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Strategic Factors. Firms focusing on cost leadership tend to find the lowest cost location for their manufacturing facilities, even if that means locating very far from the markets they serve. Firms focusing on responsiveness tend to locate facilities closer to the market and may select a high-cost location if this choice allows the firm to quickly react to changing market needs.
Technological Factors. If production technology displays significant economies of scale, a few high-capacity locations are the most effective. In contrast, if facilities have lower fixed costs, many local facilities are preferred because this helps lower transportation costs. If the production technology is very inflexible and product requirements vary from one country to another, a firm has to set up local facilities to serve the market in each country. Conversely, if the technology is flexible, it becomes easier to consolidate manufacturing in a few large facilities.
Macroeconomic Factors. Macroeconomic factors include taxes, tariffs, exchange rates, and other economic factors that are not internal to an individual firm. If a country has very high tariffs, companies either do not serve the local market or set up manufacturing plants within the country to save on duties. High tariffs lead to more production locations within a supply chain network, with each location having a lower allocated capacity. Tax incentives are a reduction in tariffs or taxes that countries, states, and cities often provide to encourage firms to locate their facilities in specific areas. Many countries vary incentives from city to city to encourage investments in areas with lower economic development. Developing countries often create free trade zones where duties and tariffs are relaxed as long as production is used primarily for export. This creates a strong incentive for global firms to set up a plant in these countries to be able to exploit their low labor costs. Many countries also place minimum requirements on local content and limits on imports. Such policies lead companies to set up many facilities and source from local suppliers. Exchange rate risks may be handled using financial instruments that limit, or hedge against, the loss due to fluctuations. Suitably designed supply chain networks, however, offer the opportunity to take advantage of exchange rate fluctuations and increase profits. An effective way to do this is to build some over-capacity in the network and make the capacity flexible so that it can be used to supply different markets. This flexibility allows the firm to alter production flows within the supply chain to produce more in facilities that have a lower cost based on current exchange rates. When designing supply chain networks, companies must build appropriate flexibility to help counter fluctuations in exchange rates and demand across different countries.
Political Factors. Companies prefer to locate facilities in politically stable countries where the rules of commerce are well defined. Countries with independent and clear legal systems allow firms to feel that they have recourse in the courts should they need it. This makes it easier for companies to invest in facilities in these countries. Political stability is hard to quantify, so a firm makes an essentially subjective evaluation when designing its supply chain network.
Infrastructure Factors. The availability of good infrastructure is an important prerequisite to locating a facility in a given area. Poor infrastructure adds to the cost of doing business from a given location. Key infrastructure elements to be considered during network design include availability of sites, labor availability, proximity to transportation terminals, rail service, proximity to airports and seaports, highway access, congestion, and local utilities.
Competitive Factors. Companies must consider competitors' strategy, size, and location when designing their supply chain networks. A fundamental decision firms make is whether to locate their facilities close to competitors or far from them. How the firms compete and whether external factors such as raw material or labor availability force them to locate close to each other influence this decision. Positive externalities lead to competitors locating close to each other. When there are no positive externalities, firms locate to be able to capture the largest possible share of the market.
Customer Response Time and Local Presence. Firms that target customers who value a short response time must locate close to them. If a firm is delivering its product to customers, use of a rapid means of transportation allows it to build fewer facilities and still provide a short response time. This option, however, increases transportation costs. Moreover, there are many situations where the presence of a facility close to a customer is important.
Logistics and Facility Costs. Logistics and facility costs incurred within a supply chain change as the number of facilities, their location, and capacity allocation is changed. Companies must consider inventory, transpo
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