Session 6

1. Global Production Networks (GPNs)

• GPNs are built on global transportation networks, economies of scale, and zero trade barriers. This allows businesses to locate production in the most cost-efficient places across the globe.

• Geographic mobility and decreasing trade barriers (due to containerization) help make this possible, along with efficient transport means.

2. Corporate Location Models

The choice of location depends on various models:

• Global Model: Production for the entire global market in one location. Benefits from economies of scale but may be highly specialized and capital intensive.

• Country Model: Localized production. Typically for industries with high transportation costs or perishable products.

• Regional Model: Production near the market where the product is sold, minimizing delivery times and logistics costs.

3. Factors Influencing Location Decisions

• Geographic Mobility: Companies assess whether they are market-seeking (e.g., electronics) or resource-seeking (e.g., chemicals) in their location decisions.

• Mobility Trade-off: There’s a trade-off between competitive ability, country/region-specific advantages, and communication/mobility factors like transport costs and coordination challenges.

4. Practical Example: Ineos and Antwerp

• Ineos selected Antwerp over other locations due to maritime trade lanes, competitive advantages in labor, and the logistical benefits of being near regional markets.

5. Critical Location Factors

• When deciding where to locate, businesses must evaluate critical location factors (e.g., labor availability, political stability, and the cost/quality balance of a location).

• A multi-criteria analysis (MCA) is typically used to assess factors like economic conditions, business ethics, political stability, and infrastructure quality.

6. Project Definition and Location Search

• Businesses define their project’s characteristics, detect critical location factors, and then search for suitable locations that match these requirements.

• A cost/quality analysis helps compare different locations by evaluating return on investment (ROI) and long-term economic factors.

7. Phase 3: Implementation

• After evaluating various options, businesses proceed with selecting the site, conducting negotiations, obtaining permits, and implementing the plan.

This overview covers the essential concepts from your supply chain course related to global production networks and location decisions. Would you like to explore any specific section in more detail?

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Here's a more detailed breakdown of the slides, including all the key concepts and methodologies presented:

1. Global Production Networks (GPNs)

GPNs are supply chains that span across countries and continents. These networks rely on key principles that shape decisions on where to locate production facilities:

• Transportation Networks: Global supply chains are reliant on efficient transportation infrastructure, like shipping containers and cargo systems. This reduces transport costs and enhances the ability to deliver goods worldwide.

• Zero Trade Barriers: GPNs thrive in environments where trade barriers such as tariffs, quotas, and import restrictions are minimal or nonexistent. This allows businesses to freely import and export goods.

• Scale: Companies leverage economies of scale by consolidating production in certain regions to produce high volumes of products. This allows them to take advantage of cost savings through mass production.

Increasing Geographic Mobility:

• Reduced trade barriers and lower transportation costs (due to advances like containerization) have made it easier for companies to relocate production facilities to areas with better economic conditions.

• Economies of scale: As production increases, the cost per unit decreases, which is a major factor in location decisions.

2. Corporate Location Models

Companies use various location models based on their business needs:

• Global Model:

  • A single, centralized production facility caters to the global market.

  • This approach is most beneficial when there are significant economies of scale and the production requires specialized skills or capital-intensive technology.

  • Example: High-tech industries or automobile manufacturing.

• Country Model:

  • Production takes place locally within the country where goods are sold.

  • This model is often employed when transportation costs are high, goods are perishable, or there are import restrictions.

  • Example: Food manufacturing, perishables like fresh produce.

• Regional Model:

  • Production facilities are located in specific regions to cater to local market needs.

  • This is useful for industries that require local products or have strict delivery timelines.

  • Example: Consumer electronics, which are sold in multiple regional markets and require quick distribution.

3. Location Footprint Case Examples

Several companies serve as examples for understanding location decision-making:

• Zara: Locations are strategically chosen to respond quickly to fashion trends, with rapid distribution networks allowing for fast product delivery.

• Nutella & Colgate: Both companies have localized production due to the nature of their products and logistical requirements. For instance, Nutella uses local suppliers for raw materials, while Colgate places production near key market regions.

• Laptop PCs: Locations are chosen based on proximity to assembly facilities and access to supply chains, especially in Asia.

4. Where to “Make”?

The decision to produce a product in-house or outsource to a third party is a critical factor for supply chain managers. Key drivers include:

• Raw Material Driven: If raw materials are abundant or cheaper in one location, it may be cost-effective to set up production there.

• Customer Driven: Proximity to key customers or target markets can influence location decisions.

• In-between/Flexible: Some companies need a balance of both, seeking flexible production models that can adapt to changing demand and supply conditions.

5. Geographic Mobility and Project Thinking

Companies often prioritize market-seeking versus resource-seeking strategies:

• Market-Seeking: Companies want to be close to consumers or target markets (e.g., consumer electronics or luxury goods).

• Resource-Seeking: Companies focus on areas with abundant resources (e.g., mining, agriculture, or energy industries).

Additionally, the concept of thinking in projects is emphasized:

• For example, some sectors, like pharmaceuticals, require precise location decisions based on logistics and labor needs, whereas others like textiles may prioritize low labor costs.

6. Mobility Trade-Off

This is the balancing act between competitive ability and communication/mobility. Key factors to consider:

• Competitive Advantage: Includes the ability to leverage local resources, skilled labor, and favorable economic conditions.

• Communication and Coordination Costs: These may rise as businesses expand to multiple locations, increasing the complexity of logistics and administration.

• Government Barriers: Barriers such as import/export duties, quotas, and taxes must be factored into the decision-making process.

7. Challenges in Decision-Making

Making location decisions involves:

• Inconsistent project strategies: Projects may conflict with a company's broader strategic goals.

• Timing and Phasing: Complexities around project timing and how phased development can affect implementation.

• Risk & Uncertainty: Each location has unique risks, such as political instability or fluctuating economic conditions.

• Multiple, Competing Objectives: Companies must juggle various goals, such as minimizing costs, maintaining quality, and meeting customer needs.

8. Practical Approach to Location Decisions

A structured approach is necessary for deciding where to locate a production facility:

• Define the Project: Establish the project’s needs, including size, scale, and type of operation (e.g., warehouse, R&D).

• Search Area: Delimit the geographic area based on the critical location factors.

• Evaluate Options: Compare different locations based on cost economics, quality, and non-monetary factors.

9. Methodology for Location Selection

The methodology includes several steps:

1. Project Definition: Identify the project’s critical needs, such as required facility type (warehouse, HQ, etc.).

2. Search Area: Use economic and logistical factors to narrow the geographic search.

3. Cost Economics: Evaluate the return on investment (ROI) by comparing the costs associated with each location (e.g., labor costs, tax incentives, real estate).

4. Intangibles: Consider non-monetary factors such as local culture, labor relations, and quality of life.

5. Evaluate Options: Select the best locations for implementation, considering all factors.

10. Project Definition – Quantitative and Qualitative

• Quantitative: Includes factors such as investment costs, labor availability, and utilities required. For example, a factory might need specific amounts of power, water, and labor to function.

• Qualitative: Involves assessing intangible factors, such as the political climate, access to skilled workers, and proximity to competitors or customers. These are usually ranked on a scale from 1 to 5.

11. Utilities & Financial Assumptions

• Utilities: Companies assess waste disposal, heat, power, water, and gas requirements for their facilities.

• Financial Assumptions: This involves evaluating the cost of financing, expected returns, tax implications, and the structure of the investment.

12. Critical Location Factors and Evaluation

After defining the project’s requirements, the next step is identifying critical location factors (CLFs), which are absolute must-haves for a project. These factors include:

• Labor Quality: The skill level and availability of labor in the area.

• Cost Factors: This includes taxes, wages, energy costs, and real estate prices.

• Legal and Political Stability: Assessing whether a location has favorable laws and policies that align with the business.

13. Cost & Quality Analysis

A key tool in evaluating different locations is the Cost-Quality Map, which plots potential locations based on cost and quality metrics. Locations with a lower cost but acceptable quality are often prioritized.

14. Implementation and Final Decision

After selecting a location based on cost, quality, and intangibles, companies proceed to the implementation phase, which involves:

• Securing the site, negotiating terms, obtaining permits, and finalizing construction.

15. Conclusion: Factors to Consider in Location Decisions

The key to a successful location decision lies in balancing tangible (e.g., costs, logistics) and intangible (e.g., quality of life, culture) factors to ensure optimal operational efficiency and long-term success.