- •Introduction
- •Li & Fung
- •Introduction
- •Strategy, Manufacturing, and Materials Management
- •Figure 16.1
- •Increased product quality means lower rework and scrap costs.
- •Technological Factors
- •Fixed Costs
- •Minimum Efficient Scale
- •Summary
- •Product Factors
- •Locating Manufacturing Facilities
- •The Strategic Role of Foreign Factories
- •Make-or-Buy Decisions
- •Facilitating Specialized Investments
- •Proprietary Product Technology Protection
- •Improved Scheduling
- •Lower Costs
- •Offsets
- •Trade-offs
- •Strategic Alliances with Suppliers
- •Coordinating a Global Manufacturing System
- •The Power of Just-in-Time
- •The Role of Information Technology
- •Chapter Summary
- •Critical Discussion Questions
- •Case Discussion Questions
Summary
A number of technological factors support the economic arguments for concentrating manufacturing facilities in a few choice locations or even in a single location. Other things being equal, when
Fixed costs are substantial,
The minimum efficient scale of production is high, and/or
Flexible manufacturing technologies are available,
the arguments for concentrating production at a few choice locations are strong. This is true even when substantial differences in consumer tastes and preferences exist between national markets, since flexible manufacturing technologies allow the firm to customize products to national differences at a single facility. Alternatively, when
Fixed costs are low,
The minimum efficient scale of production is low, and
Flexible manufacturing technologies are not available,
the arguments for concentrating production at one or a few locations are not as compelling. In such cases, it may make more sense to manufacture in each major market in which the firm is active if this helps the firm better respond to local demands. This holds only if the increased local responsiveness more than offsets the cost disadvantages of not concentrating manufacturing. With the advent of flexible manufacturing technologies, such a strategy is becoming less attractive. In sum, technological factors are making it feasible, and necessary, for firms to concentrate their manufacturing facilities at optimal locations. Trade barriers and transportation costs are probably the major brakes on this trend.
Product Factors
Two product features affect location decisions. The first is the product's value-to-weight ratio because of its influence on transportation costs. Many electronic components and pharmaceuticals have high value-to-weight ratios; they are expensive and they do not weigh very much. Thus, even if they are shipped halfway around the world, their transportation costs account for a very small percentage of total costs. Given this, other things being equal, there is great pressure to manufacture these products in the optimal location and to serve the world market from there. The opposite holds for products with low value-to-weight ratios. Refined sugar, certain bulk chemicals, paints, and petroleum products all have low value-to-weight ratios; they are relatively inexpensive products that weigh a lot. Accordingly, when they are shipped long distances, transportation costs account for a large percentage of total costs. Thus, other things being equal, there is great pressure to manufacture these products in multiple locations close to major markets to reduce transportation costs.
The other product feature that can influence location decisions is whether the product serves universal needs, needs that are the same all over the world. Examples include many industrial products (e.g., industrial electronics, steel, bulk chemicals) and modern consumer products (e.g., handheld calculators and personal computers). Since there are few national differences in consumer taste and preference for such products, the need for local responsiveness is reduced. This increases the attractiveness of concentrating manufacturing at an optimal location.