Seminar : Facility Location Planning Theme 4

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Seminar : Facility Location Planning

Theme 4

Facility Location Planning and Global Manufacturing Strategy

28. Oct. 2002

Wen Jiang

Viktor Baasch

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Theme 4Facility Location Planning and Global Manufacturing Strategy

Contents

1. Introduction (Wen Jiang)

2. Manufacturing Strategy (Wen Jiang)

3. Designing Global Supply Chain Strategies3.1. Comparative and Competitive Value-Added Chains (Wen Jiang)

3.2. Operational Flexibility (Viktor Baasch)

4. A Mathematical Model (Viktor Baasch)

5. Complexity of Production – Distribution Network with Globalization (Wen Jiang)

6. Compromise and Conclusion (Viktor Baasch and Wen Jiang)

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1. Introduction

• Economical success require facility location planning and manufacturing strategy

• Changes in today's global economic environment need global supply chain strategies

→ to obtain competitive advantage with deployment of comparative advantages

→ operational flexibility, for example, production shifting for lowering production costs

• Disadvantage: increased complexity

→ structural complexity

→ uncertainties complexity (fluctuating exchange rate, interest rate in international market)

1. Introduction2. Manufacturing

Strategy2.1 Hierarchical levels of planning2.2 Structural decisions and infrastructural decisions

3. Designing Global Supply Chain Strategy3.1. Comparative and competitive value-added chains3.2. Operational flexibility

4. Mathematical Model5. Complexity of

Production – Distribution Network with Globalization

6. Compromise and Conclusion

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2. Manufacturing strategy

• Manufacturing strategy plays an important role among the firm‘s corporate and business strategies

• To make manufacturing operation efficient is quite complex for every company

• Evidence: American neglect of the manufacturing function

result: decline in US industrial competitive strength







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2.1 Hierarchical Levels of Planning

Corporate level: goals

↓

Business level: a good run in every business

↓

Functional level: a detailed plan

Important: vertical integration of three levels








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• Figure 1 A three – level corporate hierarchy

Corporation

SBU

SBU

SBU

MarketingManufacturing

Sourcing


Sourcing


Sourcing

Corporate Strategies

BusinessStrategies

Functional Strategies

Investment

Return

Other







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2.2 Structural decisions and infrastructural decisions

Framework for manufacturing strategy

• 6 performance measures:cost, quality, delivery performance, flexibility, innovativeness, time-based competition

• 9 categories of manufacturing strategy decisions:- *Structural decisions: facilities, capacity, vertical integration, processes and technologies, vendor relations- infrastructural decisions: scope and new products, human resources, quality, infrastructure

*Structural decisions are especially crucial for designing production-distribution system








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An example of manufacturing strategies' vertical integration

• Corporate level: profit maximization↓

• Business level (SBU): capacity deciding↓

• Functional level: marketing & sales, finance department- marketing & sales department: how to deal with existing demand ;whether to add capacity to meet unexpected demand in the coming high season

- finance department: whether there are financial opportunities to support the program







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3. Designing global supply chain strategy

• Changes in today‘ global economic environment, such as

– Cut of trade barriers and tariffs– Improvements in transportation and communication– Convergence of consumer tastes– Unsteady financial markets→ increased benefits of developing multinational

companies‘ global supply chain strategies

• The global supply chain strategy involves both operational and financial decisions

• High costs and risks, but potential significant payoffs







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3.1. Comparative and competitive value-added chains

3.1.1. Value-added chain of competitive and comparative advantage

Definitions

1. Competitive advantage: firm – specific advantage

2. Comparative advantage: location – specific advantage

3. The value-added chain: the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed and distributed.







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• Interpretation of competitive advantage– 2 washing machine manufacturers: A and B. A

specialized in production, B specialized in after-sales service

– Now market demand for washing machine with strong customer service increased

– Then B will put more investments on service, so to strengthen its distinctive competence relative to A

• Interpretation of comparative advantage– USA, Japan have comparative advantage in

technology and human capital - intensive manufacturing

→ Research & Development activities– China, India have comparative advantage in labor

costs → Assembly







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Figure 2 value-added chain of comparative advantage

Research &Development

Advanced Electronics Manufacturing

Industrial Machinery Manufacturing

Basic Manufacturing

AssemblySimple Consumer Goods Food

Processing

Labor

Capital

П Ι

Isocost line 2

Isocost line 1







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3.1.2. Interrelation between competitive and comparative advantage

• Comparative advantage is inherited, competitive advantage is created

• Idea: move from comparative to competitive advantage

• Evidence in “ the flying geese formation“– New goods are produced and exported in Japan earlier than

other Asian countries– As these goods become standardized and profit margins

fall, production and export move to the so-called four tigers of Asia

– For similar reasons, moves to Malaysia and Thailand, and then to Indonesia

– In the meantime, Japan develops and exports other goods, the product cycle begins again

– The comparative advantage found in “ the flying geese formation“ responsible in large part for the high and growing competitiveness of East Asia over the last few decades







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• Moving from countries comparative advantage to competitive advantage → 3 major transitions:(1) from a traditional specialization to factor-driven competitive advantage,(2) from factor-driven competitive advantage to investment-related competitive advantage and (3) from investment-related competitive advantage to innovation-driven competitive advantage

• Illustration with Japanese television industry in American







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– In 60‘ s Japanese TV manufacturer entered into the American market relying on large-scale production, namely lower labor costs in home plants ( the first transfer from a traditional specialization to factor-driven competitive advantage)

– In response to American manufacturer‘ rivalry, heavy investment in product quality → cut down of requirement for after-sales service (the second transfer from factor-driven competitive advantage to investment-related competitive advantage)

– Placing investment in distribution channels and brand building (the third transfer from investment-related competitive advantage to innovation-driven competitive advantage)







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3.2. Operational Flexibility - Financial Decisions

• Arbitrage opportunities– Government‘ offer of subsidized loans intended for local

investment to multinational companies– multinational companies' utilization of the chance to

transfer the loans outside by remittance

• Leverage opportunities– Creation of market or bargaining power because of the

global position of the firm– Example: Michelin entered into North American market,

Goodyear cut down price in Europe so as to stop Michelin‘ investment in North American (loss in Europe can be made up by profit gained in other regions)







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5. Complexity of production-distribution network with globalization

Followed with a trend of globalization in the 1990s, many companies set up new production/distribution networks outside own country

→ lowering production and logistics costs

→ grasp of regionally available skills and process know-how

→ nearness to local customers

→ disadvantage: increased complexity of structural and uncertainty complexity







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• structural complexity

– Operations integration throughout the entire system of manufacturing facility around the world, not just rationalization operations within each individual plant

– Structural decisions at each facility with international context, integration of facility location, capacity acquisition and technology selection decisions

– case study: a freight transportation problem







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Case study: A freight transportation problem• Background

– Economies of scale exists in shipping costs with respect to volume of shipment, namely as the size or volume of shipments increases, the shipping cost per unit decreases

– Intermediate terminals are desirable where small quantities shipments can be combined or consolidated, so that the total size or volume of shipment rises and the shipping cost per unit reduces

– For each source-destination pair, to decide whether to ship of the product directly or via a consolidation terminal

– Shipping costs are piecewise linear concave functions of the volume shipped, shipping via a terminal incurs a linear inventory holding cost and extra transit time







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• Figure 3 Structure of freight transport problem

Source 1

Source 1

Source 1

Source 1

Source 1

Source 1

Source 1

Source1

Source2

Terminal1

Terminal2

Destination 1

Destination 2

Destination 3







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• Classical location-distribution problem– Unidirectional movements from plants through warehouse

to clients– Objective: cost minimization – Restrictions:

• Shortest traveling path• Costs minimization of terminal opening and operation• Timely delivery performance to customer

• Comparing concave cost facility location problem with classical location-distribution problem

– both direct and indirect (via a terminal) shipments are possible

– Objective: cost minimization of direct and indirect transportation

– Restrictions are not kept, because• The traveling distance may be raised due to transfer via

terminals• Extra stocking cost incurs• By indirect transport, products are shipped via a terminal,

extra transit time is required, so timely delivery to customer cannot be performed







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• Result: traditional algorithms cannot solve multi-product problem→ structural complexity

• A multi-product location-distribution problem can be– Linear or not linear

• Concave ( as well as the freight transport problem)• Convex • Otherwise

– Deterministic or stochastic

– Uncapacitated or capacitated

→ in one word, it can be very complicated







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• Uncertainty complexity

In international markets, factors such as– Exchange rates– International interest rate– Trade barriers and tariffs– Taxes and duties

are uncertain and nonlinear, so it is usually difficult to design mathematical models







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• Conclusion

– The global manufacturing strategy provides a framework for facility location

– Designing global supply chain strategy is crucial for achieving a long-term sustainable advantage over competitors

• To obtain the competitive advantages with deployment of comparative advantages

• Operational flexibility

– Production-distribution network with globalization is complicated

• Structural complexity• Uncertainty complexity







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• Compromise

1. To consider all competitive precedence such as flexibility, quality, delivery performance and new technology, not only focused on cost minimization

2. Coordination of all of business entities in different countries, not just the configurationally decisions alone

3. Creating competitive advantage in growth sectors should be either concerned by companies or by governments, a strong public-private partnership is required

4. Need to better approach of optimization for structural decisions i.e. capacity, technology and product range of manufacturing facilities and their vertical integration







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Seminar : Facility Location Planning Theme 4