IB Business Management HLTopic 5 — Operations ManagementPaper 1 & 2Core idea~9 min read
Deciding Where to Produce
Most operations decisions can be undone. Location cannot — not cheaply. Once a business has signed a lease, fitted out a site and hired local staff, moving again means writing all of that off. That is why examiners treat location as a long-term, high-risk decision, and why “it depends what the business needs most” is the answer they are looking for.
📚 What you need to know
Location is influenced by proximity to the market, to labour, to materials and to competitors.
It also depends on the nature of the business activity and on infrastructure — transport links and internet.
Cost factors (rent, wages, taxes, government grants) are weighed against qualitative factors the owner cares about.
Different businesses are pulled in different directions: some towards their raw materials, some towards their customers.
Location decisions are expensive to reverse, so businesses screen many sites before committing.
A poor location can sink an otherwise well-run business.
The factors that pull a business one way or another
Proximity to the market
How close the business sits to its customers. Being near them cuts the cost of delivering, shortens delivery times, and for a shop or restaurant it is the whole business — nobody travels an hour for a sandwich. It matters most when the finished product is bulky, fragile or perishable, because those are expensive to move.
Proximity to labour
Being near a pool of workers with the right skills. A software firm needs graduates and tends to cluster near universities or in cities where developers already live. A large warehouse needs a supply of people willing to do shift work nearby. If the skills are not local, the business must either train people or pay to relocate them, and both cost money.
Proximity to materials and suppliers
Being near the inputs. This matters most when the raw material is heavier or bulkier than the finished product, because it is cheaper to move the finished item than the raw material. It also supports just-in-time delivery, which only works when suppliers are close enough to deliver reliably.
Proximity to competitors
This one cuts both ways, which makes it good evaluation material. Some businesses deliberately cluster — car dealerships and furniture shops sit together because customers want to compare in one trip, so the cluster brings more traffic to everyone. Others deliberately avoid rivals, choosing an area nobody serves so they get it to themselves.
Nature of the business activity
What the business physically needs. A manufacturer needs floor space, high ceilings, heavy power supply and room for lorries to turn. A law firm needs a smart, central office that clients can reach easily. Neither would work in the other’s building.
Infrastructure
Roads, ports, rail, power and internet. A distributor needs motorway access; an online business needs reliable, fast connectivity far more than it needs a smart address. Weak infrastructure raises costs quietly and permanently.
Add the cost factors examiners expect. Rent and land prices, local wage rates, business taxes, and government grants offered to attract firms to a region. These are the numbers that decide between two sites that are otherwise equally suitable.
Which factor wins? It depends on what you move
There is a neat rule underneath all of this. A business is pulled towards whichever end of its supply chain is most expensive to transport. If the raw material is heavy and the product is light, sit near the material. If the product is heavy, fragile or perishable, sit near the customer. If neither is expensive to move, the business is free to go almost anywhere — and will then chase cheap rent or skilled staff instead.
Use this to justify a recommendation. Naming which end of the chain is expensive to move turns a list of factors into an argument.
How the decision is actually made
Businesses do not compare every possible site on every factor — that would take forever. They filter. First they rule out anywhere that fails a requirement they cannot live without, then they compare what is left on cost, then they apply judgement.
Notice that cost only appears at stage three. A site that fails a must-have is not a bargain, however cheap the rent is.
In an exam, structure a location answer this way: what must the site have, what will each option cost, and what is this firm’s priority? That order is far more convincing than listing six factors in the order you memorised them.
Quantitative and qualitative factors
Some location factors can be put in a spreadsheet. Rent per square metre, average wages, transport costs, tax rates and grants can all be added up, and the site with the lowest total cost can be identified.
Others cannot. The owner may not want to move their family. Staff may leave rather than relocate, taking their knowledge with them. A prestigious address may support a premium brand in a way no cost sheet captures. And the risk of getting it wrong is itself a qualitative factor, because location is so hard to reverse.
Business
The factor that dominates
Why
Coffee shop
Proximity to the market
Customers buy on impulse and will not travel
Cement works
Proximity to materials
Aggregate is heavy and costly to transport
Software developer
Proximity to labour
The product moves online, the skills do not
Distribution warehouse
Infrastructure
Everything depends on motorway and port access
Car dealership
Proximity to competitors
Buyers want to compare several in one trip
Fresh fish processor
Proximity to materials
The input is perishable and must be handled fast
Worked examples
WORKED EXAMPLE 1
A bottled water company is choosing between a site next to its spring and a site next to its main city market. Recommend a location. [6]
Step 1: what is expensive to move?
Water is heavy. Bottling near the spring means transporting full, heavy bottles a long way to customers.
Step 2: but check the constraint
The water itself must come from the spring, so the raw material has to be moved either way — and moving unbottled water in bulk tankers is cheaper per litre than moving packaged bottles.
Step 3: weigh it
Bottling near the market cuts the biggest transport bill, but the brand may rely on being bottled at source, which customers value.
Recommend bottling at source if the brand sells on purity; otherwise bottle near the marketThe marks here are for identifying the conflict between transport cost and brand image, not for picking a side.
WORKED EXAMPLE 2
Site A costs $40,000 a year in rent with wages of $260,000. Site B costs $25,000 in rent but wages there are $310,000, and it is 30 minutes further from customers. Which should the firm choose? [6]
Step 1: compare the measurable costsSite A: $40,000 + $260,000 = $300,000Site B: $25,000 + $310,000 = $335,000Site A is $35,000 a year cheaperStep 2: add the factor with no price on it
Site B is also further from customers, so delivery costs and response times both worsen. Nothing in the figures offsets that.
Cheaper rent is a headline that hides the real cost. Always total all the cost lines you are given before judging.
💡 Exam tip
Rank the factors for this firm. Saying which matters most, and why, is worth more than listing all six.
Total the costs you are given before you comment. A cheaper rent is often cancelled out by higher wages or transport.
Say that location is hard to reverse. It raises the risk of the decision and is a ready-made evaluation point.
Use the case study’s product. Perishable, bulky, fragile or digital — each one points to a different answer.
Mention stakeholders. Staff, the local community and suppliers are all affected by where the firm sits.
⚠️ Common mix-up
Near the market is not always best. For a heavy-materials producer it is the wrong answer.
Cheap land is not a saving if wages, transport or poor infrastructure cost more than the rent saved.
Competitors nearby are not automatically bad. Clustering can raise total customer traffic.
Infrastructure is not only roads. Internet speed and power reliability count, especially for services.
Location is not a marketing decision. “Place” in the marketing mix is about distribution channels, not where the factory sits.
Up next: Outsourcing, Offshoring and Reshoring — what happens when a business decides not to do the work itself, or not to do it at home.
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