MIT Sloan Management Review

International Business, Operations Management and Research

 

The New Dynamics of Global Manufacturing Site Location

By Alan David MacCormack, Lawrence James Newman III and Donald B. Rosenfield

July 15, 1994

MANUFACTURING SITE LOCATION HAS RECEIVED LIMITED EXPOSURE IN STRATEGIC PLANNING LITERATURE. APPROACHES OFTEN EMPHASIZE QUANTITATIVE data such as transport costs, exchange rates, taxes, labor rates, and other cost-based variables. Yet location decisions based primarily on cost underestimate the importance of qualitative factors that are more likely to provide long-term advantages. This article examines the impact on location of recent trends in the global trading environment, new production systems, and new technologies. These suggest that global corporations of the future will develop a manufacturing network of decentralized plants based in large, sophisticated, regional markets. Each plant will be smaller and more flexible than is typical today. The location of such plants will be based more on regional infrastructure and local skill levels than on purely cost-based factors.

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The past twenty years have seen the development of a global marketplace in almost all major industries. Since 1962, worldwide exports have increased from 12 percent to more than 30 percent of world GNP,1 totaling $3.5 trillion in 1992.2 If one considers the potential exposure to import penetration, more than 70 percent of goods now operate in an international marketplace.3 Every organization must now formulate strategies within a global context.

Global competition affects a firm’s manufacturing strategy by dramatically increasing the complexity of decision making. Worldwide markets can be served in many ways; for example, by export, local assembly, or fully integrated production. Underpinning these factors is the optimal configuration of the organization’s production resources. Location is an important part of that picture, but one that is usually given only limited attention. Decisions are often based purely on quantitative analyses that trade off transport costs, scale economies, and other cost-based variables. This practice, however, can lead to suboptimal results, as decision makers tend to focus only on factors that are easily quantifiable. Important qualitative issues are frequently neglected or used only to temper results. These factors are often central to supporting or creating a competitive advantage. For example, location dictates the level of knowledge embedded in the workforce; as such, it can affect the ability of... To read the complete article, login or sign-up using the form below.

 
 

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