Geography Reference
In-Depth Information
ries, the total inventory holding activities can account for a very high share
of total productions costs (McCann 1998), while for distribution centres
and retail outlets, these costs account for almost all of the establishments
costs.
The logistics costs model provides some rich additional firm locational
insights which are very powerful for the arguments in this topic. If we
allow for the much more complex interrelationships between input and
output prices, inventory holding time costs, and transport costs captured
by the logistics-costs model, it is possible to demonstrate that the optimum
location of the firm
K
* moves closer to the market the higher is the value-
added by the firm (McCann 1993, 1998). The reason is that for any given
set of input prices and input shipment distances, the greater is the value-
added by the firm the greater are the financial opportunity costs associated
with holding inventories of finished goods. As such, the firm should ship
the finished goods frequently in small individual quantities in order to
reduce the level of output inventory. However, these types of behaviour
implies high transportation costs, which can only be reduced by reduc-
ing the distance between the firm and the market, such that the optimum
location of the firm moves towards the market. Note that value-added
in our Weber-model terminology is defined as [
m
3
(
p
3
-
t
3
) -
m
1
(
p
1
1
t
1
d
1
) -
m
2
(
p
2
1
t
2
d
2
)], and for fixed input output coefficients, can be proxied as [
p
3
- (
p
1
1
p
2
)]. As such, even with land prices and labour prices which do not
vary over space, for a single establishment firm, high value-added activi-
ties will tend to be more market oriented in terms of location than lower
value- added activities.
Moreover, for a single establishment firm situated within a value-chain
production hierarchy, the observation that the optimum location of the
firm moves towards the market is also found to be true for activities
which are higher up the value-chain. This is because the average value of
output inventories held will be high, whereby opportunity costs of output
shipments will weight heavily on the total logistics costs calculation.
Conversely, low value-added activities lower down the value-chain will
tend to be located closer to the supply points, because the average value
of the output inventories held will be low but those for the inputs will be
relatively high in comparison to the output values. As such, a natural
spatial ordering therefore tends to emerge, with establishment higher
up the value-chain tending to be located closer to market locations than
establishments lower down the value-chain.
Where land and labour prices are variable across space the logistic costs
model suggest that the requisite equilibrium interregional wage gradients
will be convex with distance, even for linear transport costs, whereby
the downward slope of the gradient becomes shallower with distance.
