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 characteristics10 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