CHAPTER 11GLOBAL LOCATION DECISIONS

Principles of Supply Chain Management:

A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

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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 Eleven OutlineGlobal Location Strategies

Critical Location Factors– Regional Trade Agreements & the WTO– 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 – Utility Availability & Cost – Quality-of-Life Issues – Land Availability & Cost

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Chapter Eleven Outline (Cont.)

Facility Location Techniques– The Weighted-Factor Rating Model – The Break-Even Model

Helpful On-Line Information for Location Analysis

Business Clusters

Sustainable Development

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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 StrategiesDr. 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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Critical Location Factors (Cont.)

Regional Trade Agreements & the 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.

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Critical Location Factors (Cont.)Regional Trade Agreements & the WTO (Cont.)

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)

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Critical Location Factors (Cont.)

Competitiveness of Nations- Degree 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)

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Critical Location Factors (Cont.)

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

Table 11.2 - 2006-07 World Competitiveness Rankings

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Critical Location Factors (Cont.)

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

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Critical Location Factors (Cont.)

Currency Stability– Impacts business costs & consequently location

decisions.

Access & Proximity to Markets– “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.”- Daniel Malachuk

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

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Critical Location Factors (Cont.)

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

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.

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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.

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Critical Location Factors (Cont.)

Quality-of-Life Issues– Education– Economy– Natural Environment– Social Environment– Culture/recreation– Healthcare– Government/politics– Mobility– Public Safety

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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.

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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 (Cont.)

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Location Techniques (Cont.)

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.

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Location Techniques (Cont.)

Break-even model- Example 11.2

Location Annual Fixed Cost Unit Variable Cost

ABC

$500,000$750,000$900,000

$300$200$100

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Location Techniques (Cont.)

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Helpful Online Information for Location Analysis

Web sites 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.

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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