Alfred Weber

Least-Cost Theory

Alfred Weber (1868-1958)

• Alfred Weber was a German sociologist and philosopher.
• Was a part of the Intellectual Resistance against Nazi Germany.
• He formulated the Theory of Industrial Location (Also known as the Least-Cost Theory).
• Where will factories locate that is the lowest cost to them?
• Like von Thunen (location of agricultural activities)

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Least-Cost Theory

• Developed to resolve the problem of opposing locational pulls.
• Therefore, it aids in determining where a processing plant will be located to maximize profits and minimize costs.
• The theory that an industry will be located where the transportation costs of raw materials and the final product is at the least.
• A decision making model of the best location of a particular industry given the material, amount shipped and transport costs.
• Determines industrial location of the manufacturing plant.

Least-Cost Theory

• Site chosen must consider the following:

1. Moving raw materials to factory

2. Moving finish products to the market

• Creates a balancing act of the best location possible.

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Transportation

• The location of the industry will be located in an area where it ensures the cost will be lowest for:
• Moving raw materials to the processing location
• Moving finished products to the market
• Costs of transportation are affected by distance the product is shipped and the weight of the product when being shipped.
• Considered to be the most important factor!
• There are also cases where a company has more than 1 mode of transportation.
• This is known as break-of-bulk locations.
• Example: San Francisco, California
• Methods of Transport: Ports, Rail, Air, Highway

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Labor

• Cheap Labor is the most important because the higher labor cost are the lower a companies profit.
• Considered the most expensive factor for LCT.
• The profits of a company are reduced as the cost of labor increases
• In some cases an industry may perform better farther away from the market and raw materials, due to the availability of cheap labor.
• Higher labor costs reduce profits, can affect location of industry, regardless of raw material and market locations.
• Example: Outsourcing textiles overseas

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Labor

• Employers look for:
• Low wages
• Little unionization
• Young employees (Few healthcare costs)
• Female employees (Thought to be less demanding and more expendable)
• If an industry moves to a place to access lower labor costs, even though transportation costs increase is called the substitution principle.

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Agglomeration

• Agglomeration: the concentration of businesses in one particular area.
• Also called an agglomeration economy!
• It occurs when there is a demand for services that the population needs (school, hospitals, grocery stores).
• They provide assistance to each other through shared talents, and services. Typically results in lower prices!
• When a large number of companies cluster in the same area and can assist each other through shared talents, services and/or facilities.
• Example: Silicon Valley- Technology Industry
• Example: Michigan Auto Industry and PA steel industry

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Deglomeration

• When an agglomerated region becomes too clustered or too crowded from cumulative causation, then there are negative effects.
• Pollution, Traffic, Lack of Resources or Labor
• Industries might then choose to move for more space in a process called deglomeration or the “unclumping” of factories due to the negative effects and higher costs of industrial overcrowding. Markets can also become oversaturated with a particular industry forcing businesses to relocate or shut down.

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Weight-Gaining and Weight-Losing�Also known as Bulk Gaining/ Bulk Reducing

• Weight-Gaining
• The finished product(s) weight is more than the raw materials
• Cost for shipping the finished product are greater than that of the raw materials.
• Industry location would be the closest to the market!

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• Weight-Losing (Also known as bulk-reducing)
• The finished product(s) weight is less than the raw materials
• Therefore, it cost more to ship the raw materials than to ship the finished product.
• Industry location would be the closest to the source of raw materials!

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Weight-Losing

Scenario

Location 1

• In this situation the processing location is between the source and market.
• This however is not the best place to locate the plant because of the fact that the product is weight-losing.
• Therefore, it cost the company a great amount of money to ship the raw materials to the plant and more then half of that to ship the finished product to market.

Location 2

• In this situation the processing location has been moved closer to the source.
• This caused the cost of shipping the final product to be reduced, greatly.
• However, the cost of shipping the raw materials to the plant is still not the least it could be.

Location 3

• In this situation the processing location is located at the source of the raw materials.
• And the cost of shipping has again been reduced from the previous situation.
• Therefore, the best location for the plant would be at the source of the raw materials.

Example: Copper Industry in North America

Fig. 11-8: Copper mining, concentration, smelting, and refining are examples of bulk-reducing industries. Many are located near the copper mines in Arizona.

The Lavender Pit Copper Mine in Bisbee, Arizona operated between 1951 and 1974.

Weight- Gaining

Scenario

Location 1

• In this situation the plant is located between the source and the market.
• Therefore, the cost of shipping the raw materials is much cheaper than that of the finished product.
• And this is because the product is weight-gaining.

Location 2

• In this situation the processing plant has been moved closer to the market.
• As a result, the cost of the finished product has reduced and the cost for shipping the raw material is at a gradual rate.
• Though this location has reduced the overall cost of transportation, cost are not at the least.

Location 3

• In this situation the processing plant is located at the market.
• This causes the cost of shipping to increase at a gradual rate and therefore the cost of shipping is at the least.
• Therefore, this is the best location for the plant is at the market.

Example: Location of Beer Breweries

Fig. 11-11: Beer brewing is a bulk-gaining industry that needs to be located near consumers. Breweries of the two largest brewers are located near major population centers.

Other considerations and limitations for Weber’s Theory

• Labor costs (labor unions)
• Labor diversity (age, education, gender, etc)
• Labor movement (indeed labor does move and change from place to place)
• Reality of Transportation Costs
• Land Rent (real estate)
• Tax subsidy
• Pollution (NIMBY factor)
• Long-term Availability of Resources
• Perishability considerations
• Fragility
• Hazardous materials
• Zoning (residential versus industrial)
• NAFTA and other special trade agreements
• Globalization and Deindustrialization

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What if the costs are all the same?

• Some industries maintain the same cost of transportation and production regardless of where they choose to locate.
• These industries have spatially fixed costs.
• These are often called “Footloose Industries” because they can locate wherever they want!
• Footloose products are typically small and of very high value.
• Example: Computer chip industries

Hotelling’s Theory

• High-tech corridor – agglomeration of technology and computer industry.
• A region (such as Silicon Valley) of this agglomeration is called a technopole.
• Typically ancillary activities will be attracted to these areas to act as support businesses. (computer repair, wiring services)
• The downside of this is the brain drain of talented individuals from a particular area, called the backwash effect.
• Hotelling’s theory of locational interdependence asserts that industries choose locations based upon where their competitors are located.
• Industries do not make isolated decisions without considering where other, related industries already exist.

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