The New Dynamics of Global Manufacturing Site Location

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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 firms to implement skill-based process technologies, or it can limit the effectiveness of quality programs.

Another disadvantage of strictly cost-based methods is that they tend to focus on factor cost advantages, which are all too often transitory. Government regulations, tax systems, and exchange rates can quickly change. Strategies based on such parameters may eventually be rendered obsolete by the very factors that first created advantage.

When formulating a site location strategy, companies should therefore emphasize the qualitative factors required to ensure that it supports the business strategy. Only after establishing a set of desirable location options should companies refine choices using cost-based algorithms.

In this paper, we examine how recent macroeconomic-and business-level trends have affected site location decisions. We describe how the dynamics in production systems, technologies, and management philosophies have changed location requirements. Finally, we propose a new framework for assisting in site location decisions and a model of the future global manufacturing firm.

Macroeconomic-Level Trends and Implications

The presence of large overseas markets suggests that there are benefits of scope for firms that sell globally.

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