
competition pressure makes logistical factors more complex and
important and that companies are forced to reexamine the location of their
facilities to maintain competitiveness.
The automation of processes. Due to it, there is a loss of importance.
of the labor cost factor and, therefore, those become less attractive.
countries or regions with low wage levels; on the other hand, the qualification, flexibility and
labor mobility is becoming increasingly significant. However, the cost
the labor factor remains a fundamental factor in some industries and also in
some phases of the manufacturing processes of others that, due to this, are
moving from developed countries to others like Mexico, Taiwan, Singapore, etc.
where the hourly wage can be up to fifty times lower than that of some
developed nations.
The improvement of transportation and the development of information technologies and
telecommunications. This development is helping the internationalization of the

19
 operations and is enabling a greater geographical diversity in the decisions of
localization. This, along with the greater emphasis of the competition on customer service,
direct contact, the rapid development of new products, fast delivery, etc., is being
translating into a trend towards localization close to the markets. In terms of the
manufacturing refers to, thanks to flexible technologies companies can choose to
install smaller and more numerous plants. On the other hand, the improvement of the
telecommunications allows for the centralization and expansion of certain
operations. Thus, many service companies can reach the customers from
very remote places or a manufacturing company may choose to subcontract the phase
from production to local manufacturers, not needing to own the facilities.
At the end of this practice lies the so-called network company or enterprise
dematerialized ("hollow corporation"), which is one that is limited to the management of a
complex information system but outsources its operations to others.
The adoption of JIT systems. In some industries, this system is forcing the
supplier companies and clients to locate in a nearby area to reduce
transport times and make frequent deliveries.
Exodus from large urban areas to suburban or rural areas. It is due to the
appearance of problems related to overcrowding and the deterioration of quality
life: high crime rate, high cost of land, housing, and life in general,
traffic problems, etc. and is occurring largely in some countries such as
for example in the United States.

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 3. Quantitative methods for evaluating location alternatives
We now turn to discuss a series of quantitative methods, mathematical techniques.
which can be used in the comparison of alternatives and in the selection of the location.
They are characterized by their simplicity and generality, which makes them suitable for a large number.
of different situations, but not for that reason less precise or lacking in rigor. On the contrary, they are
very useful for conducting a first assessment or for narrowing down the search for solutions moreover
what can be used complementarily focusing on partial aspects of
decision problem.
Although primarily quantitative techniques are presented, we will also address the techniques
multicriteria that allow for the incorporation of subjective judgments and their combination with factors
quantitative, improving the decision and making it more realistic.

[Link]
Due to the large number of factors involved in the location analysis and to the
theoretically unlimited number of alternative locations, it can be said that there is no
unique method universally valid for making this type of decisions. Evidence of this is the
the existence of numerous methods that usually consider only a part of the factors to
consider. For this reason, the use of various methods is often combined given the importance and the
consequences of this type of decision, thus obtaining a more comprehensive view of the problem.
On the other hand, it is worth noting that location decisions are difficult, to say the least.
impossible to optimize. In the methods, solutions will be obtained that we can consider
satisfactory, but neither unique nor the best as is logical, since the consideration of all the
factors and available places is practically impossible and, in any case, would require a
effort and an excessive amount of resources (time) and, surely, the result
what is obtained would not be much better to compensate for this effort.
On the other hand, because the decision is made by a group of people and that, as has been
mentioned, many of the factors involved are qualitative in nature, the chosen place
it will depend on the assessment given by this decision-making team.
We can then say that there will be no locations that are better in every aspect,
but each alternative will have its advantages and disadvantages, which the firm must
be aware to adjust the choice as closely as possible to your Business Strategy.
It should also be mentioned that location decisions are long-term decisions based on
estimates and forecasts, and this extension over a time horizon of several years, makes it
even more imprecise. To mitigate this a little, not only the conditions must be taken into account
current in each possible location, but also their foreseeable developments in the medium and long term
term, this turns location decisions into a problem of a dynamic nature, it is
We must be very careful, because a good location today may not be one.
in the future.

3.2. Classification
There is a research area of available techniques called location theory.
that begins with Weber at the beginning of this century and is proving to be immensely fertile since
the 1960s, having created countless analytical methods whose applications extend
beyond business administration, which makes it a multidisciplinary area.
A possible classification of the different methods can be made based on the nature of
the techniques used in location analysis. Accordingly, it is common
distinguish three types of methods: exact, heuristic, and simulation.

21
 Exact methods are capable of providing a theoretically optimal solution,
although normally distant from reality. This would be the type of techniques
theoretically advisable, since they would provide the best of all
solutions for the data considered. However, they present important
disadvantages; modeling the problem may require oversimplifying it
reality, which greatly limits the validity of the results and representation
the problem can make the model so complex that it is not technically feasible
resolvable, or that requires such a amount of calculations and time that its cost becomes
excessive.
This category includes simple models that can be solved through
of graphic procedures or those that require a low level of mathematical analysis,
among those we can cite the method of weighted factors, the calculation of
center of gravity or the graphs of volumes/incomes/costs, up to models
more sophisticated like decision trees, Electra techniques or analysis of
regression. Regarding mathematical programming, it is important to highlight linear programming.
and, especially, the transportation method, although it has also been used in this
field of dynamic programming, multi-objective programming or programming
enter.
2. Heuristic methods establish a series of rules or procedures that
they facilitate the search for a satisfactory solution, significantly reducing the
computational effort, time, and cost of resolution. There are many
methods of this type developed for a good number of diverse situations.
Given its greater operability and efficiency, the main drawback lies in the
the fact that they do not guarantee that the solution found is the best of all. But
as in location decisions, as we have already discussed, the optimum does not
it has to exist, many times it may not compensate for the search for the
utopian optimal solution; furthermore, heuristic methods often allow,
a representation of the problem more realistic than that provided by the methods
exact and make it possible to address problems for which they are not
applicable.
3. The simulation starts with modeling the problem to subsequently simulate.
the behavior of it. The main advantage of this technique is that it allows
a representation of the problem closer to reality, including multitude
of aspects, variables, and parameters. As in the previous cases, they do not offer a
optimal solution to the problem, However, a suboptimal solution is preferable,
for a more precise formulation of the problem than a solution
supposedly optimal for a poorer description of the same. An advantage
an additional feature of the simulation is that it allows for the comparison of different policies, integrating
in the analysis of a set of interrelated variables, which provides an overview
of the problem from a more global perspective. The search for the solution in the
simulation models are carried out through the analysis of the impact of different
alternatives in various situations. The efficiency and quality of the results
they will depend on the accuracy in the representation of reality and on the skill and
User knowledge to analyze alternatives and useful situations.
Finally, we can list a series of criteria based on which other things could be done.
classifications of localization methods:
Dominant factor. Often there is one whose significance is decisive in
in which case the method used focuses on its valuation (for example the
cost in manufacturing plants, transportation in warehouses, accessibility in
public services, etc.).

22
 Number of installations. Depending on whether we have one or several installations.
we will use some methods or others because in the second case we have to
consider the interrelations between them.
Number of alternatives. Some methods consider as alternatives all the
geographical points of a specific area, others only analyze a series of points
pre-selected.
Geographic aggregation level. In many cases, the analysis is performed in stages.
with different levels of geographical aggregation, the usefulness of the
methods depending on them.
Time horizon. Methods are classified as static if they are based on data.
from a certain period or in average and dynamic data if considering the
location planning establishing multiperiod strategies.

3.3. Volume, revenue, and cost graphs: break-even analysis

Localization can affect both costs and revenues. The analysis of the graphs
deadlock can help establish comparisons between various alternatives,
considering both factors for different volumes of production and sales.
Income can be affected by location when the ability to attract customers
depends on the proximity to them, which often happens with service companies.
Regarding costs, break-even analysis distinguishes between fixed and variable costs.
the costs can vary according to the chosen site. Fixed costs include the acquisition cost
from the installation, the ones from the ground, the ones for building construction or the rental, which can
change considerably between different places. The variable costs, which include labor
of the work, raw materials or transportation costs, among others, also depend on the location
in which the activity is installed.
Few times will you find an alternative that is, simultaneously, better than the others in
terms of income and costs, both fixed and variable. It is normal for some to allow
to achieve higher income but causing higher costs, or for the fixed costs of an option
they are reduced but the variables are much higher, etc.
Break-even charts help in comparing location alternatives.
based on these issues. The attached graph illustrates the case of a company of
services (therefore their income varies depending on location) in which the option to
choosing would be A because it reports a greater amount of benefits

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 3.4. Center of gravity method
This method focuses on analyzing a single location factor: transportation costs. Therefore,
it is mainly used for the location of manufacturing plants or warehouses of
distribution regarding certain points of origin, where products or materials are received
cousins, and to others of destination, to which their outputs are directed. Given that set of points, the
the problem to be solved consists of finding a central location that minimizes the total cost of
transport (CTT) that is supposed to be proportional to the distance traveled and to the volume or weight of the
materials transported to or from the facility, therefore it can be expressed as
CTT = ∑ci*vI*dI
where c is the unit transport cost corresponding to point i, viit is the volume or weight of
the materials moved from or to, and diit is the distance between point i and the place where it
find the installation.
To calculate CTT, it is necessary to estimate the quantities moved between each point and the installation.
for a specific time horizon (one month, one year, etc.). The product (ci*vi) constitutes the
weight, wi, the importance that each point, i, has in the location of the installation, in a way
that greater withe installation of the corresponding point will have to be found closest.
To measure distances, one can work on a scale map or plan; through a
coordinate axis system, thus identifying each geographic point with a pair of values, which
which will allow calculating the distances between each point and the installation.
The two most commonly used measures are the following:
Rectangular distance: when the displacements are made through 90º turns,
that is to say, following movements in two directions, horizontal and vertical (by
example to analyze a location within a city). Calling K the factor of
scale and being (x, y) the place where it is located, its value would be given by:
di= K(|x- xi| + |y - yi|)
Euclidean distance: it is the straight line that connects the point with the location occupied by the
installation. The distance would be:

of K (x - xi)^2(y - yi)^2
Both are approximations to the real distance but, as I solve the problem I make
similar errors for all locations, the global distortion of the solution is usually
small.
Usually, what is done to reach the closest location to optimal is to start from
a good initial solution calculating the center of gravity within the area marked by the
different locations, whose coordinates would be given by:
x = sum(c)i*vi*xi/∑cI*vie y = ∑ci*vi*yi/∑ci*vi
Even this point, being a quite good approximation, could be accepted as a solution to the
problem. Although it is common to seek a better solution with what could be done
incremental calculations in the following way: the solution is shifted a small distance in
all directions (north, south, east, and west) and it is checked if the cost decreases in any of
they; if this does not happen, one would be in the optimal, but, otherwise, one would have to continue
moving in that direction where the cost decreases, repeating the process as many times
As many times as necessary, we get closer to the optimal solution each time.
Let's look at it for each of the distances:
In the case of using rectangular distances, it can be found directly the
optimal solution through the simple median model:

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 - The average value of the weighted displacements is identified by their
costs, ci*vi/2
- The points are ordered according to their ordinate and according to their abscissa in increasing order.
accumulating the weighted loads that they send or receive.
- The ordinate and the abscissa where the mean value is included will be those that
determine the optimal point.
In the case of Euclidean distances, the optimum would be located at the coordinates:
x =∑(ci*vi*xi/dI)∑(ci*vi)die y =∑(ci*vI*yi/dI)∑(ci*vi)dI
However, these expressions do not directly give us the solution, so there is
to obtain it by successive approximations following the following steps: the
center of gravity; this solution is taken to calculate the distances (di) that is
replace in these last expressions to obtain the new values of x and y. Thus
successively until the coordinates do not change from one iteration to another or until
the change seems insignificant enough to not be worth fine-tuning
more.
Among the advantages of this method, it stands out that it is very easy to use and therefore ideal for
obtain, quickly and economically, a first approximation for the choice of the
localization. It is used to define the area in which, later on, based on other criteria,
alternative locations will be sought, as has been said, in the center method of
gravity has only been considered one factor among the multiple ones that influence the decision of
localization.
Among the criticisms that could be made of this method are that
- it is a continuous method that does not consider geographical conditions, so that the
the point indicated as optimal could correspond to an area where the location is
unviable.
- fixed unit transportation costs are assumed, when in reality these often
consist of a fixed part and a variable part. It is also common for there to be others
distortions of linearity (for example: minimum rates, areas with unique rates, areas of
privileged transit, etc.)
- it is a technique of a static nature, so the solution may only be suitable for
a specific period, as long as the conditions of the analyzed situation are maintained;
If these conditions vary, the appropriate location may be quite different.
change, for example, the transferred volumes, the location of the sources of
supply, the markets, transport rates, etc.) This inconvenience can
to be saved through an appropriate sensitivity analysis that allows us to measure the
impacto que tendrían futuros cambios sobre el coste de una localización y, por tanto, sobre
the convenience of it.

3.5. Transportation Method

This method is an application of linear programming to a type of problems with some
particular characteristics.
It is considered that there is a network of factories, warehouses, or any other type of points, origins.
the destinations of some flows of goods. The location of new points in the network will affect the whole
her, causing reassignments and adjustments within the system.
The transportation method allows finding the best distribution of the mentioned flows.
usually based on the optimization of transportation costs (or, alternatively, of
time, distance, benefit, etc.

25
In location problems, this method can be used to analyze the best location.
from a new center, from several at once and, in general, for any reconfiguration of the network. In
In any case, it must be applied to each of the alternatives to consider in order to determine the
optimal flow assignment.
In this work, we will omit the explanation of this method. In any case, a good book.
where to consult in detail the steps followed in this method for the resolution of the
A problem would be, for example, Machuca J.A.D. and others 'Operations Management: Aspects
Tactical and Operational in Service Production, McGraw-Hill, 1994.

3.6. Weighted factors method

This method is more general, as it allows for the incorporation of all kinds of analysis.
considerations, both of a quantitative and qualitative nature.
The steps would be as follows:
1. Identify the most relevant factors to consider in our decision of
localization.
2. Establish a weighting among them based on their relative importance.
3. Score each alternative for each of those criteria based on a scale
previously determined.
4. Once this is done, a global rating, P, is obtained.i, of each alternative, having
taking into account the score of the same in each factor, Pij, and its relative weight, wij.
In accordance with this:

Pi inj Pij
i

This technique is merely a formalization of the decision-maker's intuitive reasoning process. Its
the main advantage lies in making this process explicit so that it can be known by all,
facilitating debate and coherence in judgment.
As disadvantages, it is worth highlighting the fact that very poor scores in some...
factors can be offset by others that are very high in others, although this can be avoided
using the geometric mean, or the product of the scores in each factor (instead of the
sum (with exponential weights instead of linear), resulting in the score
global of each alternative expressed as:

Pi PW ij
j

By doing this, the alternative with a very low score is penalized.

Let's look at it with the following example for the location decision of a manufacturing plant.
in which the table with the scores of the different alternatives based on the criteria
selected influencers would be:

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 Alternative Weights
Factors relative
(%) A B C
Proximity to suppliers 30 7 7 10
Labor costs 30 5 9 7
Transport 20 9 6 6
Taxes 15 6 6 7
Installation costs 5 7 8 2
Total score 6,65 7,3 7

The total score for each alternative is calculated as the sum of the scores for each
weighted factors according to their relative importance.

Alternatives B and C seem to be better than A, so the latter could be rejected.

Among the other two, there is a slight difference in favor of C, although perhaps not definitive.
C has the main advantage of being very close to the source of supply of material
good, which is an important factor, while its weak point is the installation cost,
which is quite high. On the other hand, the advantages of B lie in labor costs and the
installation costs, which are better than those of C. In the other criteria (transportation and
Taxes) both are very close.
In light of this, alternatives B and C could be presented as feasible options for decision-making.
based on other elements. However, with the correction indicated at the end of the
explanation of the method, alternative C would be penalized for its low score in the
installation cost criteria although not much because its weight is not very high, and this could
to cause the decision made to be B.

4. Conclusions

Location decisions are generally of great importance because they can

to condition to a great extent the framework in which the operations will be developed
for years, thus influencing their effectiveness and efficiency. Therefore, for
choosing it is advisable to create a multifunctional team and conduct a preliminary study that allows
identify, analyze and evaluate different alternatives systematically. One of the
fundamental tasks of the study is to recognize the factors that can influence success or
failure of the decision, which will be determined by competitive priorities and the
Operations Strategy. Once the different alternatives regarding these have been assessed.
factors, it will be time to compare them and make the decision. For this, they can be used
as we have seen a great variety of mathematical methods, both exact and heuristic or
of simulation. However, despite having mathematical tools, it should not
to seek an optimal solution (since, as mentioned, it is likely not
there is a unique solution of this type), but in finding a satisfactory one. Furthermore, the best
localization today may cease to be so in the future as the factors in which it is based
The decisions are subject to changes. Given that the company must adapt to its environment.
and that it is increasingly changing, it is not surprising that location decisions are
becoming more frequent in our days. In this sense, the increasing internationalization of
Companies are one of the main trends affecting this type of decisions.

27
 5. Bibliography
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CANALS, J.: "The Internationalization of the Company. How to Evaluate Market Penetration in
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DILWORTH, J.B.: "Production and Operations Management", McGraw-Hill, 1992.
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HEIZER, J. y RENDER, B.: "Dirección de la Producción", 4ª edición, Allyn and Bacon, 1997.
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