Facality Decision

7/28/2019 Facality Decision

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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 businessclusters.


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Location StrategiesCritical Location Factors

Regional Trade Agreements &the World Trade OrganizationCompetitiveness of Nations

Government Taxes & IncentivesCurrency StabilityAccess & Proximity to MarketsCustomersEnvironmental IssuesLabor IssuesRight-to-work LawsAccess to Suppliers & CostEnvironmental Issues

Labor IssuesRightto-work LawsAccess to SuppliersUtility Availability & CostQuality-of-Life IssuesLand Availability & Cost

Facility Location ModelsThe Weighted-Factor ModelThe Break-Even ModelThe Center-of-Gravity Model

Helpful On-Line Information forLocation Analysis

Business Clusters


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Why is facility location so important Facility location has a long-term impact on the

supply chain & must be part of the firms strategy.

Companies can locate anywhere in the world dueto increased globalization, technologyinfrastructure, transportation, communications, &open markets,

Location still matters- clusters in many industriesshow that innovation & competition aregeographically concentrated.


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Dr. Kasra Ferdows suggests 6 location strategy roles: Low cost investment & labor costs. Plant mgmt involved in supplier selection & production planning. Firm uses government incentives & low exchange risk & tariff

barriers to reduce taxes & logistics costs. Firminvolved in product development, production planning,

procurement decisions, & developing suppliers. Embedded network of suppliers, competitors, research facilities for

materials, components & products. Firm is source of product & process innovation & competitive

advantage of the entire organization.

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World Trade Organization (WTO)successor to the GeneralAgreement on Tariffs/Trade

(GATT). Functions include: Administering agreements,

Forum for tradenegotiations,

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 SoutheastAsian Nations (ASEAN),

Common Market ofEastern & Southern Africa(COMESA).

World Trade Organization & Regional Trade Agreements


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Degree to which a country, under free & fair marketconditions, produces goods & services which meet theneeds of the rest of international markets, whilemaintaining/expanding personal real income over time.

Made up of 314 criteria, grouped into 4 factors: Domestic economy, international trade, international

investment, employment, prices

Public finance, fiscal policy, institutional framework,business legislation, education

Productivity, labor market, finance, management practices,impact of globalization

Basic infrastructure, technology infrastructure, scientificinfrastructure, health & environment, value system


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Government Taxes & Incentives

Several levels of government must be consideredwhen evaluating potential locations.

Countries with high tariffs discourage companies fromimporting goods into the country.

High tariffs encourage multinational corporations to setup factories to produce locally.

Many countries have set up foreign trade zones

(FTZs) where materials are imported duty-free as longas the imports are used as inputs to production ofgoods.


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Currency Stability Impacts business costs & consequently

location decisions.

Access & Proximity toMarkets/Customers

The trend in manufacturing is to bewithin delivery proximity of yourcustomers. Logistics timelines &costs are the concerns, so thatreinforces a clustering effect ofsuppliers & producers to places thatoffer lower cost labor & real estate.

In the service industry, proximity tocustomers is even more critical.


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Environmental Issues

Global warming, air pollution, & acid rain areincreasingly 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 joinor support a union.

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Access to Suppliers & Cost

Supplier proximity influences the delivery ofmaterials & effectiveness of the supply chain.

Utility Availability & Cost

Supply of electricity has not kept pace with thehigh speed of development.

In heavy industries the availability & cost ofenergy are critical considerations.

Telecommunication costs have droppeddramatically. Many organizations now have backoffice operations & call centers internationally toserve the U.S. market.


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Quality-of-Life IssuesDefined as a feeling of well-being,fulfillment, or satisfaction resulting fromfactors in the external environment.

Education

Economy Natural Environment Social Environment Culture/recreation Health

Government/politics Mobility Public Safety


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Land Availability & Costs

As land &construction costs in

big cities continue toescalate, the trend isto locate in thesuburbs & rural

areas.


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A method used to compare the attractiveness of several locations alonga number of quantitative & qualitative dimensions.

Identify the factors

Assign weights to each factor. The weights sumto 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.


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BrUseful location analysis technique when fixed & variablecosts 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 lowercost.


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Break-evenmodel- Example

Location Annual Fixed Cost Unit VariableCost

Breakeven

Q

A $500,000 $300 $2,500

B $750,000 $200 $1,500

C $900,000 $100 $2,000


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The Center-of-GravityModel-Involves mapping all ofthe market locations onanx, y-coordinate grid &

then finding a centrallocation that is closest tothe markets with thehighest demand.


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Business Clusters

Geographic concentrations of interconnectedcompanies & institutions. Clusters encompass anarray 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 amongclustered companies

fierce competition among rival companies

companies recruit from local pool of skilled workers


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Principles of Supply Chain Management: A BalancedA h b Wi L d T 20

Facality Decision

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