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Supply chain network design decisions include the assignment of facility role location of manufacturing storage , or transportation-related facilities, and the allocation of capacity and markets to each facility.
Facility role Facility location Capacity allocation Market and supply allocation
Firms that focus on responsiveness tend to locate facilities closer to the market and may select a high-cost location if this choice allows the firm to react quickly to changing market needs. For example, local capacity allows the company to respond quickly to changing fashion trends in Europe. Any examples?
Convenience store chains aim to provide easy access to customers as part of their competitive strategy. Global supply chain networks can best support their strategic objectives with facilities in different countries playing different roles. It is important for a firm to identify the mission or strategic role of each facility when designing its gobal network.
Taxes/Tariffs
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.
Countries with independent and clear legal systems allow firm to feel that they have recourse in the courts should they need it. April 09 Dawn. Irfan Husain. INFRASTRUCTURE FACTORS Poor infrastructure adds to the cost of doing business from a given location. Key infrastructure elements to be considered during network design include availability of sites, labor availability, proximity to transportation terminals, rail service, proximity to airports and seaports, highway access, congestion, and local utilities. What else?
COMPETITIVE FACTORS A fundamental decision firms make is whether to locate their facilities close to competitors or far from them.
SOCIOECONOMIC FACTORS
The industrial policy aims to spread industrialization to backward areas of the country through institutions, appropriate initiatives and infrastructure investments that would facilitate private investment.
FACTORS INFLUENCING NETWORK DESIGN DECISIONS CUSTOMER RESPONSE TIME AND LOCAL PRESENCE (contd.) Many situations in which the presence of a facility close to a customers is important. For example, a coffee shop is likely to attract customers who live or work nearby. LOGISTICS AND FACILITY COSTS Inventory and facility costs increase as the number of facilities in a supply chain increase. When there is a significant reduction in material weight or volume as a result of processing, it may be better to locate facilities closer to the supply source rather than the customer. Examples?
For example, when iron ore is processed to make steel, the amount of output is a small fraction of the amount of ore used. Locating the steel factory close to the supply source is preferred because it reduces the distance that the large quantity of ore has to travel.
COMPETITIVE ENVIRONMENT
REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK
AVAILABLE INFRASTRUCTURE
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The next step is for managers to identify whether economies of scale or scope can play a significant role in reducing costs, given available production technologies.
If economies of scale or scope are not significant, it may be better for each market to have its own facility. The regional configuration defines the approximate number of facilities in the network, regions where facilities will be set up, and whether a facility will produce all products for a given market or a few products for all markets in the network.
A manager considers regional demand, tariffs, economics of scale, and aggregate factor costs to decide the regions in which facilities are to be located. As an example, consider SunOil, a manufacturer of petrochemical products with worldwide sales. The Vice President of Supply Chain can consider several different options to meet demand.
Facilities at each location Consolidate plants in just a few regions
Quantitative model. Cannot consider invisible factors such as the competitive environment, and political risk
Works on the premise that the following is known at an aggregate level
Annual demand for each location Variable inventory costs, production and transportation costs Fixed costs
The constraint in Equation 5.1 requires that the demand at each regional market be satisfied. The constraint in Equation 5.2 states that no plant can supply more than its capacity.
Currency Stability
Impacts business costs & consequently location decisions.
"Shelby is defending the industry model of his state," says Merle Black of Emory University in Atlanta, a southern politics expert. "A lot of southerners feel they've been talked down to for a long time by northern industry, so he doesn't lose any votes by doing this." Jason Ray, who has worked for both Mercedes and Chrysler in Hunstville, Ala., says the Big Three "have engineered a doomsday scenario where if they aren't allowed to continue being irresponsible with money, including the billions from taxpayers, the U.S. economy will crash. American automakers need to learn to grow with the times or become obsolete." More than a few northerners feel the South supposedly the last bastion of red, patriotic values is being hypocritical by bending over backward for Germans and Japanese at the expense of U.S. companies. To make the point, a retired GM engineer this month set up a website called boycottalabamanow.com. But southerners ask who the hypocrites really are. "When the textile industry went down in the South and we were accused of being behind the times, we didn't ask for a bailout we just had to reinvent ourselves," says John Jeter, a South Carolina author whose family owns a small chain of auto parts stores and whose new novel, The Plunder Room, examines the modern southern character. "So southerners feel it takes some audacity for northern businessmen who make millions to come holding out beggar's bowls for billions."
Not that southern sages like Black approve of an industrial civil war. "We're all in this recession together," says Black, who like many others is quick to note that Detroit's collapse isn't exactly good for the South, especially given the large number of auto parts production jobs that rely in part on the Big Three. Still, most southerners champion their region's low-tax, non-union style of economic development, which they credit for luring overseas car companies like BMW and Kia to build major plants from Kentucky to South Carolina to Texas. More important, after spending the 20th century as America's industrial backwater and after watching the conservative Reagan revolution they once led fade away in last month's presidential election they hail the idea that the South is rising again in the 21st century. "The sense of confidence is palpable," says Jim Cashman, a management professor at the University of Alabama and a Chicago native who has worked in the auto industry. "Companies like Mercedes have legitimized the efforts of the New South." Alabama has been particularly aggressive. Since the early 1990s, the state has offered Germanbased Mercedes, Japan's Honda and South Korea's Hyundai a staggering $1 billion in tax incentives, abatements and infrastructure improvements to build plants there. The return on investment has been $7 billion, creating almost 50,000 direct jobs and another 70,000 in sectors like parts suppliers. The population of the town of Vance, where the 4,000-employee Mercedes factory is located, has leapt from 500 to 2,000. Unlike the local sawmill, fertilizer plant or rock quarry, residents feel Mercedes "is going to survive, no matter what," says one woman who has five family members working there. "That's what made Vance what it is."
But before Dixie gets too smug, it should acknowledge a debt it owes Detroit, or rather Detroit's labor union, the United Autoworkers (UAW). The UAW has made the Big Three's labor force one of the world's best paid and protected clout that is now a focus of what's wrong with Detroit. Still, the foreign automakers are in America in large part because, as their more fuel-efficient cars became popular in the U.S. in the 1980s and '90s, the UAW lobbied to get them to build production plants here. True, those Asian and European firms flocked to the South to avoid Detroit's high-cost culture. But while southern auto employees extol the union-free, right-to-work rules of their states, the truth is that they might still be earning the basement-level wages of a Mississippi textile worker today if the UAW hadn't leaned on the likes of Mercedes in Washington. "Mercedes wanted a much lower pay scale when it arrived here," says Cashman, who notes that veteran southern autoworkers now earn "only fractionally less" than the average $27 an hour for Detroit workers (and often end up with more, thanks to the foreign car companies' bonus systems). "If not for the UAW pressure, the starting pay would have been more in line with the going wage rate of this region instead of this industry." At the same time, southern workers have taught the UAW an important lesson about helping to keep that industry viable. The foreign companies enjoy not only the South's lower legacy costs but a more flexible production culture. Unlike the Big Three, the southern car plants are far more agile when it comes to accommodating shifting market demand; and that's due largely to employees' willingness to exact fewer of the production rules UAW contracts are notorious for.
Part of that efficiency is what Edward Miller, a Honda spokesman in Alabama, calls a modern "harmonious flow" having nearby vendors supply parts, and workers assemble them, as they're needed rather than stockpiling too much inventory or flooding the market with, say, gas-guzzlers no one wants to buy anymore. "Southern communities understand you can't tie organizations down with restrictions," says manufacturing management expert David Miller of the Alabama Productivity Center. "Successful auto companies in the South provide all the positives you'd find in a union shop." Perhaps. But labor advocates still fear for U.S. workers if the South's automotive industry supplants Detroit as the template. And it's not as if all is as shiny as a new Lexus in Dixie right now. The Mercedes plant in Vance recently had to cut back to a four-day workweek; and with even Japanese powerhouse Toyota facing U.S. sales slumps, the company this week said it's delaying the startup of a new plant in Mississippi that will make its Prius hybrid car. Even workers like Ray now feel that a union "would definitely benefit" Dixie autoworkers; and either way, says Cashman, the New South's economies "still have many, many miles of training and education to go." Still, you don't hear any of the Big Three these days even thinking of opening a $1.2 billion, 2,000employee facility in Georgia, as South Korea's Kia is set to do next year. It's enough to make a NASCAR driver take a victory lap.
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