Facilities Strategy and Globalization Chapter 5 Facilities Strategy and Globalization McGraw-Hill/Irwin Operations Strategy Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Agenda General strategic concepts An integrated approach New paradigms for the global environment

General Strategic Concepts Fit with strategy Focus of plants Scale and cost Centralization and standardization Means of evaluation and plant roles Sourcing and allocation models

Issues Traditional approaches to facilities and supply chains emphasize a number of issues Scale Logistics and supply chain flow Focus Global flexibility and access to R&D

Product/Market-Process Focus Mean of focus Volume Product Market Process Off On Volume Low High Volume Low High Job Batch Line Detroit Saginaw Lima Job Batch Line Detroit Fremont Lancaster Mayesville Example

Scale Analysis Subcontract Technology 1 Technology 2 COST VOLUME

Consumer Goods Example Cost per unit Volume in millions of units

Modeling Supply Chain Flow Supply chain management often requires sophisticated models to determine questions such as: Number of inventory locations Assignment of market areas and products to facilities

Simple Facilities Network and Supply Chain for Two-Stage LP Flows Sources Destinations

Network for Multi-Location Supply Chain Suppliers Plants Distribution Centers Customers

Some Examples of Strategies Different process steps and scale, significant logistics Central stage 1, decentralized stage 2 Significant central R&D Central plant for at least early life cycle Significant product flexibility Decentralized satellite plants for some stages The examples underscore the need to develop a consistent focus and then appropriately analyze scale and logistics

A General Approach Develop a strategy and appropriate means of focus Using data, benchmarking, and analysis of technology, develop scale curves Identify major decision choices and service requirements covering plant and process options Do the analysis

Case Study: Worldwide Consumer Goods Manufacturer 25 product groups 10 production locations Variety of product values and weights Over capacity Lack of focus Significant tax issues

Case Study Fixed costs Variable costs Fixed costs Variable costs Taxes Stage 1 Stage 2 Customer Why Separate? Scale Capacity Tax laws Focus Relative technological complexity Approach Cross sectional analysis Tax analysis Model of variable costs Detailed analysis of actual fixed costs Solution: Move “light” products to tax havens Better focus facilities by product group

Globalization Adds Some Additional Complexities Increase in worldwide exports Business level trends Lower scale, higher-skill level manufacturing systems such as FMS JIT systems that also underscore the need for sophisticated vendor infrastructure TQM and organizational learning Faster product development Customization needs High-value products such as wafers and chips

Globalization Complexities (cont’d) Macro level trends Large, sophisticated overseas markets with local needs Non-tariff barriers Regionalized trading economies Variable factor costs Particular case of China Longer lead times

Global Strategies Emphasize Some Additional Factors Global product volumes Decentralized network based on regional presence Infrastructure versus cost Changing product cost structure Skill requirements Vendors Flexibility in several ways Multiple stages, players, and movements Global product and development supply chains Postponement strategies

Exchange Rate Model 460 450 One 440 Two Cost 430 Three Four 420 Five # of plants One 440 Two Cost 430 Three Four 420 Five 410 400 100 200 300 400 Total Capacity

Facilities Strategy Given Uncertainty (adapted from Huchzermeir and Cohen) Alternative Exchange Rate & Factor Cost Distributions Supply Chain Network Model Outcome for Each Combination Alternative Facilities Configurations Expected Outcomes A A Best Configuration for Current Exchange Rate and Factor Costs B B K N Switching Costs N

Five-Stage Approach to Strategy Development Strengths Stage 1: Business and Operations Strategy and Plant Charters Competitive Environment Global Market Cross-Sectional Data Stage 2: Multiple-Technology Scale Curves Process Technologies Internal Constraints Market Presence and Capabilities Stage 3: Major Network Options Supplier Industries Infrastructural Requirements Stage 4: Location and Process Options Political and Market Issues Logistics Costs Stage 5: Modeling Factor Costs

Summary Methods for analyzing focus, scale flow, etc. Impact of new markets and technologies Global product design and flow patterns Flexibility Factor costs