limate and the quality of the local water and air fall into the same category, as do topography and physical soil structure ofar as they affect construction costs, amenity and convenience. Locally provided public services such as police and fire he short run at least) is another, usually accounting for a major portion of the total feature of all these local heir nature ghborhood ively on the disposal tuse within other he negative ould no longer iron and steel gh cost for disposing descr d upon the ing them, if we f equity but le inputs-such as fuels, materials, tion from wherever they are produced. ctivities r example automob different sources. Anal or of access to places where such outputs are in der 33 er to markets. To irces to the location in question, reflectir ; in particular, the net receipts from such sales, for output"means the demand for the output of the specifi ation, and not the aggregate demand for all output of of course, by the degree of competition; ors. The same holds true for supply of an g units and the resulting patterns of location for types of activities are eristics of locations. But in order to rate the or public facility, one needs to or shoe factory or less specific classes of activities. Those Those interested in community ies, government administrators, Perhaps the most direct method: Ask the people who are making the locational decision. In many questionnaire surveys addressed to businessmen in connection with"industry studies,"firms have been given a list of location factors, including such items as labor cost, taxes, water supply, access to markets, and power cost,and
6 Climate and the quality of the local water and air fall into the same category, as do topography and physical soil structure insofar as they affect construction costs, amenity, and convenience. Locally provided public services such as police and fire protection also are local inputs. Labor (in the short run at least) is another, usually accounting for a major portion of the total input costs. Finally, there is a complex of local amenity features, such as the aesthetic or cultural level of the neighborhood or community that plays an especially important role in residential location preferences. The common feature of all these local input factors is that what any given location offers depends on conditions at that location alone and does not involve transfer of the input from any other location. In addition to requiring some local inputs, the unit choosing a location may be producing some outputs that by their nature have to be disposed of locally. These are called nontransferable outputs. Thus, the labor output of a household is ordinarily used either at home or in the local labor market area, delimited by the feasible commuting range. Community or neighborhood service establishments (barber shops, churches, movie theaters, parking lots, and the like) depend almost exclusively on the immediately proximate market; and, in varying degree, so do newspapers, retail stores, and schools. One type of locally disposed output generated by almost every economic activity is waste. At present, only radioactive or other highly dangerous or toxic waste products are commonly transported any great distance for disposal; though the disposal problem is increasing so rapidly in many areas that we may see a good deal more long-distance transportation of refuse within our lifetimes. Other wastes are just dumped into the air or water or on the ground, with or without incineration or other conversion. In economic terms, a waste output is best regarded as a locally disposed product with negative value. The negative value is particularly large in areas where considerations of land scarcity, air and water pollution, and amenity make disposal costs high; this gives such locations an element of disadvantage for any waste-generating kind of unit. It is not always possible to distinguish unequivocally between a local input and a local output factor. For example, along the Mahoning River in northeastern Ohio, the use of water by industries long ago so heated the river that it could no longer furnish a good year-round supply of water for the cooling required by steam electric generating stations and iron and steel works. In this instance, excess heat is the waste product involved. The thermal pollution handicap to heavy-industry development could be assessed either as a relatively poor supply of a needed local input (cold water) or as a high cost for disposing of a local output (excess heat). This is just one example of numerous cases in which a single situation can be described in alternative ways. An often-neglected responsibility of government is to see that the costs of environmental pollution are imposed upon the polluting activity. The price of goods should reflect fully the social costs associated with consuming and producing them, if we value a clean environment. It is important to note that this guiding principle can be defended not only on the basis of equity but even more importantly on the basis of efficiency. 2.3.2 Transferable Inputs and Outputs A quite different group of location factors can be described in terms of the supply of transferable inputs—such as fuels, materials, some kinds of services, or information—which can be moved to a given location from wherever they are produced. Here the advantage of a location depends essentially on its access to sources of supply. Some kinds of activities (for example, automobile assembly plants or department stores) use an enormous variety of transferred inputs from different sources. Analogously, where transferable outputs are produced, there is the location factor of access to places where such outputs are in demand. The seller can sell more easily or at a better net realized price when located closer to markets. 2.3.3 Classification of Location Factors To sum up, the relative desirability of a location depends on four types of location factors: Local input: the supply of nontransferable inputs at the location in question Local demand.' the sales of nontransferable outputs at the location in question Transferred input: the supply of transferable inputs brought from outside sources to the location in question, reflecting in part the transfer cost from those sources Outside demand: the sales of transferable outputs to outside markets; in particular, the net receipts from such sales, reflecting in part the transfer costs to those markets It should be kept in mind that, throughout this chapter, "demand for output" means the demand for the output of the specific individual plant, factory, household, or other unit under consideration, and not the aggregate demand for all output of that kind. The demand for an individual unit's product at any given market is affected, of course, by the degree of competition; other things being equal, each unit will generally prefer to locate away from competitors. The same holds true for supply of an input. This and other interactions among competing units and the resulting patterns of location for types of activities are, however, the concerns of Chapters 4 and 5. 2.3.4 The Relative Importance of Location Factors The classification of location factors just suggested is based on the characteristics of locations. But in order to rate the relative merits of alternative locations for a specific kind of business establishment, household, or public facility, one needs to know something about the characteristics of that kind of activity. Just how much weight should a pool hall or shoe factory or shipyard or city hall assign to the various relevant location factors of input supply and output demand? There have been countless efforts to answer this question with respect to more or less specific classes of activities. Those concerned with location choice want to know the answer in order to pick a superior location. Those interested in community promotion seek the answer in order to make their community appear more desirable to industries, government administrators, and prospective residents. Perhaps the commonest method of measurement is the most direct method: Ask the people who are making the locational decision. In many questionnaire surveys addressed to businessmen in connection with "industry studies," firms have been given a list of location factors, including such items as labor cost, taxes, water supply, access to markets, and power cost, and
les be and disadvan tages. till do not al of 10 cents put to him melt one ton of iron or our answer would se two locations indicative tions for thi rwout wage tabnsn s to refer to from a wider supply area, be very elastic Ajax's entry as a buyer would not drive the e economies of larger volume would be sufficient to make E ght that it would be better to operate on a reduced scale in Burton City. Similarly, some locations will offer a more elastic demand for the output than others, and here
7 have been asked to rate them in relative importance, either by adjectives ("extremely important," "not very important," and so forth) or on some kind of simple point system. This primitive approach is unlikely to provide any insights that were not already available and may sometimes be positively misleading. In the first place, it provides no real basis for a quantitative evaluation of advantages and disadvan tages. If, for example, "taxes" are given an importance rating of 4 by some respondent, and "labor costs" a rating of 2, we still do not know whether a tax differential of 3 mills per dollar of assessed property valuation would offset a wage differential of 10 cents per man-hour. The respondent probably could have told us after a few minutes of figuring, but the question was not put to him or her in that way. A further shortcoming of the subjective rating method is that respondents are implicitly encouraged to overrate the importance of any location factors that may arouse their emotions or political slant, or if they feel that their response might have some favorable propaganda impact. It has been suggested, for example, that employers have often rated the tax factor more strongly in subjective-response surveys than would be supported by their actual locational choices. A more quantitative approach is often applied to the estimation of the strength of various location factors involving transferred inputs and output. For example, we might seek to determine whether a blast furnace is more strongly attracted toward coal mines or toward iron ore mines by comparing the total amounts spent on coal and on iron ore by a representative blast furnace in the course of a year, and such a figure is easily obtained. Unfortunately, this method could not be relied on to give a useful answer where the amounts are of similar orders of magnitude. We might use it to predict that a blast furnace would be more strongly attracted to either coal mines or iron ore mines than it would be to, say, the sources of supply of the lubricating oil for its machinery; but it may be assumed that we know that much without any special investigation. A little closer to the mark, perhaps, would be a comparison between the annual freight bills for bringing coal to blast furnaces5 and for bringing iron ore to those furnaces. But this comparison is obviously influenced by the different average distances involved for the two materials as well as by the relative quantities transported, so again it tells us little. We might instead simply compare tonnages and say that if it takes coke from two tons of coal to smelt one ton of iron ore, the choice of location for a blast furnace should weight nearness to coal mines twice as heavily as nearness to iron ore mines. Here we are getting closer to a really informative assessment (for these two location factors alone), although our answer would be biased if one of the two inputs travels at a higher transport cost per ton-mile than the other (a consideration to be discussed later in this chapter). It would appear that in order to assess the relative importance of various location factors for a specific kind of activity we need to know the relative quantities of its various inputs and outputs. If, for example, we want to know whether labor cost is a more potent location factor than the cost of electric power, we first need to know how many kilowatt-hours are required per man-hour. If this ratio is, say, 20, and if wages are 10 cents an hour higher in Greenville than in Brownsville, it would be worthwhile to pay up to ½ cent more per kilowatt-hour for power in Brownsville (assuming of course that these two locations are equal with respect to all other factors, including labor productivity). This kind of answer is what the locator of a plant would need; but it should be noted that it is not necessarily indicative of the degree to which we should expect to find this kind of activity attracted to cheap power as against cheap labor locations. Perhaps differentials of ½ cent per kilowatt-hour or more are frequently encountered among alternative locations for this industry, whereas wage differentials of as much as 10 cents an hour are rather rare for the kind of labor it uses. In such a case, the power cost differentials would show up more prominently as decisive locational determinants than would wage differentials. Thus we conclude that, for some purposes at least, we need to know something about the degree of spatial variability of the input prices corresponding to the location factors being weighed against one another. When we consider a location factor such as taxes, we encounter a further complication: There is no appropriate way to measure the quantity of public services that a business establishment or household is buying with its taxes or to establish a "unit price" for these services. The only way in which we can get a measure of locational sensitivity to tax rates is to refer to the actual range of rates at some set of alternative locations and translate these into estimates of what the tax bill per year or per unit of output would amount to at each location. This procedure has been followed in some actual industry studies, such as the one carried out by Alan K. Campbell for the New York Metropolitan Region Study.6 A major relevant problem is how to measure and allow for any differences in the quality of public services; this is related to tax burdens, although not in the close positive correspondence that one might be tempted to assume. Insight into still another problem of assessing relative strength of location factors comes from consideration of the implications of a differential in labor productivity. If wages are 10 percent higher in Harkinsville than in Parkston, but the workers in Harkinsville work 10 percent faster, the labor cost per unit of output will be the same in both places, and one might infer that neither place will have a net cost advantage over the other. In fact, however, the speedier Harkinsville workers will need roughly 10 percent less equipment, space, and the like than their slower counterparts in Parkston to turn out any given volume of output; so there will be quite a sizable saving in overhead costs in Harkinsville. This advantage, though resulting from a quality difference in production workers, will appear in cost accounts under the headings of investment amortization costs, plant heating and services, and perhaps also payroll of administrative personnel and other nonproduction workers. A somewhat different kind of identification problem arises when there are substantial economies or diseconomies of scale. Suppose we are trying to compare two locations for the Ajax Foundry, with respect to supply of the scrap metal it uses as a principal input. The going price of scrap metal is lower in Burton City than in Evansville; but only relatively small amounts are available at the lower price. If Ajax were to operate on a large scale in Burton City, it would have to bid higher to attract scrap from a wider supply area, whereas in Evansville scrap is generated in much larger volume and supply would be very elastic: Ajax's entry as a buyer would not drive the price up appreciably. In this case, Ajax must decide whether the economies of larger volume would be sufficient to make Evansville the better location or so slight that it would be better to operate on a reduced scale in Burton City. Similarly, some locations will offer a more elastic demand for the output than others, and here
again the choice of location will depend in part on economies of scale. brought to light some of the less obvious complexities of the problem of measuring the ng the choice of location for a specific business establishment or other unit. It n be assigned to the various factors only in certain cases(to be argued that the relative influence of the various factors e geographical patterns of variation of the peaks rise above face look very egularities. i itern is quite choosing whethe metropol ation(say, within a erent regio aggregation. The choice is a , or among countries y the level of comparison outputs. After all, th only really comparison o hood), we must recognize t r, electric energy, tr ling requires travel to th to h d at any to the location rger than on are generally ey may even be the ide). Many the sense of equall that the postal example unit is locate utputs that are not transferable b nined b size of place; but there are Some activities cater to local markets and cannot operate at a minimum efficient scale except in places of at least a certain minimum size. In selecting a
8 again the choice of location will depend in part on economies of scale. The foregoing discussion has brought to light some of the less obvious complexities of the problem of measuring the relative importance of the various factors affecting the choice of location for a specific business establishment or other unit. It should now be clear that definite quantitative "weights" can be assigned to the various factors only in certain cases (to be discussed later in this chapter) involving transfer cost. It has also been argued that the relative influence of the various factors upon location depends on the amounts and kinds of inputs and outputs and on the geographical patterns of variation of the respective input supplies and output demands. 2.4 SPATIAL PATTERNS OF DIFFERENTIAL ADVANTAGE IN SPECIFIC LOCATION FACTORS If one views the earth's surface from space, it looks completely smooth—after all, the highest mountain peaks rise above sea level by only about 1/13 of 1 percent of the planet's radius. A closer view makes many parts of the earth's surface look very rough indeed. Again, if one looks at a table-top, it appears smooth, but a microscope will disclose mountainous irregularities. The same principle applies to spatial differentials in a location factor: The interregional (macrogeographic) pattern is quite different from the local (microgeographic) pattern. For example, we should not expect land cost to be relevant in choosing whether to locate in Ohio or in Minnesota; but if the choice is narrowed down to alternative sites within a particular metropolitan area, land cost will indeed be important. Large differences may appear even within one city block. Labor supply and climate, in contrast, are examples of location factors where there is little microgeographic variation (say, within a single county or metropolitan area), but wide differences prevail on a macrogeographic scale involving different regions. Locational alternatives and choices are generally posed in terms of some specific level of spatial disaggregation. The choice is among sites in a neighborhood, among neighborhoods in an urban area, among urban areas, among regions, or among countries. No useful statements about location factors, preferences, or patterns can be made until we first specify the level of comparison or the "grain" of the pattern we are concerned with. This principle was in fact implicit in our earlier distinction between local and transferable inputs and outputs. After all, the only really non-transferable inputs are natural resources or land, including topography and climate. In a very fine-grained comparison of locational advantages (say, the selection of a site for a residence or retail store within a neighborhood), we must recognize that all other inputs and all outputs are really transferred, though perhaps only for short distances. Water, electric energy, trash, and sewage all require transfer to or from the specific site. Selling one's labor or acquiring schooling requires travel to the work place or school; selling goods at a retail store requires travel by customers. Accordingly, our distinction between local and transferable inputs is a flexible one: It will vary according to how microgeographic or macrogeographic a view of location we are taking for the situation at hand. Thus if we are concerned with choices of location among cities, "local" means not transferable between cities. Some inputs or outputs properly regarded as local in such a context are properly regarded as transferable between sites or neighborhoods within a city. What, then, are the possible kinds of spatial differential patterns for a location factor as among various locations at any prescribed level of geographic detail? The simplest pattern, of course, is uniformity: All the locations being compared rate equally with respect to the location factor in question. For example, utility services are commonly provided at uniform rates over service areas far larger than neighborhoods, often encompassing whole cities or counties. Wage rates in an organized industry or occupation are generally uniform throughout the district of a particular union local, and in industries using national labor bargaining they may even be uniform all over the country. Tax rates are in general uniform over the whole jurisdiction of the governmental unit levying the tax (for example, city property taxes throughout a city, state taxes throughout a state, and national taxes nationwide). Many commodities are sold at a uniform delivered price over large areas or even over the whole country. Climate may be, for all practical purposes, the same over considerable areas. The special term ubiquity is applied to inputs that are available in whatever quantity necessary at the same price at all locations under consideration. Air is a ubiquity, if we are indifferent about its quality. Federal tax stamps for tobacco or alcohol are a ubiquity over the entire country. If an input is ubiquitous, then its supply cannot be a location factor—being equally available everywhere, it has no influence on location preferences. The demand-side counterpart of a ubiquity is of course an output for which there is the same demand (in the sense of equally good access to markets) at all locations under consideration. There does not seem to be any special technical term for this, and it is in fact a much rarer case than that of an input ubiquity. Perhaps we could illustrate it. Imagine some type of business that distributes its product by letter mail, but with speedy delivery not being a consideration. In such a case, proximity to customers is inconsequential; demand for the output is in effect ubiquitous. The reason, in this special case, is that the postal service makes no extra charge for additional miles of transportation of letters. A different pattern of advantage for a location factor can be illustrated by market access for wheat growers. The demand for their wheat is perfectly elastic, and what they receive per bushel is the price set at a key market, such as Chicago, minus the handling and transportation Charges. The net price they receive will vary geographically along a rather smooth gradient reflecting distance from Chicago. The locational effect of the output demand factor can be envisaged as a continuous economic pull in the direction of Chicago. Similar pull effects reflecting access advantage operate within individual urbanized areas. For example, workers' residence preferences are affected by the factor of time and cost of commutation to places of employment. Another kind of systematic pattern involves differential advantage according to the size of the town or city in which the unit is located. This might apply to certain location factors involving the supply of or the demand for inputs or outputs that are not transferable between cities. It would be surprising to find any kind of differential advantage that is precisely determined by size of place; but there are many location factors that in fact show roughly this kind of pattern. Some activities cater to local markets and cannot operate at a minimum efficient scale except in places of at least a certain minimum size. In selecting a
location for such an activity, the first step in the selection process might well be to winnow down the alternatives to a limited places. Thus one would not ordinarily expect to find patent lawyers, opera houses, investment bankers, small cities. atial pattern of advantage is not obviously systematic at all-that is, it random. Tax rates this category. Some general statements can be r merit further ity or local market, and those involving labor cost reasons s, for which transportation costs are in ansfer costs on oment of a systematic le for emphasis on costs are functionally inated by differential oth. Similarly, we can model, it will be newed as a service; thus, one n of transfer r se. It also al distances we are to nging inputs tota ut The total costs. profits must take ng to maximize profits (revenue less cost) ul to start al points, but that the unit is too small to have and it lelivering its output, so se as distance from th tion on the input side as we have just done on the output side. I s, but at each source the supp ght. Consequently, on to the already mentioned Our third tion or scale of operations. ns, which will be addressed cation to the much simpler prob such factors as processing-co ing prices by the business unit under ce Fina m per ton mile, regardless of d postpones(until the next chapter) a recognition of the various lly appear in transte costs in If the unit in question uses only one kind of transferable input (say, wood)and produces one kind of transferable output (say, baseball bats), then the choice of the most profitable location is easy to describe. The first question to be settled is that of input orientation versus output orientation. Will it be preferable to make the bats at a wood source, or at the market, or at some
9 location for such an activity, the first step in the selection process might well be to winnow down the alternatives to a limited set of sufficiently large places. Thus one would not ordinarily expect to find patent lawyers, opera houses, investment bankers, or major league baseball teams in towns or small cities. Finally, there are location factors for which the spatial pattern of advantage is not obviously systematic at all—that is, it cannot be described or predicted in any reasonably simple terms, although it is not necessarily accidental or random. Tax rates, local water supply, labor supply, and quality of public services seem to fall into this category. Some general statements can be made to explain the broad outlines of the pattern (such a statement is attempted for labor costs in Chapter 10); but for making comparisons for actual selection of locations there is no way of avoiding the necessity of collecting information about every individual location that we wish to consider. Among the kinds of patterns of differential advantage that location factors may assume, three in particular merit further discussion: those determined by transfer costs, those determined by size of city or local market, and those involving labor cost. We turn here to the transfer cost case, reserving the other two for consideration in later chapters. 2.5 TRANSFER ORIENTATION Until fairly recently, location theory laid exaggerated emphasis on the role of transportation costs, for a number of reasons. Interest was particularly focused on interregional location of manufacturing industries, for which transportation costs are in fact relatively more important and obvious than for most other kinds of activities. Moreover, the effect of transfer costs on location is more amenable to quantitative analysis than are the effects of other factors, so that the development of a systematic body of location theory naturally tended to use transfer factors as a starting point and core. A basic rationale for emphasis on transfer advantages is given by Walter Isard: "Only the transport factor and other transfer factors whose costs are functionally related to distance impart regularity to the spatial setting of activities."7 We can speak of a particular activity as transfer-oriented8 if its location preferences are dominated by differential advantages of sites with respect to supply of transferable inputs, demand for transferable outputs, or both. Similarly, we can call an activity labor-oriented where the locational decisions are usually based on differentials in labor cost. Let us look first at a simple model of transfer orientation. In order to facilitate the development of this model, it will be helpful to consider the concept of production. In traditional nonspatial economic theory, production is viewed as a transformation process. One uses factors of production in some combination in order to produce a good or service; thus, one "transforms" inputs into outputs. Later in this chapter, we shall find that the nature of that transformation process may itself influence the location decision. However, for our immediate purposes, it is important to recall from the discussion of transf er factors earlier in this chapter that the activity of a locational unit involves much more than transformation per se. It also involves the acquisition of inputs and the distribution of output, both of which may require transfer over substantial distances. The same might be said about the activity of a household or other nonprofit establishment. Space plays an essential role in economic activity. Given this, it is easy to recognize that the costs incurred by the firm also have a spatial component. If we are to understand the behavior of business establishments, we must be concerned with the costs associated with bringing inputs together and distributing outputs, just as we are concerned with the costs of transforming inputs into output. The total costs, therefore, include these three components, and a locational unit that is seeking to minimize costs or maximize profits must take them all into consideration. Let us focus now on the behavior of a single-establishment business firm aiming to maximize profits (revenue less cost) and seeking the best location for that purpose. We shall see that the problem can be quite complex, so it will be helpful to start off with some simplifying assumptions that can later be relaxed. First, we shall assume that there are markets for this unit's output at several points, but that the unit is too small to have any effect on the selling price in any of those markets. In other words, demand for the unit's output is perfectly elastic, and it must take the prevailing prices as given, regardless of its volume of sales. The firm has to pay for the costs of delivering its output, so there is some incentive to locate at or near a market. Costs associated with distribution of output rise as distance from the market increases. We simplify the case further by making exactly the same kind of assumption on the input side as we have just done on the output side. In other words, the kinds of transferable inputs our unit uses are available at different sources, but at each source the supply is perfectly elastic, so the price can be taken as given regardless of how much of the input is bought. Consequently, there will be a cost incentive for the unit to locate at or near a source of transferable inputs, in addition to the already mentioned incentive to locate at or near a market. Our third assumption is that the unit's processing costs (using local inputs) will not vary with either location or scale of operations. These three simplifying assumptions bypass some highly important factors bearing on the choice of locations, which will be addressed in later chapters. What we have done for the present is to reduce the problem of a maximum-profit location to the much simpler problem of minimizing transfer costs per unit of output, by postponing consideration of such factors as processing-cost differentials, economies or diseconomies of scale, and control over buying or selling prices by the business unit under consideration. Finally, we can simplify the problem of minimizing transfer costs by letting transfer costs be uniform per ton mile, regardless of distance or direction. This assumption of what is called a uniform transfer surface postpones (until the next chapter) a recognition of the various differentials that typically appear in transfer costs in the real world. If the unit in question uses only one kind of transferable input (say, wood) and produces one kind of transferable output (say, baseball bats), then the choice of the most profitable location is easy to describe. The first question to be settled is that of input orientation versus output orientation. Will it be preferable to make the bats at a wood source, or at the market, or at some
FIGURE 2-1: A Pair of Source and Market Locations sibilities, since a detour would obviously be The question can be settled by considering any pair of source and market locations, as in Figure 2-1. The possible locations are the points on the line sm. Input costs are reduced as the point is shifted toward s, but receipts per unit output are increased as the location is shifted the other way, toward M; that is, transport costs associated with the delivery of the final product are reduced with movements toward the market. Which attraction will be stronger? There is a close physical analogy here to a tug of war between two opposing pulls, but how are their relative strengths measured? Let the relative weights of transferred input and transferred output be wm and wq respectively (i.e, let it take wm tons of the material to make w, tons of the product ). The material travels at a transfer cost of rm per ton-mile and the product at rq per ton-mile. Moving the oduct and material respectively, since they measure the strengths of the opposing pulls in the locational tug of war between material source and market, and take account of both the relative physical weights and the relative transfer rates on material and product. Production will ideally take place at the market or at the material source, depending on which of the ideal weights is the greater A numerical example may help to clarify this point. Let us say that, in the course of a typical operating day, 2000 tons of the transferable input are required and that the transferable output weighs 250 tons. Further, assume that the transfer rate on this input is 2 cents per ton-mile, whereas the transfer rate on the output is 32 cents per ton-mile. Given these conditions, lelivery costs on the output would decrease by $80 (250 X 32 ) per day for every mile that the location is shifted toward the market and away from the material source. However, transfer costs on the input would increase by only $40(2000 x 2e)per day for each such move. We might express these ideal weights in relative terms as $80/$40 or 2/1 in favor of the transferable output, and in this example the locational unit would be drawn toward the market It is of course conceivable that the two ideal weights might be exactly equal, suggesting an indeterminate location anywhere along the line SM. This special case would appear, however, to be about as likely as flipping a coin and having it stand on edge. Indeed, certain further considerations to be introduced in the next chapter make such an outcome even more improbable. So it is a good rule of thumb that if there is just one market and just one material source, transfer costs can be minimized by locating the processing unit at one of those two points and not at any intermediate point We can establish a rough but useful classification of transfer-oriented activities as input-oriented (characteristically locating at-a transferable-material source) and output-oriented (characteristically locating at a market). Various familiar attributes of activities play a key role in determining which orientation will prevail For example, some processes are literally weight-losing: Part of the transferred material is removed and discarded during processing so that the product weighs less. In such physically weight-losing processes, clearly a location at the material sourd gets rid of surplus weight before transfer begins, reduces the total weight transferred, and thus will be preferred unless the ipping rate on the product exceeds that on the material sufficiently to compensate for the reduction in total ton-miles The opposite case(gain of physical weight in the course of processing)can occur when some local input such as water is incorporated into the product, thus making the transferred output heavier than the product Here (in the absence of a compensating transfer rate differential) the preferred location will be at the market, because it pays to introduce the added weight as late as possible in the journey from s to M Both of the above two cases entail, essentially, differences in the physical weight component of the ideal weights. But as the further illustrative cases in Table 2-l show, the transfer orientation of an activity can be based on some characteristic and production process is associated with major changes in such attributes as bulk, fragility, perishability, or nazar occur when the logical differential between the transfer rate on the output and the transfer rate on the input This can TABLE 2-1: Types of Input-Oriented and Output-Oriented Activities Process Characteristic Orientation Physical weight loss Input Smelters; ore beneficiation; dehydration Physical weight gain Output Soft-drink bottling, manufacture of cement blocks Bulk loss np Compressing cotton into high-density bales Bulk Outp Assembling automobiles; manufacturing co rs, sheet-metal work Input Canning and preserving food Perishability Output Newspaper and job printing; baking bread and pastry Packing goods for shipment Fragility gain Coking of coal Hazard loss Input Deodorizing captured skunks; encoding secret intelligence microfilming records Hazard gain Output Manuf acturing explosives or other dangerous compounds; distil ling moonshine whiskey *In some of these cases, the actual orientation reflects a combination of two or more of the listed process characteristics
10 point on the route between source and market? There are no other rational possibilities, since a detour would obviously be wasteful. The question can be settled by considering any pair of source and market locations, as in Figure 2-1. The possible locations are the points on the line SM. Input costs are reduced as the point is shifted toward S, but receipts per unit output are increased as the location is shifted the other way, toward M; that is, transport costs associated with the delivery of the final product are reduced with movements toward the market. Which attraction will be stronger? There is a close physical analogy here to a tug of war between two opposing pulls, but how are their relative strengths measured? Let the relative weights of transferred input and transferred output be wm and wq respectively (i.e., let it take wm tons of the material to make wq, tons of the product). The material travels at a transfer cost of rm per ton-mile and the product at rq per ton-mile. Moving the processing location a mile closer to the market M and thus a mile farther from the material source S will save wq,rq, in delivery cost but will add wmrm to the cost of bringing in the material. The wq,rq, and wmrm are called the ideal weights of product and material respectively, since they measure the strengths of the opposing pulls in the locational tug of war between material source and market, and take account of both the relative physical weights and the relative transfer rates on material and product. Production will ideally take place at the market or at the material source, depending on which of the ideal weights is the greater. A numerical example may help to clarify this point. Let us say that, in the course of a typical operating day, 2000 tons of the transferable input are required and that the transferable output weighs 250 tons. Further, assume that the transfer rate on this input is 2 cents per ton-mile, whereas the transfer rate on the output is 32 cents per ton-mile. Given these conditions, delivery costs on the output would decrease by $80 (250 × 32¢) per day for every mile that the location is shifted toward the market and away from the material source. However, transfer costs on the input would increase by only $40 (2000 × 2¢) per day for each such move. We might express these ideal weights in relative terms as $80/$40 or 2/1 in favor of the transferable output, and in this example the locational unit would be drawn toward the market. It is of course conceivable that the two ideal weights might be exactly equal, suggesting an indeterminate location anywhere along the line SM. This special case would appear, however, to be about as likely as flipping a coin and having it stand on edge. Indeed, certain further considerations to be introduced in the next chapter make such an outcome even more improbable. So it is a good rule of thumb that if there is just one market and just one material source, transfer costs can be minimized by locating the processing unit at one of those two points and not at any intermediate point. We can establish a rough but useful classification of transfer-oriented activities as input-oriented (characteristically locating at-a transferable-material source) and output-oriented (characteristically locating at a market). Various familiar attributes of activities play a key role in determining which orientation will prevail. For example, some processes are literally weight-losing: Part of the transferred material is removed and discarded during processing so that the product weighs less. In such physically weight-losing processes, clearly a location at the material source gets rid of surplus weight before transfer begins, reduces the total weight transferred, and thus will be preferred unless the shipping rate on the product exceeds that on the material sufficiently to compensate for the reduction in total ton-miles. The opposite case (gain of physical weight in the course of processing) can occur when some local input such as water is incorporated into the product, thus making the transferred output heavier than the product. Here (in the absence of a compensating transfer rate differential) the preferred location will be at the market, because it pays to introduce the added weight as late as possible in the journey from S to M. Both of the above two cases entail, essentially, differences in the physical weight component of the ideal weights. But as the further illustrative cases in Table 2-1 show, the transfer orientation of an activity can be based on some characteristic and logical differential between the transfer rate on the output and the transfer rate on the input. This can occur when the production process is associated with major changes in such attributes as bulk, fragility, perishability, or hazard. TABLE 2-1: Types of Input-Oriented and Output-Oriented Activities Process Characteristic Orientation Examples* Physical weight loss Input Smelters; ore beneficiation; dehydration Physical weight gain Output Soft-drink bottling; manufacture of cement blocks Bulk loss Input Compressing cotton into high-density bales Bulk gain Output Assembling automobiles; manufacturing containers; sheet-metal work Perishability loss Input Canning and preserving food Perishability gain Output Newspaper and job printing; baking bread and pastry Fragility loss Input Packing goods for shipment Fragility gain Output Coking of coal Hazard loss Input Deodorizing captured skunks; encoding secret intelligence; microfilming records Hazard gain Output Manufacturing explosives or other dangerous compounds; distilling moonshine whiskey *In some of these cases, the actual orientation reflects a combination of two or more of the listed process characteristics