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Asset Location & Global Networks - Coggle Diagram
Asset Location & Global Networks
Drivers
Macro-economic & non-market factors
Tariffs, duties, quotas, and trade agreements
Tax rates, government incentives, and regulations
Exchange rates and volatility
IP protection
Political stability
Supply Markets
Availability and costs of required inputs (capital, labor, energy, materials, goods, services ...)
Knowledge, skills, infrastructure
Technology
Production economies (or diseconomies) of scale, scope and learning
Transportation costs and lead times
Competitive Strategy
Product/Service positioning
Competitors positioning
Existing assets & processes
Existing facility network
Existing skills & capabilities
Product Markets
Customer proximity premium
(understanding customers, being able to meet up, etc)
Distinctiveness of local product markets
Predicted growth, uncertainty, and geographical distribution of demand
structured approach to decide where to expand or contract capacity
Location Strategy Framework
Structured approach to identify and decide where to position assets
Step 1: Strategic role of an additional location
Types of Plant
Source Plant
authority over procurement, production, planning, logistics, process & product customisation
Scope of current activities & competencies
Broad & High
Primary strategic reason for the location
Access to low-cost production
produces at low cost but with same ability as best plant in the network
Offshore Plant
Scope of current activities & competencies
Narrow & Low
Primary strategic reason for the location
Access to low-cost production
produces specific terms at low cost & exports for further work or for sale
minimal authority & investment
Lead Plant
Scope of current activities & competencies
Broad & High
Primary strategic reason for the location
Access to skills & knowledge
global hub for product and process knowledge & innovation
full authority over all activities.
taps into local skills & knowledge to initiate company-wide innovation
Outpost Plant
Scope of current activities & competencies
Narrow & Low
Primary strategic reason for the location
Access to skills & knowledge
primary role is to collect information from advanced suppliers, competitors, research labs, or customers
secondary role as offshore or server
Contributor Plant
Scope of current activities & competencies
Broad & High
Primary strategic reason for the location
Access to market
serves specific regional market but competes with other plants in network for new processes or products
authority over product & processes development as well as supplier choice
Server Plant
Scope of current activities & competencies
Primary strategic reason for the location
serves spevific regional market to overcome tariffs, taxes, logistics, or foreign-exhcnage risk
limited authority to make mirror modifications to fit local conditions
Purpose of classification
identify gaps in network
provide development path for plants
Key insight
plant capabilities (i.e., people) take years/decades to build. So, long-term plant is needed!
Step 2: Global Assessment of industry presence
search for good offshore/source plants
conducted through trade export analysis for plumbing related industries
Step 3: Country segmentation
(set of attractive candidate locations)
comprehensive analysis of technical & business factors for alternative locations
Technical factors
Sector Maturity
Technical Infrastructure
Manufacturing Competitiveness
Productivity & Efficiency
Business factors
Domestic Economy
Ease of Doing Business
International Investment
Business Risks
Step 4: Total Landed Cost (TLC) Analysis
TLC = total supply chain cost to serve a (set of) market(s) with a given service level
TLC analysis enables improved location & related decisions without sacrificing customer service
E.g., with an offshore plant, the domestic distribution centre will need to keep higher inventory levels (because of longer lead times) to maintain the same service levels
Elements
Track flow units through the process
example: offshore plant with domestic distributon centre
1) inbound raw material & services purchased at offshore plant
2) inbound logistics of moving inputs to offshore pant
3) processing ad inventory holding cost at offshore plant
4) overhead at offshore plant & domestic distribution centre
5) logistics from offshore plant to domestic DC
consider cost, leadtimes, and pipeline inventory for
offshore plant → offshore port → domestic port → DC
6) outbound fulfilment from DC
consider cycle & safety stock costs and outbound trnasportation cost
7) include any other costs that are impacted by this plant location choice
e.g., SGA
TLC = total end-to-end cost to transform inputs at sourcing location to outputs at customer locations
scope: products x customers
Total Landed cost breakdown
Extra start-up, quality costs (Typical COGS)
Working Capital Costs (Supply Chain + Service)
Working Capital (includes inventory)
Inventory has several components
In-transit stock
= average throughput x average transportation time
Cycle stock
= Q/2 = from recurrent batch deliveries of size Q
Safety stock
= z sqrt(lead_time) standard_deviation_of_demand (in 1 time unit) with z = normsinv(in-stock probability)
Service - Location Tradeoffs
if required service levels are high, the
lower needs for safety stock
can make a nearshore plant more attractive even though its COGS is high compared to an offshore plant
TLC Features
a cost focus
therefore important to fix the differentiation level on dimensions of time, quality, variety/customisation
sometimes difficult to do
and estimate what it would take to reach that same level of differentiation in different locations
challenge
to carefully track direct & indirect (and often hidden) costs through the entire value chain
this analysis is painful (because data is not always easy to find) but rewarding
some of the most quantitative studies in operations
good analysis can save 5% on COGS
Example
a manufacturer of cell phone transmission towers found that
often labor costs are not that significant
(for deciding nearshore/offshore)
but sourcing & working capital costs are
Step 5: Dynamic updating provides dynamic location recommendation
Network Analysis
Network & Competitive Location Analyses Tools
1) Geographical or spatial location analysis
includes TLC for one location or for all locations in your network & markets you serve
timing & location decisions may interact
2) Competitive analysis
take location of competitors or their possible reaction into account
e.g., 2 competitors locate side by side in the middle of Main Street if price is fixed
important if customers choose based on proximity
3) Network analysis
qualittaive choices regarding the facility network
focus on ΔC & ΔX
e.g., centralise or distribute, localise or standardise, integrate or separate, offshore, onshore, or re-shore
Capacity sizing, timing and location interact
Example
starting operations in country A
assume you have a short-term view: build one plant in region A (a central region of the country)
if anticipate potential future additions: start in B then in the longer term, add C. (B+C are slightly further, but have lower TLC than A)
Should a
network
be
centralised or distributed
Distributed
cost with increasing returns is high per unit
cost with decreasing returns is low per unit
also offers customer proximity & a basis for differentiation
Centralised
cost with increasing returns is low per unit
e.g., production costs
cost with decreasing returns is high per unit
e.g., transportation
is riskier as ‘all eggs in one basket’; if the country face threats, it would be fatal for the company as well)
Should
facilities
be
standardised or localised
for a
distributed network
Standardisation
can slow down improvements (enforcing standards inhibits natural experimentation) but can also increase the impact of improvements (can be copied to other facilities)
facilities intregration & its advantages
e.g. risk pooling
offers purchasing power for materials & equipment
Localisation
may be useful to adjust facilities to available inputs/suppliers
e.g., Mittal Steel mini-mills adjust level of automation depending on labor costs
can be part of a differentiation strategy that takes advantage of local customer preferences
Pirelli 30 inch tires in USA
may be required
by regulation
Should
facilities
be
integrated or separated
for
distributed
facilities
Separation
leads to plant networks that are easy to manage
leads to market focused plants (local product & supply markets) with potentially better competitive positions (valuable if customers are willing to pay for this)
Integration
comes in different levels of operational flexibility (production & transportation lead-times, flexibility of capacity)
offers the scale economies of capacity pooling; less safety capacity is needed
less unccertainty (if you ran out of capacity in one country, can still use the capacity for another country)
means that one location can serve multiple markets or multiple locations can serve one market
allows reaction to demand & exchange rate shifts
VCAP: As + Ps
Location
Supply
availability & total landed cost of inputs (labor, energy, material, ...)
supplier relationship management
Technology
infrastructure (airports, transport, services, ...)
network planning & coordination
knowledge & skills
Demand
competition
local presence, content, service level
access & market forecasts
Innovation
role in network
There are often interactions between aspects of As & Ps - they are interrelated.