CHAPTER 11- FACILITY LOCATION DECISIONS Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD

© 2005 Thomson Business and Professional Publishing Learning 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

Chapter 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 Labor Issues Right–to-work Laws Access to Suppliers Utility Availability & Cost Quality-of-Life Issues Land Availability & Cost Facility Location Models The Weighted-Factor Model The Break-Even Model The 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

Why is facility location so important? Introduction 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

© 2005 Thomson Business and Professional Publishing Location 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

Critical Location Factors Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Critical Location Factors- Cont. World Trade Organization & Regional Trade Agreements 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). Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

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: Economic performance: Domestic economy, international trade, international investment, employment, prices Government efficiency: Public finance, fiscal policy, institutional framework, business legislation, education Business efficiency: Productivity, labor market, finance, management practices, impact of globalization 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

Critical Location Factors- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

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

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

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

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

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

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

Facility 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

Facility Location Models- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

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

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

Facility Location Models- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

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

Helpful Online Information for Location Analysis 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

© 2005 Thomson Business and Professional Publishing Business 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 Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing