CHAPTER 11- FACILITY LOCATION
DECISIONS
Principles of Supply Chain Management:
A Balanced Approach
Prepared by Daniel A. Glaser-Segura, PhD
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
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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
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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
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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
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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
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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
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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
ModelInvolves 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.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
22
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
23