Chapter 11 3rd edition

Supply Chain

Management:

LOCATION DECISIONS

Chapter 11

Prepared by Mark A. Jacobs, PhD

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duplicated, or posted to a publicly accessible website, in whole or in part.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.2

LEARNING OBJECTIVES

You should be able to: Explain the impact of global location decisions on a

supply chain.

Identify the factors influencing location decisions.

Understand the impact of the Regional Trade

Agreements on location decisions.

Use several location evaluation models.

Understand the advantages of business clusters.

Understand the importance of sustainable

development

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CHAPTER OUTLINE

• Introduction

• Global Location Strategies

• Critical Location Factors

• Facility Location Techniques

• Helpful On-Line Information for Location Analysis

• Business Clusters

• Sustainable Development

Introduction

Facility location must be part of the firm’s supply chain

strategy.

Companies can locate anywhere in the world due to

increased globalization, technology, transportation, & open

markets.

Location still matters- industry clusters show that

innovation & competition are geographically concentrated.

Global location decisions involve location of the facility,

defining its strategic role, & identifying the markets it

serves

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Location Strategies

Dr. Kasra Ferdows suggests 6 location types Offshore factory - low cost investment & labor costs.

Source factory - plant mgmt involved in supplier selection & production planning.

Server factory - firm uses government incentives & low exchange risk & tariff barriers to reduce taxes & logistics costs.

Contributor factory - firm involved in product development, production planning, procurement decisions, & developing suppliers.

Outpost factory - embedded network of suppliers, competitors, research facilities for materials, components & products.

Lead factory - firm is source of innovation & competitive advantage of the organization.

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Location Factors

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Regional Trade Agreements (RTA) & WTO

World Trade Organization (WTO) successor to the

General Agreement on Tariffs/Trade (GATT).

Functions include:

Administering agreements,

Forum for trade negotiations,

Trade disputes,

Monitor trade policies,

Aid for Developing countries

International organizations.

Location Factors (Continued)

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RTA & the WTO (Continued)

European Union (EU): [1950] Set up after the WWII, the

EU consists of 27 members

North American Free Trade Agreement (NAFTA):

[1994] among the U.S., Canada, & Mexico

Southern Common Market (MERCOSUR): [1991]

among Argentina, Brazil, Paraguay, & Uruguay

Association of Southeast Asian Nations (ASEAN):

[1967] in SE Asia

Common Market of Eastern and Southern Africa

(COMESA)

Location Factors (Continued)

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Competitiveness of NationsDegree to which a country produces goods &

services which meet the needs of international

markets, while maintaining or expanding personal

real income over time. Made up of 323 criteria,

grouped into 4 factors –

1. Economic performance (79 criteria)

2. Government efficiency (72 criteria)

3. Business efficiency (71 criteria)

4. Infrastructure (101 criteria)

Location Factors (Continued)

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Rank Global Competitiveness

Report (WEF)

World Competitiveness

Yearbook (IMD)

1. Switzerland US

2. Finland Singapore

3. Sweden Hong Kong

4. Denmark Luxemburg

5. Singapore Denmark

6. US Switzerland

7. Japan Iceland

8. Germany Netherlands

9. Netherlands Sweden

10. UK Canada

2006-07 World Competitiveness Rankings

Location Factors (Continued)

Table 11.2

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Institutions

Infrastructure

Macroeconomic stability

Health & primary

education

Higher education &

training

Goods market efficiency

Labor market efficiency

Financial market

sophistication

Technological

readiness

Market size

Business

sophistication

Innovation

Location Factors (Continued)

12 Pillars of Competitiveness

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Government Taxes & Incentives Several levels of government must be considered

when evaluating potential locations.

Countries with high tariffs discourage importing

goods into the country.

High tariffs encourage multinational corporations to

produce locally.

Many countries have foreign trade zones (FTZs)

where materials are imported duty-free as inputs to

production

Location Factors (Continued)

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Currency Stability Impacts business costs & consequently location

decisions.

Environmental Issues Trade liberalization creates need for environmental

cooperation

NAAEC – North American Agreement on Environmental

Cooperation

Coordination on environmental issues will mitigate

Greenhouse gas production & Ozone depletion

Production of Nitrogen & Sulfur Dioxide

Deforestation

Location Factors (Continued)

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Access & Proximity to Markets Relocation to China not just for cheap labor but for

access to the market

In the service industry, proximity to customers is

even more critical

Convenience is a factor in consumer choice

Labor Issues Labor availability, productivity, & skill

Unemployment & underemployment rates

Wage rates; turnover rates; labor force competitors

Right-to-work laws

Location Factors (Continued)

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Access to Suppliers & Cost Supplier proximity influences the delivery of materials

& effectiveness of the supply chain.

Utility Availability & Cost Supply of electricity has not kept pace with the high

speed of development.

In heavy industries the availability & cost of energy

are critical considerations.

Telecommunication costs have dropped dramatically.

Many organizations now have back office operations

& call centers internationally to serve the U.S.

market.

Location Factors (Continued)

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Quality-of-Life Issues Education

Economy

Natural Environment

Social Environment

Culture/recreation

Healthcare

Government/politics

Mobility

Public Safety

Location Factors (Continued)

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Land Availability & Costs As land & construction costs in big cities continue

to escalate, the trend is to locate in the suburbs &

rural areas.

Location Factors (Continued)

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Location Techniques

The Weighted-Factor Rating Model

Compares the attractiveness of several locations along a number of quantitative & qualitative dimensions. Identify the factors

Assign weights to each factor. The weights sum to 1.

Determine a score for each factor.

Multiply the factor score by the weight, then sum the weighted scores

The location with the highest total weighted score is the recommended location.

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Location Techniques (Continued)

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Break even model

Useful location analysis technique when fixed &

variable costs can be determined

Identify the locations to be considered.

Determine the fixed cost of land, property taxes,

insurance, equipment, & buildings.

Determine the unit variable cost, materials, utilities, &

transportation costs.

Construct the total cost lines.

Determine the break-even points on the graph.

Identify the range over which each location has the

lower cost.

Location Techniques (Continued)

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Break-even model

Location Annual Fixed Cost Unit Variable Cost

A

B

C

$500,000

$750,000

$900,000

$300

$200

$100

Example 11.2

Location Techniques (Continued)

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Location Techniques (Continued)

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Helpful Online Information for

Location Analysis

Web sites that provide useful information for use

in location analysis:

www.developmentalliance.com was developed by

the International Economic Development council

& Conway Data, Inc

www.mappinganalytics.com was developed to aid

in site selection for a wide array of businesses

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Business Clusters

Geographic concentrations of interconnected

companies & institutions.

Research parks & special economic/industrial

zones serve as magnets for business clusters.

Reasons for success-

close cooperation, coordination, & trust among

clustered companies

fierce competition among rival companies

companies recruit from local skilled workers

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Sustainable Development

Sustainable Development – “development that meets

the needs of the present without compromising the ability of

future generations to meet their own needs”

Green Development – “prioritizes what its proponents

consider to be environmental sustainability over economic

and cultural considerations”

Resource ranking and technology innovation are keys to

reducing cost and increasing competitiveness

United Nations Framework Convention on Climate

Change (UNFCCC)

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