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Local agencies, such as industrial commissions and chambers of commerce, can provide details more specific to a particular location, such as labor, utility, land and housing costs, and availability of transportation facilities, such a railroad, trucking, and airports. Once the necessary information about alternative locations has been gathered, the advantages and disadvantages of one location over another must be evaluated. One may have the lowest raw material cost, another the lowest utility cost, and yet another the best labor supply.

Each of the major factors is rated from 0 to relative to its importance. Each individual location is then rated from 0 to the maximum for each factor. The scores for the locations will determine the final ranking. An example of this procedure is shown in Table 1. Location Z would be selected, based on its maximum score. It is clear that the ranking obtained by this method is largely subjective. When the factors are evaluated, they express an analyst's feelings that are measured in terms of assigned weights. It is quite possible that different analysts might choose varying weights for the same physical conditions, leading to entirely diverse site selections.

Such variations in judgment can be eliminated if all the locations that meet certain minimum requirements are made candidates, and the procedures, presented later text, are then applied based on the cost data that can be collected for each site. We have seen in our discussion that in most factors e. Because the ultimate objective of any business is to provide goods or services at a profit, the site that can minimize the operational cost and, at the same time, satisfy other subjective criteria e.

The models in the latter chapters would evaluate each site in a quantitative manner. The minimum score requirements for screening purposes may be set in many different ways. For example, for each factor, a minimum necessary value may be set, and the site that fails to meet the minimum is then eliminated from any future consideration; or a minimum could be set just for the more important factors, such as the first four considered in Table 1.

Introduction and the Traditional Approach 11 Another approach is to allow all the sites to be considered for objective evaluation by first applying the methods presented in later chapters and then checking to see if the best site selected also meets the minimum requirements of the foregoing subjective factors. If it does not, and an alternative site is to be chosen, management will at least understand the dollar cost associated with that decision. Even within a plant, location of machines and placement of offices follow the same basic rules. For example, some factors that may influence selection of possible sites for a machine are the following: 1.

Required floor space and floor space available 2. Cost of installation Availability of auxiliary equipment 4.

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Travel time and distance between existing and new machines or offices Work flow between existing and new machines and offices Weight or physical size of the units that are processed In-process inventory With so many different factors affecting location and allocation decisions, careful analysis, similar to that for the plant location problem, is essential if we are to make the "right" decision.

Again the combination of qualitative and quantitative approaches is of major benefit. Listed in the following are the few well-known economic models for more details refer to an engineering economy book : 1. Payback period: Determine the number of years it will take to recover the invested capital at each site. Rate of return method: Determine the rate of return from each site and select the site with maximum rate of return. Rate of return is the interest rate at which the present worth of all expenditures are equal to the present worth of all earnings.

Take the ratio and select the site that gives maximum value. These are major investment decisions, and added political, social, and local factors must also be considered. That industries had been protected in the third world and developing countries earlier, which are now opening up their economies, makes these countries more interesting to research for investment and locations by MNC.

The MNC seeking expansion may be from developed countries going into business in developing or underdeveloped countries or vice versa. The factors consider in each case in making decisions may be distinct.

Logistics of Facility Location and Allocation | Taylor & Francis Group

As an example, we might consider the United States as the developed world, countries such as South Korea as developing countries, and countries such as India, as an underdeveloped country. Firm-specific advantages that are required to operate in a country, largely depend on the economic development in that country. As a result, firm-specific advantages to operate in a less-developed country and developed country are different.

MNCs make substantial investment in terms of time and money before a project is begun, and usually the gestation period is long, meaning that a huge outflow of cash has to be managed for long time periods, with no immediate return on the money. As a result, an MNC makes a careful study of the socio-economicpolitical conditions before going into a new venture in an alien land.

The factors usually considered by an MNC before making an investment decision follow: 1. The political stability of the country The commitment of the government to the opening up of the economy The advantages of introducing a new technology and the possibility of adapting the new technology to the host country The influences of the host's economy on the regional economy and vice versa 5.

Facility Location 1: Single-Facility Location

The product life cycle of the local manufacturers if the product to be 6. Government restrictions on import of raw materials, knocked-down kits and such 8. The variability of the market size Political Stability If we consider the huge investment required, any MNC is skeptical about the commitment of the local rulers to liberalization. Investments in countries that do not have a stable political setup are usually considered to be vulnerable. To avoid a possible loss of investment, MNCs usually prefer countries where all major parties in case of democracies are committed to liberalization.

In Asia, for example, it is apparent that U. MNCs prefer investing in China, a communist country, with a stable political scenario, vis-a-vis India, which has a multiparty democracy. Commitment of the Local Government The commitment of the local government toward liberalization becomes another important factor. A government that is usually more populist could at any time roll back on its liberalization plans.


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For example, many MNC prefer Japan as an investment destination because most of the important economic and trade decisions in Japan are made by the bureaucrats in the ministry of international trade and industry MITI , rather than politicians, which means that any change in the government will not affect the liberalization process. Adaptability of Technology Any MNC that plans to invest capital in new projects at a new country has to make sure that it can adapt its technology to the new country. There have been cases of good technologies failing in new markets as a result of the inability of the local populace to adapt itself to new technologies.

A typical example would be the case of Rover Motors' introduction of its car in India. The car, albeit had a good technology, could not perform satisfactorily because Indian servicemen were not used to the new type of carburetor used in these cars and, hence, could not fix any problems that arose in the same. As a result of the regionalization of the economies, any investment decision is influenced by the effect of the local economy on the regional economy.

Any decision made without considering this could be disastrous. One example for this would be the failure of the Southeast Asian Pacific rim countries economies in the s, which was largely triggered 14 Chapter 1 by the failure of some banks in Japan and, hence, the imminent depression in the local economy Japan. If such companies are to make investments in a country where the product life cycles of already existing competitors are long, there is an advantage.

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The investing company could generate larger revenues out of a product in these countries and, thereby, make up for short life cycles in their home developed countries. Export and Reimport Possibility The MNCs usually operate in a number of economies, and there will be bilateral and multilateral treaties between these economies. An MNC that manufactures labor-intensive products might usually be interested in investing and creating new manufacturing facilities in countries that do not have such high labor costs.

However, these decisions are also based on the tariff rates that prevail between the host and home countries. If the home country has high import tariff rates, then the MNC is at a disadvantage because reimporting into the home country to avoid high labor costs would entail huge tariffs in the form of import duties. Government Tariffs for Import of Raw Materials Any MNC that is operating in technology-intensive business will have to consider this factor in making an investment decision. That such MNCs will usually be unwilling to part with their technology would largely force them to manufacture the core items at home and manufacture the rest of the assemblage in the new country.

In some cases, governments charge large import tariffs on such items. Variability of the Market Size Variability of the market size becomes an important criterion, for the cash flows are usually considered in advance before venturing into a new project, and they are projected using an assumed market size. Firm, specific advantages are those leverages Introduction and the Traditional Approach 15 obtained by a firm, such as low-interest source of capital and technological advantage. Source of Funds Multinational companies usually enjoy high leverage of funds, as a result of their clout, and have the ability to source funds from different parts of the world in the economies in which they operate.

This ability to secure funds from lowinterest country and use it in a high-interest market usually gives MNCs an advantage.

Technological Intensity Companies that are in technology-intensive businesses tend to patent their technologies to safeguard their interests commercially. In such cases, they would like to maximize their revenue within the years operating window allowed by the Intellectual Property Rights. MNCs tend to prefer places where a competitor's technology is not by any means better than their own.


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Investment Pattern Decision When a multinational corporation makes a decision to invest in a country, it is faced with the problem of determining the mode of investment. For example, different modes of investment include the following: total ownership of a subsidiary; partnership with a local firm in which the multinational owns a major part of the subsidiary; partnership with a local firm in which the local firm owns a major chunk in the subsidiary; or just giving technology to the local firm. The factors that are to be considered before making an investment decision are 1.

Existence and strength of the local players Market size Cultures prevalent in the host country Government regulations Existence and Strength of the Local Players When an MNC makes an investment in which there are local players, it has to consider the strength of the local players. For example, if a company such as Daimler-Benz, which makes luxury cars, decides to invest in a third-world country, the road conditions and the infrastructure would not be very well developed to exploit the luxury built into the car.

To avoid this problem, the company would like to go for a partnership with a local car manufacturer, which would obviate the need to study the road conditions and adapt the vehicle for that country's conditions. Also, for an MNC that decides to go it alone, it has to consider the difficulties in marketing the product all by itself in a new country. To take advantage of the existing dealership network, an MNC would choose to go for a partnership with a local manufacturer.

So they usually tend to go for partnerships to avoid any possible overestimation of the size of the market. Cultures Prevalent in the Country In some third-world countries, the cultures are very complex, and there are different languages spoken and different religions being practiced. In such countries, it may be better for an MNC to go for partnerships with a local organization than to go for full ownership.

Government Regulations When an MNC comes into a new country, it is competing for the local market, without bringing the nation any value other than employment for local people. To take care of this problem, governments decree regulations on total ownership of subsidiaries. For example, there are countries in which, if an MNC goes for total ownership of a local subsidiary, it has to meet some export obligations spread over a period of years, say a decade. This helps the local government obtain valuable foreign exchange.

In such cases, if the company is not sure of the possibility of exporting, it must go for a partnership.