Chapter 11 Global Location Decisions

Principles of Supply Chain Management (5e)
Chapter 11
GLOBAL LOCATION
DECISIONS
Prepared by Cynthia Wisner, MBA
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LEARNING OBJECTIVES
You should be able to:
• Describe various Global Factory Models;
• Explain and discuss Critical Location Factors;
• Calculate Factory Location Models (Weighted Factor
and Break-Even Models).
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.
• Explain the impact of sustainable development on
facility location.
CHAPTER OUTLINE
• Introduction
• Global Location Strategies
• Critical Location Factors
• Facility Location Techniques
• Business Clusters
• Sustainable Development and Facility Location
• Additive Manufacturing and Its Impact on Facility
Location
Introduction
• Facility location affects the efficiency and effectiveness of
managing supply chains & a firm’s overall competitive
advantage.
• Companies can locate anywhere in the world due to
increased globalization, technology, faster transportation,
improved communication & 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.
Global Location Strategies, Part 1

• Global location decisions should optimize the
performance of the supply chain and be
consistent with the firm’s competitive strategy.
• Firms competing on cost will select location that
provides a cost advantage
• Firms competing on speed of delivery use the
hub and spoke approach to determine location
• Foreign-based facility managers must treat
plants as source of competitive advantage
Global Location Strategies, Part 2
Strategic roles for foreign facilities

▪ Offshore factory - low cost investment & labor costs
▪ Source factory - plant management involved in supplier
selection & production planning
▪ Server factory - uses government incentives, low exchange
risk & tariff barriers to reduce taxes & logistics costs
▪ Contributor factory - involved in product development,
production planning, procurement decisions, & developing
suppliers
▪ Outpost factory - network of suppliers, competitors, research
facilities for materials, components, technology & products
▪ Lead factory - firm is source of innovation & competitive
advantage of the organization
Critical Location Factors, Part 1

Table 11.1 – Important Factors in the Location Decision Process
Location Factor Country Region/State Community
Regional trade agreements – trade barriers, and X Empty Cell Empty Cell
import duties
Competitiveness of nations – economic performance, X Empty Cell Empty Cell
government efficiency, business efficiency and
infrastructure
Government taxes and incentives X Empty Cell Empty Cell
Currency stability X Empty Cell Empty Cell
Environmental issues X X X
Access and proximity to markets X X X
Labor issues X X X
Access to suppliers X X X
Transportation issues X X X
Utility availability and cost X X X
Quality-of-life issues X X X
State taxes and incentives Empty Cell X X
Right-to-work laws Empty Cell X X
Local taxes and incentives Empty Cell Empty Cell X
Land availability and cost Empty Cell Empty Cell X
Critical Location Factors , Part 2
Regional Trade Agreements (RTA) & WTO

World Trade Organization (WTO) successor to the
General Agreement on Tariffs/Trade (GATT)
• Only global international organization which deals
with the rules of trade between nations
• Goal is to help producers of goods and services,
exporters, and importers conduct their business
• Has 164 members
Critical Location Factors, Part 3
World Trade Organization functions include:

• Administering agreements
• Forum for trade negotiations
• Trade disputes
• Monitor trade policies
• Aid for developing countries
• Cooperating with other International
organizations.
Better know Regional Trade Agreements

European Union (EU): [1950] currently consists of 28 members
– established the euro notes and coins in 2002
United States-Mexico-Canada Agreement (USMCA): [2020]
among the U.S., Canada, & Mexico
Southern Common Market (MERCOSUR): [1991] among
Argentina, Brazil, Paraguay, Uruguay & Venezuela
Association of Southeast Asian Nations (ASEAN): [1967] among
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,
Philippines, Singapore, Thailand & Vietnam
Common Market of Eastern and Southern Africa (COMESA):
[1994] has 19 member countries in African Economic
Community
Competitiveness of Nations
“A measure of a country's advantage or disadvantage
in selling its products in international markets.”
Two competing sources for national competitiveness
rankings
1. World Competitiveness Yearbook published annually
by the Swiss business school IMD
2. The Global Competitiveness Report, prepared by the
World Economic Forum (WEC)
2013-14 World Competitiveness Rankings

Table 11.2 International Competitiveness Ranking
Ranking 2013-14 Global Competitiveness Report 2013 World Competitiveness Yearbook
1. Switzerland United States
2. Singapore Switzerland
3. Finland Hong Kong
4. Germany Sweden
5. United States Singapore
6. Sweden Norway
7. Hong Kong SAR Canada
8. Netherlands United Arab Emirates
9. Japan Germany
10. United Kingdom Qatar
IMD’s World Competitiveness Yearbook

Four competitiveness factors:
1. Economic performance: Macro-economic evaluation
of the domestic economy
2. Government efficiency: Extent to which government
policies are conducive to competitiveness
3. Business efficiency: Extent to which the national
environment encourages enterprises to perform in an
innovative, profitable and responsible manner
4. Infrastructure: Extent to which basic, technological,
scientific and human resources meet the needs of
business
12 Pillars of Competitiveness
1. Institutions 7. Labor market efficiency
2. Infrastructure 8. Financial market
3. Macroeconomic stability sophistication
4. Health & primary 9. Technological readiness
education 10. Market size
5. Higher education & 11. Business sophistication
training 12. Innovation
6. Goods market efficiency
Government Taxes & Incentives

• Several levels of government are considered when
evaluating potential locations
• Countries with high tariffs discourage importing of
goods
• High tariffs encourage multinational corporations to
produce locally
• Foreign trade zones (FTZs) where materials are
imported duty-free as inputs to production
• Broad-based personal income tax and corporate
income tax
Currency Stability
• Risk of currency fluctuation
Environmental Issues
• North American Agreement on Environmental
Cooperation - foster the protection and improvement
of the environment
• Global organizations are assessing their total
environmental footprints by focusing on carbon and
life-cycle analysis
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
• Employment trends
Access to Suppliers & Cost

• Supplier proximity influences the delivery of materials
& effectiveness of the supply chain
Utility Availability & Cost

• Electricity supply has not kept pace with high speed
of development
• Heavy industries - cost & availability are critical
• Upstate New York, the Tennessee Valley and parts of
Canada, are gaining in location popularity because of low
cost and plentiful energy supply
• China is the world’s largest producer of solar power
Quality-of-Life Issues
• Achieving Educational Excellence
• Growing a Vibrant Economy
• Preserving the Natural Environment
• Promoting Social Wellbeing and Harmony
• Enjoying Arts, Culture and Recreation
• Sustaining a Healthy Community
• Maintaining Responsive Government
• Moving Around Efficiently and Safely
• Keeping the Community Safe
Right-to-Work Laws
• Forbid unions and employers to require
employees to join a union and pay dues and fees
to it in order to get or keep a job
Land Availability & Costs

• As land & construction costs in big cities continue
to escalate, the trend is to locate in the suburbs &
rural areas
Facility Location Techniques, Part 1

The Weighted-Factor Rating Model
Compares attractiveness locations along a number of
quantitative & qualitative dimensions. Steps:
1. Identify the factors
2. Assign weights to each factor. Weights sum to 1.
3. Determine a score for each factor.
4. Multiply the factor score by the weight, then sum
the weighted scores
5. The location with the highest total weighted score
is the recommended location.
Facility Location Techniques , Part 2
Example 11.1 – Using the weighted-factor location model
The following factors have been identified as critical to making a location decision among the
three countries of China, Singapore, and Indonesia. A group of functional managers has
determined factors, weights, and scores to be used in the analysis.
Scores (Maximum 100) Scores (Maximum 100) Scores (Maximum 100)

Factor Weight China Singapore Indonesia
Labor cost 0.20 100 40 90
Proximity to market 0.15 100 60 80
Supply chain compatibility 0.25 80 80 60
Quality of life 0.30 70 90 60
Stability of government 0.10 80 100 50
Break even model

Location analysis technique when fixed &
variable costs can be determined
• Identify locations to be considered
• Determine fixed cost of land, property taxes,
insurance, equipment, & buildings
• Determine unit variable cost, materials, utilities, &
transportation costs
• Construct total cost lines
• Determine break-even points on the graph.
• Identify range over which each location has lower cost
Example 11.2 - Using the Break-Even Model

• Three locations have been identified as suitable
candidates for building a new factory. The fixed and unit
variable costs for each of three potential locations have
been estimated and are shown in the following table.
Location Annual Fixed Cost Unit Variable Cost
A $500,000 $300
B $750,000 $200
C $900,000 $100
Using the Break-Even Model
Given a forecasted demand

of 3,000 units per year, the
best location can be found
by first, plotting the three
total cost curves,
represented by
Example 11.2 - Using the Break-Even Model (cont.)

• Next, the break-even point between Location A and
Location B is determined:
TCA = TCB
500,000 + 300Q = 750,000 + 200Q
100Q = 250,000 and then Q = 2,500 units
• Producing less than 2,500 units per year would be
cheaper at Location A (when the lower fixed cost
predominates), while producing more than 2,500 units
per year would be cheaper at Location B (when the
lower variable cost predominates).

• Next, the break-even point between Location B and
Location C is determined:
TCB = TCC
750,000 + 200Q = 900,000 + 100Q
100Q = 150,000 and then Q = 1,500 units.
cheaper at Location B, while producing more than
1,500 units per year would be cheaper at Location C.

• Finally, the break-even point between Location A and
Location C is determined:
TCA = TCC
500,000 + 300Q = 900,000 + 100Q
200Q = 400,000 and then Q = 2,000 units.
cheaper at Location A, while producing more than
2,000 units per year would be cheaper at Location C.

• Based on the cost curves shown in Figure 11.1,
Location C has the lowest total cost when producing
the forecasted quantity of 3,000 units per year.
• If, however, the annual demand forecast was 1,000
units, then Location A would be preferred. From
Figure 11.1, it can be seen that Location B would
never be the preferred location when comparing the
costs of all three sites simultaneously.
Business Clusters, Part 1

▪ Geographic concentrations of interconnected
companies & institutions in a particular field
▪ Research parks & special economic/industrial
zones serve as magnets for business clusters
▪ Different types of business clusters
• High-tech clusters
• Factor endowment clusters
• Knowledge-service clusters
• Low cost manufacturing clusters
Business Clusters, Part 2
▪ Reasons for success-

• Close cooperation, coordination, & trust among
clustered companies
• Fierce competition among rival companies
• Companies recruit from local skilled workers
• Competitive environment that promotes
increasing innovation and profitability
Sustainable Development and Facility Location

Sustainable Development – meets needs of present without
compromising future generations to meet their own needs
▪ Resource efficiency and technology innovation are keys to
reducing cost and increasing competitiveness
▪ Critical issues
• energy consumption/production
• air pollution
• climate change
▪ United Nations Framework Convention on Climate Change
(UNFCCC) – global warming issues
Green Development – prioritizes environmental sustainability
over economic and cultural considerations
Additive Manufacturing and its Impact on Facility

Location
• Additive Manufacturing or 3D printing – process of making three dimensional
solid objects from a digital file
• Affordability of 3D printers may keep businesses from going overseas for
their manufacturing needs
• Benefits include:
• shorter lead times • efficient material use
• mass customization • lower energy
• reduced parts count consumption
• more complex shapes
• parts on demand
End of Chapter 11
35

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Chapter 11 Global Location Decisions

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Principles of Supply Chain Management (5e)

Prepared by Cynthia Wisner, MBA

Global Location Strategies, Part 1

Global Location Strategies, Part 2

Strategic roles for foreign facilities

Critical Location Factors, Part 1

Critical Location Factors , Part 2

Regional Trade Agreements (RTA) & WTO

Critical Location Factors, Part 3

World Trade Organization functions include:

Critical Location Factors , Part 4

Better know Regional Trade Agreements

Critical Location Factors , Part 5

Critical Location Factors , Part 6

2013-14 World Competitiveness Rankings

1. Switzerland United States

3. Finland Hong Kong

5. United States Singapore

7. Hong Kong SAR Canada

8. Netherlands United Arab Emirates

10. United Kingdom Qatar

Critical Location Factors , Part 7

IMD’s World Competitiveness Yearbook

Critical Location Factors , Part 8

Critical Location Factors , Part 9

Government Taxes & Incentives

Critical Location Factors , Part 10

Critical Location Factors , Part 11

Access & Proximity to Markets

Critical Location Factors , Part 12

Access to Suppliers & Cost

Utility Availability & Cost

Critical Location Factors , Part 13

Critical Location Factors , Part 14

Land Availability & Costs

Facility Location Techniques, Part 1

Facility Location Techniques , Part 2

Example 11.1 – Using the weighted-factor location model

Scores (Maximum 100) Scores (Maximum 100) Scores (Maximum 100)

Facility Location Techniques , Part 3

Break even model

Facility Location Techniques , Part 4

Example 11.2 - Using the Break-Even Model

Location Annual Fixed Cost Unit Variable Cost

Facility Location Techniques , Part 5

Using the Break-Even Model

Given a forecasted demand

Facility Location Techniques , Part 6

Example 11.2 - Using the Break-Even Model (cont.)

Facility Location Techniques , Part 7

Example 11.2 - Using the Break-Even Model (cont.)

Facility Location Techniques , Part 8

Example 11.2 - Using the Break-Even Model (cont.)

Facility Location Techniques , Part 9

Example 11.2 - Using the Break-Even Model (cont.)

Business Clusters, Part 1

Business Clusters, Part 2

▪ Reasons for success-

Sustainable Development and Facility Location

Additive Manufacturing and its Impact on Facility

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