CHAPTER 11- FACILITY LOCATION

DECISIONS
Principles of Supply Chain Management:
A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
2
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
3
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
Rightto-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
4
Introduction
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 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
5
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
6
Critical Location Factors
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
7
Critical Location Factors- Cont.
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).

World Trade Organization & Regional Trade Agreements
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
8
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
9
Critical Location Factors- Cont.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
10
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
11
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
12
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
13
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
14
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
15
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
16
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
17
Facility Location Models- Cont.
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- 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
19
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
20
Facility Location Models- Cont.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
2005 Thomson Business and Professional Publishing
21
Facility Location Models- Cont.
The Center-of-Gravity
Model-
Involves 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
22
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 & Todays 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
23
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