Chapter 11 LOCATION DECISIONS LEARNING OBJECTIVES You should be able to:  Explain the impact of 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 MBA Nguyen Phi Hoang@2015_SCM CHAPTER OUTLINE • • • • • Introduction Global Location Strategies Critical Location Factors Facility Location Techniques Helpful On-Line Information for Location Analysis • Business Clusters • Sustainable Development MBA Nguyen Phi Hoang@2015_SCM Introduction Location decision can impact firm’s competitive advantage It is very costly to move or shut down the facility so 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 key matters for firm Many successful industry clusters (Silicon valley, Wall Street,…) show that innovation & successful competition are geographically concentrated Global location decisions involve location of the facility, defining its strategic role, & identifying the markets it serves MBA Nguyen Phi Hoang@2015_SCM Location Strategies Dr Kasra Ferdows suggests location types  Offshore factory – this kind of factory produce at low cost with:  Minimum investment in technical/managerial resources  Make use of low labor costs  Buy local parts/components, export finished goods.( Ex Samsung in VN)  Source factory –  plant mgmt involved in supplier selection & production planning  This kind of factory is controlled by low production cost, fairly developed infrastructure and availability of skilled workers  Server factory –  Based primary on government incentives & low exchange risk & tariff barriers to reduce taxes & logistics costs  Involved in making minor improvements in products and process MBA Nguyen Phi Hoang@2015_SCM Location Strategies (cont.)  Contributor factory –  involved in product development, production planning, critical procurement decisions, & developing suppliers  Outpost factory –  Is set up at location of advanced suppliers, competitors, research facilities where easy to get access almost current information on materials, components, products and technologies  Lead factory –  is a source of innovation & competitive advantage for firm MBA Nguyen Phi Hoang@2015_SCM Critical Location Factors  The most challenging task for one company is where to position assets strategically to create a long term competitive advantage  To solve above question partially, need to answer following questions:  What will be the reaction of shareholder, clients, competitors, employees or market?  Will the location provide a sustainable competitive advantage?  What will impact on product, service quality or deliver performance?  Can hire right people?  What will be the effect on Supply chain?  What is the projected cost? MBA Nguyen Phi Hoang@2015_SCM Critical Location Factors (Cont.) MBA Nguyen Phi Hoang@2015_SCM 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 MBA Nguyen Phi Hoang@2015_SCM 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) MBA Nguyen Phi Hoang@2015_SCM 10 Location Factors (Continued) 2006-07 World Competitiveness Rankings Rank 10 MBA Nguyen Phi Hoang@2015_SCM Global Competitiveness Report (WEF) Switzerland Finland Sweden Denmark Singapore US Japan Germany Netherlands UK Table 11.2 World Competitiveness Yearbook (IMD) US Singapore Hong Kong Luxemburg Denmark Switzerland Iceland Netherlands Sweden Canada 12 Location Factors (Continued) 12 Pillars of Competitiveness  Institutions  Infrastructure  Macroeconomic stability  Health & primary education  Higher education & training  Goods market efficiency MBA Nguyen Phi Hoang@2015_SCM  Labor market efficiency  Financial market sophistication  Technological readiness  Market size  Business sophistication  Innovation 13 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 MBA Nguyen Phi Hoang@2015_SCM 14 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 MBA Nguyen Phi Hoang@2015_SCM 15 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 MBA Nguyen Phi Hoang@2015_SCM 16 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 MBA Nguyen Phi Hoang@2015_SCM 17 Location Factors (Continued) Quality-of-Life Issues          Education Economy Natural Environment Social Environment Culture/recreation Healthcare Government/politics Mobility Public Safety MBA Nguyen Phi Hoang@2015_SCM 18 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 MBA Nguyen Phi Hoang@2015_SCM 19 Facility Location Models The Weighted-Factor Rating Model Compares the attractiveness of several locations along a number of quantitative & qualitative dimensions      MBA Nguyen Phi Hoang@2015_SCM Identify the factors Assign weights to each factor The weights sum to 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 20 Facility Location Models (Continued) MBA Nguyen Phi Hoang@2015_SCM 21 Facility Location Models The Break – Even Model (cont.) This model is suitable where we can classify the fixed and variable cost for each potential location • Identify the location to be considered • Determine the fixed cost for each facility( land, property taxes, insurance, equipment, buildings) • Determine the unit variable cost for each facility( labors, materials, utilities, transportation cost) • Construct the total cost line for each location on a graph • Determine the break-even point on graph • Identify the range over which each location has the lowest cost MBA Nguyen Phi Hoang@2015_SCM 22 Facility Location Models (cont.) MBA Nguyen Phi Hoang@2015_SCM 23 Facility Location Models • Base on above data, we have: • TC(QN) = 500,000 + 300Q • TC(HN) = 750,000 + 200Q • TC(HP) = 900,000 + 100Q, where Q: quantity MBA Nguyen Phi Hoang@2015_SCM (cont.) 24 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 MBA Nguyen Phi Hoang@2015_SCM 25 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 MBA Nguyen Phi Hoang@2015_SCM 26 ... Phi Hoang@2015_SCM CHAPTER OUTLINE • • • • • Introduction Global Location Strategies Critical Location Factors Facility Location Techniques Helpful On-Line Information for Location Analysis •... of 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. .. weighted scores The location with the highest total weighted score is the recommended location 20 Facility Location Models (Continued) MBA Nguyen Phi Hoang@2015_SCM 21 Facility Location Models The