SBP 2c: Customer Proximity

This principle occurs because customers need to get their inputs to the location in order for production to begin (by the Unified Services Theory). Customer-suppliers cannot usually bulk-ship their individual inputs to the service production location.

If information is the only input needed from customers, then much of the production process can be performed far from the customer, and telecommunications or mail can be used to bring the customer information to the production process. An example is the phone company, which processes telephone calls at centralized switching locations, but the “information portal” gathers customer inputs (i.e. voice signals) at locations very near the customers (i.e. telephones).

Some customer belongings can be shipped, implying that we could centralize production. It might be possible to centralize a shoe repair service–have customers send their shoes to a location that services a huge geographical area. However, having the customers ship their inputs to the production location can be very expensive since they are unlikely to take advantage of bulk rates or other economies of scale.

An example of a service that has successfully centralized is film processing. Customers mail their rolls of film to centralized processing facilities, and the developed prints are mailed back. The result is dramatic cost savings to the customer when compared with less-centralized film processing. Some cost savings come through economies of scale in film processing. Other cost savings come through low inconvenience to the customer: The “portal” (i.e. location) where the customer inputs (i.e. rolls of film) are provided to the service process is as near as the closest mail box.

Service providers must pay close attention to location factors, particularly considering costs of location decisions to the customer. (As a hotel executive supposedly once said, the three most important success factors in his business were location, location, and location.)

Realize that there are many challenges in decentralized production such as limited scale of economies (a cost factor) and maintaining process control (a quality and productivity factor).

Conduct location analysis. This often means estimating where customers are located and the costs of getting customer inputs to the service production facility.

Electronics manufacturing can be very labor-intensive, causing many companies to locate their production facilities in regions of the world with low labor costs–even though most of the present customers are in other regions of the world. Restaurant services are also quite labor-intensive. However, we would consider it absurd to locate a restaurant in an area of low labor costs when most of the potential customers are very far from there. In fact, many restaurants are located in high rent districts with expensive labor markets because those locations are very convenient to customers.

McKesson is a large drug distributor, with a number of centralized warehouses. Customers of McKesson are hospitals and pharmacies, which are dispersed around the world. Rather than locate a distribution facility near every customer, the company places computer terminals at many customers' locations. That way the customer inputs–order specifications–can be quickly sent to a centralized distribution location.

A major decision for any airline is where to locate the facilities–which is where to locate a station with incoming and outgoing flights. The primary factor in deciding where to locate a new station is where the customers are coming from or want to go to. It is pointless to locate a station at a particular location for any other reason, if customers do not desire to fly from or to that location.

With manufacturing, the production location is generally dictated by other factors. Non-customer suppliers can often bulk-ship their inputs. Customers generally do not need to even know where the production location is, or where inputs enter the process.

1. Where do service (production) facilities tend to be located?
2. How much of the production process must be near the customer?
3. How much of the production is centralized?
4. If production can be centralized, how do customers get their inputs to the central location?
5. What advantages would be gained by improving the proximity of the service location to the customer? What would the fixed and variable costs be?

If you were going to locate another entire production facility, where would you locate it? Why? What data would you need to make such a decision? What are the cost factors involved?