SCOT558
Advanced Operations Strategy
Session 5 Capacity Location and Global Sourcing
Fuqiang Zhang
Olin Business School
Washington University in St. Louis
SCOT558, Prof. Zhang Session 5
Slide 1
Agenda for today
 Capacity location and globalization
 Location analysis
 Offshoring
 Simulation Game and Case: Mexico or China: Managing Global
Network
SCOT558, Prof. Zhang Session 5
Slide 2
1
Capacity location decisions in practice
 Harley-Davidson:
Decided to adopt the “greenfields” expansion strategy in the mid-1990s
(see the Harley-Davidson case study).
 Hired a consulting company (J.M. Mullis) specialized in location studies

 Monsanto (Bayer)

Supply chain network design (e.g., location of processing plants)
SCOT558, Prof. Zhang Session 5
Slide 3
Offshoring: general rationale
Con
Pro
SCOT558, Prof. Zhang Session 5
Slide 12
2
Fuyao Glass looking for 400 new workers
Fuyao Glass America wants to add 400 employees to its 2,300 worforce by the end of 2018, both for
its aftermarket glass production and the company’s planned warehouse.
Part of the need for workers is being driven by a shift of work from Fuyao’s plants in China to
Moraine, Liu said. Today — after four years and nearly a billion dollars of investment — Fuyao’s
Moraine plant is serving all domestic automotive original equipment manufacturers, he said.
Fuyao isn’t the only Dayton-area manufacturer looking for the right workers. U.S. Reps. Mike
Turner, R-Dayton and John Shimkus, R-Ill. visited Fuyao Monday to highlight manufacturing growth
locally and beyond.
Turner called manufacturing “the bedrock of the economy here locally.”
In just four regional counties — Montgomery, Butler, Clark and Warren — there are nearly 72,000
workers in manufacturing, according to a report released last week by the Ohio Manufacturers’
Association.
Fuyao was built from the vacant plant left behind when General Motors closed its Moraine assembly
operation in late 2008.
https://www.mydaytondailynews.com August 07, 2018
SCOT558, Prof. Zhang Session 5
Slide 15
Documentary Film: American Factory
Storyline
In post-industrial Ohio, a Chinese billionaire opens a new
factory in the husk of an abandoned General Motors plant, hiring
two thousand blue-collar Americans. Early days of hope and
optimism give way to setbacks as high-tech China clashes with
working-class America.
Reviews
“It’s a surprisingly fair look at the complex nature of how the
manufacturing industry works in the 21st Century, here in
America and in China, and how both cultures are experiencing
upheaval in the interest of progress.”
SCOT558, Prof. Zhang Session 5
Slide 16
3
Outsourcing vs. offshoring
SCOT558, Prof. Zhang Session 5
$13 (Largan Precision,
Taiwan)
Camera
$28
Mechanical Elements
$18.7
Other components
(box contents, etc.)
Slide 20
$41 (LG, Korea)
Display and Touch Screen
$9.4 (Toshiba, Japan)
NAND Flash
$11 (TSMC, Taiwan)
DRAM Memory
Total BOM cost:
Manufacturing cost:$3.6
$8(Samsung, Korea)
$190.70
Battery
$19 (Samsung, Korea)
Processor
$32 (Qualcomm,
USA)
Wireless Section
$15 (France & Italy)
User Interface & Sensors
SCOT558, Prof. Zhang Session 5
4
Partners across the globe are bringing the 787 together
COPYRIGHT © 2008 THE BOEING COMPANY
SCOT558, Prof. Zhang Session 5
Slide 23
Mini-Case: Mexico-China?

You are a $10B high-tech US manufacturer of wireless transmission
components, about 20SKUs. Intense global competition puts pressure on
margins and working capital.
 You have two assembly plants, one in China and another in Mexico, that supply
a warehouse in McAllen, TX.
 How can you best manage this existing global network?
SCOT558, Prof. Zhang Session 5
Slide 24
5
Total Landed Cost (TLC)

TLC = total end-to-end cost to transform inputs at sourcing location to
outputs at customer locations

Track flow units through the process: e.g. offshoring
1.
2.
3.
4.
5.
Inbound RM and services purchased at offshore plant
Inbound logistics of moving inputs to offshore plant
Processing and inventory cost at offshore plant
OH at offshore plant and domestically
Logistics from offshore plant to domestic DC: consider cost and leadtimes for
•
•
Offshore plant → offshore port → domestic port → DC
Consider working capital (both cash cost and pipeline inventory)
6.
Outbound fulfillment from DC
7.
Include any other costs that are impacted by increased activity in end-to-end
•
Consider cycle and safety stock and outbound transportation
Key for Mexico China
Dual Sourcing Simulation
SCOT558, Prof. Zhang Session 5
Slide 25
Optimize global network allocation using Total Landed Cost
•
TLC = total supply chain cost from origin to destination for a given service level
Total Landed Cost Breakdown
8%
3%
7%
3%
2%
100%
9%
68%
Typical COGS
•
Illustrative
Supply Chain
+ Service
TLC analysis provides useful information for sourcing decision and for process
improvement
SCOT558, Prof. Zhang Session 5
Slide 26
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