CHAPTER 11- FACILITY LOCATION CHAPTER 11- FACILITY LOCATION DECISIONSDECISIONS

Principles of Supply Chain Management:

A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 2

Learning ObjectivesLearning Objectives

You should be able to:– Explain the impact of facility decisions on a supply chain.– Identify the factors influencing facility location.– Understand the impact of the Regional Trade Agreements on

facility decisions.– Use several location evaluation models.– Understand the advantages of business clusters.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 3

Chapter Eleven OutlineChapter Eleven Outline

Location Strategies

Critical Location Factors

Regional Trade Agreements & the World Trade Organization

Competitiveness of Nations

Government Taxes & Incentives

Currency Stability

Access & Proximity to Markets Customers

Environmental Issues

Labor Issues

Right-to-work Laws

Access to Suppliers & Cost

Environmental Issues

Labor IssuesRight–to-work LawsAccess to SuppliersUtility Availability & Cost Quality-of-Life IssuesLand Availability & Cost

Facility Location ModelsThe Weighted-Factor ModelThe Break-Even ModelThe Center-of-Gravity Model

Helpful On-Line Information for Location Analysis

Business Clusters

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 4

IntroductionIntroduction

Why is facility location so important?

– Facility location has a long-term impact on the supply chain & must be part of the firm’s strategy.

– Companies can locate anywhere in the world due to increased globalization, technology infrastructure, transportation, communications, & open markets,

– Location still matters- clusters in many industries show that innovation & competition are geographically concentrated.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 5

Location StrategiesLocation Strategies

Dr. Kasra Ferdows suggests 6 location strategy roles:• 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 product & process innovation &

competitive advantage of the entire organization.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 6

Critical Location FactorsCritical Location Factors

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 7

Critical Location Factors- Cont.Critical Location Factors- Cont.

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.

Regional Trade Agreements:

– European Union (EU),

– North American Trade Agreement (NAFTA),

– Southern Common Market (MERCOSUR),

– Association of Southeast Asian Nations (ASEAN),

– Common Market of Eastern & Southern Africa (COMESA).

World Trade Organization & Regional Trade Agreements

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 8

Critical Location Factors- Cont.Critical Location Factors- Cont.

Competitiveness of Nations- Degree to which a country, under free & fair market conditions, produces goods & services which meet the needs of the rest of international markets, while maintaining/expanding personal real income over time. Made up of 314 criteria, grouped into 4 factors:

1.Economic performance: Domestic economy, international trade, international investment, employment, prices

2.Government efficiency: Public finance, fiscal policy, institutional framework, business legislation, education

3.Business efficiency: Productivity, labor market, finance, management practices, impact of globalization

4.Infrastructure: Basic infrastructure, technology infrastructure, scientific infrastructure, health & environment, value system

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 9

Critical Location Factors- Cont.Critical Location Factors- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 10

Critical Location Factors- Cont.Critical Location Factors- Cont.

Government Taxes & Incentives– Several levels of government must be considered when

evaluating potential locations. – Countries with high tariffs discourage companies from importing

goods into the country.– High tariffs encourage multinational corporations to set up

factories to produce locally.– Many countries have set up foreign trade zones (FTZs) where

materials are imported duty-free as long as the imports are used as inputs to production of goods.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 11

Critical Location Factors- Cont.Critical Location Factors- Cont.

Currency Stability– Impacts business costs & consequently

location decisions.

Access & Proximity to Markets/Customers

– “The trend in manufacturing is to be within delivery proximity of your customers. Logistics timelines & costs are the concerns, so that reinforces a clustering effect of suppliers & producers to places that offer lower cost labor & real estate.”

– In the service industry, proximity to customers is even more critical.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 12

Critical Location Factors- Cont.Critical Location Factors- Cont.

Environmental Issues– Global warming, air pollution, & acid rain are increasingly

debated as the price of industrialization.– Trade liberalization creates need for environmental cooperation.

Labor Issues– Labor availability, productivity, & skill. – Unemployment & underemployment rates.– Wage rates; turnover rates; labor force competitors.

Right-to-Work Laws– The right of employees to decide whether or not to join or

support a union.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 13

Critical Location Factors- Cont.Critical Location Factors- Cont.

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.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 14

Critical Location Factors- Cont.Critical Location Factors- Cont.

Quality-of-Life Issues- Defined as “a feeling of well-being, fulfillment, or satisfaction resulting from factors in the external environment.”

– Education– Economy– Natural Environment– Social Environment– Culture/recreation– Health– Government/politics– Mobility– Public Safety

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 15

Critical Location Factors- Cont.Critical Location Factors- Cont.

Land Availability & Costs– As land & construction

costs in big cities continue to escalate, the trend is to locate in the suburbs & rural areas.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 16

Facility Location ModelsFacility Location Models

The Weighted-Factor Rating Model- A method used to compare 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.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 17

Facility Location Models- Cont.Facility Location Models- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 18

Facility Location Models- Cont.Facility Location Models- Cont.

Break-even model- useful location analysis technique when fixed & variable costs can be determined. Involves the following steps;– 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.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 19

Facility Location Models- Cont.Facility Location Models- Cont.

Break-even model- Example

Location Annual Fixed Cost Unit Variable Cost

Breakeven

Q

A $500,000 $300 $2,500

B $750,000 $200 $1,500

C $900,000 $100 $2,000

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 20

Facility Location Models- Cont.Facility Location Models- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 21

Facility Location Models- Cont.Facility Location Models- Cont.

The Center-of-Gravity Model-

Involves mapping all of the market locations on an x, y-coordinate grid & then finding a central location that is closest to the markets with the highest demand.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 22

Helpful Online Information for Location Helpful Online Information for Location AnalysisAnalysis

Several Web sites are available that provide useful information for use in location analysis:

– http://www.FacilityCity.com: provides direct links to Business Facilities: the Location Advisor & Today’s Facility Manager.

– http://www.bizsitesDATA.com: “provide decision support tools to corporate real state directors, site selectors, consultants, commercial realtors, & economic development professionals.”

– http://www.developmentalliance.com: developed by the International Economic Development council & Conway Data, Inc.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 23

Business ClustersBusiness Clusters

Business Clusters– Geographic concentrations of interconnected companies &

institutions. Clusters encompass an array of linked industries & other entities important to competition.

– 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 pool of skilled workers