Premlal C R
Unit 4.1
PRODUCTION OF GOODS AND SERVICES
What is production?
Production
is an economic activity by which inputs becomes goods and services. It converts
the resources to useful products.
Operations Management
Operations management involves managing business resources
(inputs) throughout the production process to produce finished goods, services
and components (output).
OM
consists of following activities
1. Use
resources in the most cost-effective way
2. Produce
output to meet the consumer demand
3. Meet the quality standard of the products
Differences
between production and productivity
Production is the process by which raw materials are
transformed (converted) into finished/semi-finished goods.
Productivity shows the efficiency
or capacity to produce output. It measures the amount of output produced
against used inputs.
Productivity = Output/Input used
a. By labour
- Productivity = Total
output / Number of employees
b. By machine - Productivity = Total output / Number of
machines
c. By hours - Productivity = Total output / Number of hours
Example: A factory employs 50 workers. Annual output is 8250 units in 2018.
What is the productivity per worker?
Productivity
= 8250/50= 165 units per worker.
Each worker produced 165 units in the year 2018.
FACTORS
AFFECTING THE PRODUCTIVITY OF THE BUSINESS.
1.
Labour absenteeism
2.
Machine breakdown
3.
Industrial actions
4.
Skill level of workers
5.
Level of employee motivation
6. Capital or labour intensive business.
Measures
to improve labour productivity (May/June
2016 Q.No-1d) (May/June 2021 Q.No-2b) (Oct/Nov 2022, Q.No-4d)
1. Improve the skill level of workers- Providing
training
2. Improve the motivation of workers- Financial and
non-financial motivations
3. Introducing more automation or better technology-
Capital intensive measures
4. Improve the quality standards using the methods
of quality control or assurances to reduce the wastage of resources.
5. Introduce lean production methods such as JIT, Kaizen method, etc.
INVENTORY MANAGEMENT
What
is inventory (Stock)?
Inventories are the resources kept in the business for smooth running of
business. It includes raw materials, semi-finished goods and goods ready to use.
Why
businesses hold inventories? (Mar 2017 Q.No-2c)
(May/June 2021 Q. No 4a P-2) (Oct/Nov-2015
Q.No2c) (Feb/Mar 2023 Q.No-2c)
1. To
continue production
2. To
reduce wastage of resources
3. To
meet the demand of consumers
4. To get the seasonal resources and continue the production without delay
Cost/
Problems of holding inventories.
(Oct/Nov 2017 Q.No-4a.P-2) (May/June 2016 Q.No-1c)
1. Warehousing
costs – the business will need to rent
or purchase a warehouse to store the inventories.
2. Handling
costs – inventories need to be moved
into and out of the warehouse so workers cost may increase.
3. Shrinkage
costs – damaged, lost or stolen
inventories will need to be replaced.
4. Insurance
costs – these will cover the cost of
losses from shrinkage.
5. Required working capital – working capital is ‘tied-up’ in inventories so it would affect the liquidity of business.
LEAN
PRODUCTION (Oct/Nov-2018 Q.No-3c)
The production of goods and
services with minimum waste of resources is known as lean production. It aims
to lower the costs of production by reducing waste to a minimum while
maintaining, or even improving, the quality of the finished product.
Benefits
of lean production
1. New products can be brought to the market more
quickly.
2. Quality of the product is improved
3. Wastage of time and other resources is
eliminated.
4. The costs of holding inventories is eliminated.
5. Unit costs are reduced, which will increase the profit made on each unit sold or enable a business to reduce its price and be more competitive. This will increase sales, revenue and profits.
METHODS
OF LEAN PRODUCTION
1. JIT production
2. Kaizen.
3. Cell Production
1. Just in time production (Mar 2020 Q.No-3d) (Oct/Nov 2021 Q.No-1b)
In this method no inventories are held by the business. Here inventories are arrived from the supplier when production is started. Like that finished goods are produced according to the demand. The system originated in Japan first.
The
advantages of just-in-time production are:
1. No need more capital in production processes
2. Warehouse cost can be reduced because no need to
store much inventories.
3. Reduces wastage or obsoleting of resources by
holding minimum quantities.
4. The finished product should be cheaper for the
consumer to buy.
5. Improve working capital/cash-flow as less money tied up as inventory in business.
The
disadvantages of just-in-time production are:
1. Limited inventories might affect the continuous
production if delayed at any reasons- in case of imported resources
2. Production could be halted if the wrong goods
were delivered at the last minute
3. Difficult to continue production with seasonal
resources such as cotton, fruits, etc.
4. No economies of scale possible as purchases done
at minimal quantities.
2. Kaizen
(Continuous Improvement)
Kaizen is a Japanese term meaning ‘Continuous Improvement’. In this method the efficiency of employees is improved to increase the production and quality of goods without affecting costs. Employees are given freedom to make suggestions to contribute better. Proper motivation and training will be considered as improvement methods.
3.
Cell Production
Cell production is a form of mass production that divides work into teams known as cells. Each cell is managed to achieve goals such as quality and waste reduction. It is an example autonomous team working.
METHODS
OF PRODUCTION (May/June
2018 Q.No.4.c) (Oct/Nov 2017. Q.No-2d)
1. Job production (Oct/Nov 2016 Q.No-3a) (Oct/Nov 2021 Q.No-2a. P-2) (May/June 2023 Q.No1e)
Job production is where one single item is made at a time. Each
product is unique and a long time would usually have been spent on it. For this
reason, goods produced by this method are expensive to buy. Job production
usually needs highly skilled workers and specialized equipment.
Eg:- boat manufacturing, dress designing, furniture, etc.
Advantages
of Job production
1. Unique, high quality products are made
2. Workers are motivated and take pride in their
work
3. Workers get freedom to use their skills in
production
4. Meet the exact demand of customers.
Disadvantages of Job production (Mar-2018. Q.No-1b)
1. Uses skilled labour rather than machinery, so
cost of production may increase
2. Selling prices of products may increase as cost
of production is high.
3. Production process may take long time
4. Economies of scale are not possible, often resulting in a more expensive product.
2. Batch
production. (May/June 2017 Q.No-2d) (Mar 2017 Q.No-2a) (Mar 2017 Q.No-4a P-2) (Mar-2021
Q.No-3b)
In batch production, a group of items is completed at one stage of
production. The production of goods is going in batches. Each batch
passes through one stage of production before moving onto the next stage.
Eg:- Making of bread in a bakery.
Advantages
of Batch production
1. Since larger numbers are made, unit costs are
lower.
2. Offers the customer some variety and choice.
3. Low price
Disadvantages of Batch production
1. Workers are often less motivated because the work
becomes repetitive.
2. Goods have to be stored until they are sold, which increases warehousing cost
3. Flow
production (Mass production) (Mar
2019 Q.No-2c) (Oct/Nov-2015 Q.No3a) (March 2022 Q.No-1d.) (May/June 2022 Q.No-3e.)(Mar 2023.
Q.No-1a.P-2)
Flow production is the production
of very large quantities of identical goods using a continuously moving
process. At each stage of production additional features are added until the
product reaches its finished stage. This type of production is used where a
large output of identical, standardized product is required.
Eg:- Making chocolate bar,
Electronic equipment, Car factory, etc.
Advantages of Flow production
1. Capital intensive than job or batch production,
which lowers the labour cost.
2. Materials can be purchased in large quantities,
so they are often cheaper due to bulk-buying- economies of scale.
3. Large number of goods are produced in short time.
4. Standardized outputs.
Disadvantages of Flow production
1. Requires large capital investment in production
line technology.
2. Workers are not very motivated, since their work
is very repetitive.
3. It is not very flexible method as production
lines are difficult to change.
4. If one part of the production line breaks down,
the whole production process will have to stop until it is repaired.
5. High levels of raw material, and finished goods (inventories) are held. This increases warehousing cost as well as capital cost.
FACTORS
AFFECTING THE METHOD OF PRODUCTION (Oct/Nov 2020, Q.No-2d)
1.
Budget for production - amount of capital available or cost of machinery is to
be considered as business may not be able to afford to set up machineries or
flow production.
2.
Level of demand or quantity needed - if there is a lot of competition production
can be reduced and if more demanded, need to produce large quantities using
machineries
3.
Type of product - if the product needs to be designed based on individual
demand better job production is preferred.
4.
Availability of storage or warehouse - if large space is available for storage
the business can prefer flow or batch production.
5.
Access to skilled employees - if skilled employees are available the business
can prefer job production.
6.
Possible environmental pollution- if heavy machineries are operated the chance
of pollution may be increased.
7. Cost of production - if labour cost is higher, the business can think of capital intensive methods such as batch or flow production. It is beneficial in long run.
TECHNOLOGIES
IN PRODUCTION METHODS
New
technology can help to improve productivity and quality, provide faster and
more accurate information and reduce costs. Example: improved stock control and
ordering
a. Computer
aided manufacturing (CAM)
In computer aided manufacturing (CAM), computers can
control machinery or equipment, need for labour and correcting faults for
resetting machines. Computer aided manufacturing is very accurate and can
produce products to exacting standards.
b. Computer
integrated manufacturing (CIM)
Computer integrated manufacturing, an entire manufacturing
lines is controlled by computers. Robots control in this way can perform simple
repetitive or highly complex tasks accurately.
c. Computer
aided design (CAD)
With CAD, a product can be designed and displayed in three dimensions
on a computer screen and tested using computer programs. Designing and testing
on computer screen, saves on expensive prototypes at least in the early stage
of product development.
d. EPOS
(Electronic point of sale)
Larger retailers, especially
supermarkets, use an EPOS system not only to calculate the amount purchased by
consumers, but also to manage their inventory levels of each item.
e. EFTPOS
(Electronic fund transfer at point of sale).
Many retailers use this method to
enable customers to buy goods using debit or credit cards instead of paying by
cash or cheque.
Advantages
and disadvantages of new technology implementation (Oct/Nov
2017. Q.No-2e) (Mar
2016, Q.No.3d) (Feb/Mar 2023 Q.No-1b)
Advantages
to Business
1. Reduces the costs and time taken to design new products
2. Increased productivity
3. Reduces costs of production
4. Improves quality and reduces waste.
Disadvantages
to Business
1. Can be very expensive
2. When technology is rapidly changing it will need
to be changed of ten if the business is to remain competitive.
3. Business may need to spend more for training of
workers which increases costs
Advantages
to Consumers
1. Better quality products
2. Lower prices
3. Products with more features are easier to develop
and produce.
Disadvantages
to Consumers
1. Products may become out-of-date more quickly.
2. When the product develops a fault it can be expensive to repair.
Advantages
to Employees
1. The work is easier with the aid of technology.
2. A business that uses the latest technology is
likely to be more successful so provides job security
3. The development and manufacture of new technology products provide employment opportunities
Disadvantages
to Employees
1. Technology often reduces the need for workers,
resulting in redundancy.
2. Technology could make the work less interesting.
3. A smaller workforce reduces opportunities for
promotion.
UNIT 4.2
COSTS, SCALE OF PRODUCTION AND BREAK-EVEN ANALYSIS
What
is cost of production?
Cost of production is the total amount of money that is required for the production of a good or service. Cost does not include a mark-up or profit.
TYPES OF COSTS
1. Fixed cost. (May/June 2019 Q.No.1b) (May/June 2018 Q.No.4.b) (May/June 2017 Q.No-1b.) (May/June
2021 Q.No-3a) (Oct/Nov
2022, Q.No-4b)
This
is the cost that is not varying based on output. Fixed cost will be same amount
when output is zero or when producing maximum.
Eg:-
Rent, Rate (land tax), Insurance, Salary of office staffs, loan instalment or
interest, etc.
2. Variable cost (Mar 2019 Q.No-3b) (Oct/Nov 2021 Q.No-2a)
This
is the cost always varying according to the output. If output is zero variable
cost also will be zero and if output increases variable cost also increases.
Eg:-
Raw materials, Transport, wages of part-time employees, fuel, etc.
3. Total cost (Mar 2019 Q.No-3a) (March 2022 Q.No-2b)
Total
cost is all the costs of making a certain level of output.
TC (Total
Cost) = FC + VC
4. Average cost
Average cost is the cost of
producing a single unit of output.
AC (Average cost) = TC/Output
Measure to reduce cost in business (May/June 2020 Q. No
4c)
1. Reduce the number of employees if employees are
redundant.
2. Reduce amount of wastage by mechanizing the production
unit
3. Train the employees the waste management criteria
4. Place orders with cheaper suppliers or find alternate
cheaper sources.
5. Buy in bulk quantity so it helps to avail trade discount.
ECONOMIES AND DISECONOMIES OF SCALE
Economies of scale (Mar 2020 Q.No-2a) (Mar 2019 Q.No-2a) (Mar 2019 Q.No-2b P-2)
(May/June 2018 Q.No-3a.P-2) (Oct/Nov 2016 Q.No-3a P-2) (Mar 2016, Q.No.3c)
Economies scale indicates the reduction in average costs as a result of increasing the scale of operations. The term scale means the size of the business operations. It is the measure of output, as output grows, a business often benefits from reduced average costs.
Types of Economies of scale
1. Financial economies
Lenders such as banks,
prefer to lend money to large business than smaller businesses considering the
chance of risk. As a result, large businesses get more money from the bank at
lower rate of interest.
2. Managerial economies
As a business grows, it
often employs specialist managers in major functional areas such as finance,
marketing, HR and operations, it would improve the quality of output and
reduces mistakes than non-specialist manager.
3. Marketing economies
If a business increases
advertising and promotions, by result, its sales increases, so the business can
meet such expenses from. This means that the average cost of marketing decreases
as output and sales increase
4. Purchasing economies
Large
scale businesses usually buy in bulk quantities of raw materials and goods than
smaller business so sellers often offer discounts on bulk purchase- Trade
discount. It is known as bulk buying economies.
5. Technical economies
Automation of production (capital intensive method) units may result to the production of large quantity of output at lower unit costs. Normally large-scale business units prefer this method of production.
Diseconomies of scale (Oct/Nov 2019 Q.No-4d) (Oct/Nov 2022, Q.No-1a.P-2)
Diseconomies of scale is the
opposite of economies of scale where business grows it may lose the benefit of
growth due to some problems such as,
1. Poor communication.
As business grows the number
of staffs also increases. So managers may be unable to contact with the
employees directly. It results the poor decision making and increases in
mistakes.
2. Lack of employee commitment
In large scale businesses,
managers may not have day to day contact with the employees so this may lead to
the lack of commitment from the employee’s side. This may result to the high
employee turnover.
3. Weak co-ordination
As business grows, the
number of departments also increases this may result to the weak co-ordination
of various production and related departments consequently business may face
issues in production processes.
4. Lack of
control.
Because a larger business may not have a close working relationship with all employees so some employees may not be motivated to work hard producing outputs.
BREAK-EVEN
ANALYSIS (Mar-2020
Q.No-4a P-2), (Oct/Nov 2020 Q.No-4a P-1) (May/June 2017.Q.No-3b P-2) (Oct/Nov
2016 Q.No-2a(i) P-2) (May/June 2022 Q.No-3b.) (May/June 2023 Q.No1b)
Break-even describes a
situation where a business is not making profit or loss from the production and
sale of products. Here sales revenue equals to the cost of production.
Break-even analysis shows the relationship between revenue, cost and output.
Break-even Output
and Margin of safety
Break-even output = Fixed costs / (Price per unit – Variable cost per
unit)
Margin of safety = Actual output – Break-even output
Break-even point
Break-even point is the level of sales at which Total costs = Total revenue.
Break-even point: the
calculation method.
It is
possible to calculate the breakeven point without having to draw the graph. We
need two formulas to achieve this:
·
Contribution = Selling Price - Variable
Costs
·
Break-even point = Total fixed
costs/Contribution
Drawing
a break-even chart (March
2022 Q.No-2a) (May/Jun 2015, Q.No.1c)
In
order to draw a break-even chart, we need information about the fixed costs,
variable costs and revenue of a business. For example, in sports shoe business:
·
Fixed costs are $5000 per year
·
The variable costs of the business are $3 per
unit of output (a pair of sports shoes)
·
Each pair of shoes is sold at $8
· The factory can produce a maximum output of 2,000 pair of shoes per year.
|
Outputs |
Fixed cost |
Variable cost |
Total cost |
Revenue |
|
0 |
5000 |
0 |
5000 |
0 |
|
500 |
5000 |
1500 |
6500 |
4000 |
|
1000 |
5000 |
3000 |
8000 |
8000 |
|
1500 |
5000 |
4500 |
9500 |
12000 |
|
2000 |
5000 |
6000 |
11000 |
16000 |
·
When output is 2,000 units, variable costs will
be: 2,000 × $3 = $6,000.
· Assuming all output is sold, total revenue will be: 2,000 × $8 = $16,000
1.
It shows the margin of safety which is the amount by which sales
exceed the breakeven point
2.
It helps to predict how much sales the business needs to make profit
3. It helps to make financial plans or budget in business.
4. It shows the potential profit/loss for the business at
different levels of output.
5. It shows possible effect of change in price on the
break-even level of output/profit.
6. It shows possible effect of change in costs on the
break-even level of output/profit.
7. It helps to get loans or advances from the bank.
Disadvantages of
Break-even Analysis (Oct/Nov
2021 Q.No-2b)
1.
The graph assumes that all goods produced are sold.
2.
Fixed costs will change if the scale of production is changed.
3.
Only focuses on the breakeven point. Completely ignores other aspects of
production.
4.
Does not take into account discounts or increased wages, etc. and other things
that vary with time.
Analysis
of Margin of Safety (May/June
2021 Q.No-3b) (May/June 2022 Q.No-3c.)
The margin
of safety is the difference between the number of units of actual
sales and the number of units of sales at break-even point. This is the revenue earned after the company or
department pays all of its fixed and variable costs associated with producing
the goods or service.
Calculate
BEP, Margin of Safety and draw a graph indicating margin of safety.
The
Noor enterprises, a single product company, provides you the following data for
the Month of June 2020.
Sales (3,500 units @ $20/unit): $70,000
Contribution margin per unit: $12
Total fixed cost for the month: $15,000
Solution
1. Break-even
point
Break-even point in units:
Break-even point in dollars:
2. Margin
of safety
Margin
of safety in dollars:
Margin
of safety in units:
It
is done by dividing the margin of safety in dollars by the sales price per unit.
The
MOS of Noor Enterprises in terms of units is 2,250 as computed below:
Unit 4.3
ACHIEVING QUALITY PRODUCTION
Quality
product
Quality products means products without any defects. High
quality never means high price or high cost of production. Quality product is
one that meets the needs and requirements of consumer without any complaints.
Quality
standards
Business sets the standard of quality of products which are expected by the consumers after conducting proper market research. Quality represents the level of satisfaction getting from a product. Quality standards are of two types – design standards and process standards.
IMPORTANCE OF QUALITY IMPROVEMENTS (Mar 2018 Q.No.4a P-2) (May/June 2017 Q.No-3d) (Mar-2021 Q.No-4a P-2)
(May/June
2021 Q.No-1c)
1.
To develop a strong brand image.
Quality attracts the consumers so quality is the basis of
brand image. Promotional costs can be saved while introducing high quality
goods in the market.
2.
To keep customers and attract new customers.
Once the customers get satisfied, it would help to
maintain customer loyalty towards such products so it attracts more customers
to the products.
3.
To reduce costs, customer complaints and return.
If the products do not meet the quality standard, the
customers would return the products so the business should take extra cost to
replace or repair the products.
4.
To charge high price.
Business can charge higher price to the products with
unique quality than other products. It would increase the revenue of business.
5.
To encourage middlemen- wholesalers and retailers.
Mostly wholesalers and retailers prefer to stock high
quality products or branded products so it would help them to clear the stocks
quickly without damage or other warehousing costs.
6.
To lengthen product life cycle.
Demand for high quality goods will be higher in market so it would help to stay longer in market in product life cycle without being declined.
7.
To increase market share.
Quality speaks itself about the product so it helps to increase the percentage of products sold in the market.
HOW
BUSINESS ACHIEVE QUALITY PRODUCTION?
METHODS TO ENSURE QUALITY PRODUCTION (Oct/Nov 2020 Q.No-1b P-2) (May/June 2020 Q.No-1c) (Oct/Nov 2018 1a. P-2) (Mar-2021 Q.No-3c)
A.
Quality control. (Oct/Nov 2016 Q.No-3b) (Oct/Nov 2021 Q.No-1c) (Feb/Mar
2023 Q.No-4b)
In this method, trained quality inspectors check the products at the end of production process to ensure the quality standard. Here quality inspectors use sampling methods to check the quality of products so not all the product is checked properly.
Advantages
of Quality control
1. Products are checked
before reaching to the customer’s hand.
2. Less training is
required for workers so quality inspectors check the outputs.
Disadvantages
of quality control
1. Cost increases as
the salary of specialized quality inspectors
2. Difficult to trace
where the fault occurs if only output is checked.
3. Inspection mostly
done at the end of production process so faults may repeat if not identified.
4. Cost increases if
outputs scrapped when faults detected.
5. Quality inspectors use sampling method to check quality of product so it cannot check all the products.
B.
Quality Assurance. (Mar 2016, Q.No.3b) (May/Jun
2015, Q.No.1a)
Quality assurance is
better than quality control. It focuses the following aspects,
1. Checking the quality of raw materials before
they are used.
2. Makes quality
standards- BSI, ISI, etc.
3. Uses more automation in product design and manufacturing.
Benefits of Quality Assurance (Mar
2020 Q.No-3b)
1.
It helps to eliminate faults or errors at each stage of production before
passing to the next stage.
2. It reduces the costs
of scrap and improves quality at each level of production
3. Before starting
production, ensure quality materials so it prevents fault in products.
4. Business can save
the cost of inspection throughout each production stage.
5. It improves brand image, reduces customer complaints and return.
Problems of Quality Assurance
1. Can be expensive to train employees to
check the quality of their own work as there is no special team to check
quality.
2. The reliability of employees is
important, and they need to be committed or quality assurance will not be
effective
3. Takes longer to produce output as each worker needs to check their own faults.
C. TQM (Total Quality Management)
TQM is the advanced form of quality
improvement to ensure continuous improvement focusing on each and every
stage of the production processes.
Advantages
1. Quality becomes the central character
of employees so it ensures best output.
2. Right first time- ensures no customer
complaints by offering full customers satisfaction throughout the existence.
3. It reduces costs as no faults to
repair or price reductions needed
Disadvantages
1. Increase cost to train all employees
2. Quality is depending on employee’s attitude and responsibility.
D.TRAINING
If employees are trained, it would increase the skills of employees so it would reflect in the process of production as high quality. Business can use different types of training such as on the job training, off the job training, and induction training
QUALITY
STANDARD
A quality standard is a set of various guidelines instructed by the standard institutes to be followed when producing products in order to meet the purpose of the consumer.
STANDARD INSTITUTES
1. ISO
The International Organization for Standardization (ISO) is an international standard-setting body composed of representatives from various national standards organizations. Founded on 23 February 1947, the organization promotes worldwide industrial and commercial standards.
2. BSI
The British Standards Institution (BSI)
is a service organization that produces standards across a wide variety of
industry sectors. Its codes of practice and specifications cover management and
technical subjects ranging from business continuity management to quality
requirements.
Kite mark is the quality symbol offered by BSI.
3.
ISI
Bureau of Indian Standard (BIS), the national standards body of India. The ISI
mark is by far the most recognized certification mark in the Indian subcontinent.
The name ISI is an abbreviation of Indian Standards Institute.
Unit 4.4
LOCATION DECISIONS
The location of a business is usually considered either when the business is setting up first or when its present location changes. Changing location is not so easy decision regarding each and every business as it needs more investment and studies. Mainly business consider the infrastructure facilities to choose the location.
Why business
locates to another country or location (Oct-Nov
2020, Qno-1d)
1. To achieve growth and expansion by accessing into new markets
2. To reduce cost of production because resources may be available at
cheap rate.
3. To locate closer to the market because shifting location into a city
or town would bring more sales.
4. Lower labour cost because workers are ready to work at lower
remuneration.
5. Access to global market because international market brings worldwide
market.
6. To reduce legal barriers because government may support business or
industry.
7. To avoid competition from similar business.
FACTORS AFFECTING THE LOCATION OF MANUFACTURING INDUSTRY (Oct/Nov 2018 4b. P-2) (May/June 2016 Q.No-4d) (Mar-2021 Q.No-4d)
(Mar 2016, Q.No.3e) (Oct/Nov 2022, Q.No-4e)
1. Production methods
If job production is used, the
business is likely to be on a small scale and so the influence of the nearness
of components will be of less importance to the business than if flow
production is used.
2. Cost of the site/ Rent
The area type and cost of land
are important factors in choosing a location. The cost of land will vary across
different regions (city/urban/rural). Normally higher rent is charged in city
or populated area than remote area.
3. Personal preferences of the owner
Usually the personal preferences of the owner will also influence the location decisions of the business. They may wish to stay in an area due to family links or they may want to live in an area that is particularly pleasant for some reason. E.g: Good climate.
4. Availability of labour
The
availability of workers, their skill level and wage rate they need to be paid,
etc., are important in deciding the business location; some business may need
skilled labours where as other require a large supply of cheap unskilled
workers according to the availability business can be located.
5. Nearness to raw-materials
Businesses
that use large quantities of raw materials need to be located nearer to the
sources of raw material as it will reduce transport cost. Such businesses are
called ‘bulk reducing’ as the weight and size of the finished products is less
than the raw materials went in to make it.
E.g. steel factories, sugar producers, etc.
6. Nearness to market
Businesses
that assemble components often choose to locate closer to the customers.
Because the transporting cost of bulkier or heavier finished products are
greater than the transporting of raw materials. Such businesses are called ‘bulk
increasing’ business.
e.g. car manufacturers, breweries.
7. Infrastructure (transport, communication, power,
water supply, etc.)
Infrastructure
covers the modes of transport, communication network and access to basic
facilities like water and electricity. Businesses need to ensure that there are
adequate infrastructure facilities to locate the business. It is the government
that is largely responsible for providing all these facilities.
8. Government incentives
Government
policy also influences businesses location. Government often offers incentives
to start businesses or relocate existing ones in areas that need economic development
(regeneration). This has led to certain areas being called enterprise zones or
assisted areas where firms are offered grants or low interest loans. Business
are encouraged to develop ‘brown field’ sites rather than on green fields’.
9. Climate
Climate will not influence
most manufacturing business but occasionally it might be important.
e.g: Silicon Valley in USA has a very dry climate which aids the production of silicon chips.
FACTORS AFFECTING THE LOCATION OF A RETAILING
BUSINESS (Mar 2019 Q.No-3b.P-2) (Oct/Nov 2018 Q.No-1d) (May/June 2018 Q.No-1d) (May/June 2017
Q.No-1c.) (Oct/Nov 2016 Q.No-4d) (May/June
2021 Q.No-1b P-2)
(March 2022 Q.No-2c)
1. Access to the customers
A
retailer decides to locate the business in those areas which are regularly
visited by shoppers than areas which shoppers don’t visit.
2. Nearby shops/ competitions
Being
able to locate near to other shops, offices and institutions helps to increases
sales. Because people pass your shop on the way to other shops and office may
be attracted by the shop display that motivate them to make purchases.
3. Customer parking facility
Where parking is convenient and near to the
shops. This will convenient and near to the shops. This will encourage choppers
to that area and therefore it possibly increases the sales.
4. Availability of suitable vacant
premises/access for delivery vehicles
There
should be suitable vacant shop or premises for purchase or rent, where the
business likes to be locating its operations. Access for delivery vehicles
might be a consideration if it is very difficult for them to gain access to the
premises.
5. Rent and taxes
The
more central the site of the business the higher the taxes and the rent will
be. The amount of tax and rent payable by the business also influence the
location decision of the business.
6. Security
The
rate of crime in an area might be important to a business. High rates of crimes
such as theft and vandalism may discourage business from locating from that
area.
7. Legislation
In some countries there may be laws restricting the trading or marketing of goods in particular area.
FACTORS THAT INFLUENCE A BUSINESS TO RELOCATE
EITHER AT HOME COUNTRY OR ABROAD (May/June 2020 Q. No-2d)
(Mar 2018. Q.no 4.e) (May/Jun
2015, Q.No.3e)
1. Increased demand.
When
demand for the products increase, business may produce more products by
investing in its present site. But there will be a limit to the expansion with
in the present location, so the business will have to relocate the business
into larger market.
2. Lack of resources
If
the raw material of a business runs out, the business might either bring in another
supply from elsewhere or relocate their business to where they can obtain these
supplies easily.
3. Difficulties with labour force
It
the business is located where the wage rate keeps rising, it might relocate overseas
in order to take the advantage of lower wage rate and if particular types of
skilled labours are needed by the business it might relocate to a place where
they can recruit the right type of labour to enable business expansion.
4. Rents/taxes rising
If other costs like rent and taxes keep raising it might cause the business to relocate in order to decrease their business costs.
5. Government grants.
Government
might provide grants and subsidies to encourage foreign businesses to locate in
their country in order to bring in job opportunities and investment.
6. Tariff barriers
If there are tariff barriers, such as quotas (where limits are placed on quantity of imports of a particular good) then by location in such countries there will be no restrictions.
TRADE
RESTRICTIONS
In
order to protect the home industries, countries may impose trade restriction to
limit the import of certain goods from other countries.
1. Tariff
(Duty)- tax on import of goods and services
2. Quotas-
physical limits on quantity of goods imported.
3. Embargo-
Complete ban on the import of certain goods
4. Exchange
control- Money transfer limit from a country to
outside
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