CHAPTER 11 FACILITY LOCATION DECISIONS Principles of Supply
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CHAPTER 11 - FACILITY LOCATION DECISIONS Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, Ph. D Principles of Supply Chain Management: A Balanced
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 2
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 Environmental Issues 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 3
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 4
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 5
Critical Location Factors Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 6
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 7
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 8
Critical Location Factors- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 9
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 10
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 11
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 12
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 13
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 14
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 15
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 16
Facility Location Models- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 17
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 18
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 19
Facility Location Models- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 20
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 21
Helpful Online Information for Location Analysis Several Web sites are available that provide useful information for use in location analysis: – http: //www. Facility. City. com: provides direct links to Business Facilities: the Location Advisor & Today’s Facility Manager. – http: //www. bizsites. DATA. 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 22
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 23
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