Supply Chain Management

1. Supply Chain
Management:
Chapter 11
LOCATION DECISIONS
Prepared by Mark A. Jacobs, PhD
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.

2. 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
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

3. CHAPTER OUTLINE
• Introduction
• Global Location Strategies
• Critical Location Factors
• Facility Location Techniques
• Helpful On-Line Information for Location
Analysis
• Business Clusters
• Sustainable Development
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3

4. 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
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4

5. Location Strategies
Dr. 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.
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5

6. Location Factors
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6

7. Location Factors (Continued)
Regional Trade Agreements (RTA) & 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.
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7

8. Location Factors (Continued)
RTA & the WTO (Continued)
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)
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8

9. Location Factors (Continued)
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)
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9

10. Location Factors (Continued)
2006-07 World Competitiveness Rankings
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
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10

11. Location Factors (Continued)
12 Pillars of Competitiveness
 Institutions
 Infrastructure
 Macroeconomic stability
 Health & primary
education
 Higher education &
training
 Goods market efficiency
 Labor market efficiency
 Financial market
sophistication
 Technological
readiness
 Market size
 Business
sophistication
 Innovation
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11

12. Location Factors (Continued)
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
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12

13. Location Factors (Continued)
Currency Stability
 Impacts business costs & consequently location
decisions.
Environmental Issues
 Trade liberalization creates need for environmental
cooperation
 NAAEC – North American Agreement on Environmental
Cooperation
 Coordination on environmental issues will mitigate
 Greenhouse gas production & Ozone depletion
 Production of Nitrogen & Sulfur Dioxide
 Deforestation
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13

14. Location Factors (Continued)
Access & Proximity to Markets
 Relocation to China not just for cheap labor but for
access to the market
 In the service industry, proximity to customers is
even more critical
 Convenience is a factor in consumer choice
Labor Issues
 Labor availability, productivity, & skill
 Unemployment & underemployment rates
 Wage rates; turnover rates; labor force competitors
 Right-to-work laws
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14

15. Location Factors (Continued)
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.
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15

16. Location Factors (Continued)
Quality-of-Life Issues
 Education
 Economy
 Natural Environment
 Social Environment
 Culture/recreation
 Healthcare
 Government/politics
 Mobility
 Public Safety
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16

17. Location Factors (Continued)
Land Availability & Costs
 As land & construction costs in big cities continue
to escalate, the trend is to locate in the suburbs &
rural areas.
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17

18. 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.
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18

19. Location Techniques (Continued)
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19

20. Location Techniques (Continued)
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.
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20

21. Location Techniques (Continued)
Break-even model
Location Annual Fixed Cost Unit Variable Cost
A
B
C
$500,000
$750,000
$900,000
$300
$200
$100
Example 11.2
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21

22. Location Techniques (Continued)
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22

23. Helpful Online Information for
Location Analysis
Web sites that provide useful information for use
in location analysis:
 www.developmentalliance.com was developed by
the International Economic Development council
& Conway Data, Inc
 www.mappinganalytics.com was developed to aid
in site selection for a wide array of businesses
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23

24. 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
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24

25. Sustainable Development
Sustainable Development – “development that meets
the needs of the present without compromising the ability of
future generations to meet their own needs”
Green Development – “prioritizes what its proponents
consider to be environmental sustainability over economic
and cultural considerations”
 Resource ranking and technology innovation are keys to
reducing cost and increasing competitiveness
 United Nations Framework Convention on Climate
Change (UNFCCC)
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25