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Chapter 9

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chapter 9. Evaluating new production and sourcing locations

9.1

Labor costs in manufacturing industries in different countries Norway
Belgium
Switzerland
West. Germany
Denmark
Finland
France
Austria
Luxemburg
Sweden
Netherlands
Ireland
Italy
USA
Japan
UK
Spain
East Germany
Canada
Greece
Slovenia

43.64
38.59
37.14
36.05
35.08
33.76
33.31
33.20
33.09
32.88
32.75
29.62
27.40
22.95
22.86
22.21
21.87
21.11
21.01
16.44
13.18

South Korea
Malta
Portugal
Czech Rep.
Croatia
Slovakia
Estonia
Hungary
Poland
Lithuania
Latvia
Turkey
Russia
Romania
Belarus
Bulgaria
China
Ukraine
Modavia
Georgia
Phillippines

11.49
10.27
10.03
8.86
7.89
7.80
7.30
6.94
6.04
5.45
5.25
4.33
3.61
3.39
2.67
2.44
2.25
1.81
1.74
1.65
1.33

Data in EUR per hour, 2009

(adapted from Institut der Deutschen Wirtschaft, 2010)
© 2012 R. Grünig/D. Morschett

9. Evaluating new production and sourcing locations

9.2

Total costs of Electrolux for products sourced in different regions Chest-freezers for
US market

USA

China

Washing machines for
EU market

Mexico

Production Country
= Logistics

= Direct labour & overhead

Western
Europe

China

Eastern
Europe

Production Country
= Materials & components

(Electrolux, 2005)

© 2012 R. Grünig/D. Morschett

9. Evaluating new production and sourcing locations

9.3

Components of procurement cost
+

+

+
+

=

Purchasing cost or production costs abroad
Logistics
 Inland freight in the production country
 International freight
 Inland freight in the home country
 Transfer charges
 Additional safety stock
Customs duties and fees
 Duties
 Customs fees
 Harbour fees
Taxes
 VAT and/or import tax
 ./. Tax incentives in the production country
Other costs
 Cost of quality monitoring
 Cost of damage
 Supplier development and certification
 Cost due to exchange rate volatility
Total cost of procurement

(adapted from Deloitte, 2007)
© 2012 R. Grünig/D. Morschett

9. Evaluating new production and sourcing locations

9.4

Motives for relocating production abroad
77%

Labor costs

29%

Proximity to key customers

28%

Market-seeking

16%

Proximity to other relocated production

15%

Transport/logistics costs

12%
8%
2%

Taxes/levies/subsidies
Lack of skilled employees
Access to new knowledge/technology/clusters

% = Percentage of relocating companies
(adapted from Fraunhofer Institut, 2009)
© 2012 R. Grünig/D. Morschett

9. Evaluating new production and sourcing locations

9.5

Reasons for foreign divestments
68%
43%

Quality

Flexibility/service levels for delivery

33%

Labor cost

32%

Transport/logistics costs

20%
19%
5%
2%

Coordination effort
Availability/fluctuation of skilled employees
Loss of know-how/copies/piracy
Proximity to R&D

% = Percentage of reversing companies
(adapted from Fraunhofer Institut, 2009)
© 2012 R. Grünig/D. Morschett

9. Evaluating new production and sourcing locations

9.6

Process for evaluating new production and sourcing locations 1. Producing an initial list of potential country locations

2. Eliminating the less attractive countries

3. Selecting the most attractive countries

© 2012 R. Grünig/D. Morschett

9. Evaluating new production and sourcing locations

9.7

Evaluation of Romania in the World Competitiveness Report
Key indicators
Population (millions)

21.3

GDP (billions USD)

161.5

GDP per capita (USD)

7,542

Global Competitiveness Index and its components 2010-2011
Criterion

Rank
(out of 139)

Score
(1-7)

Institutions

81

3.7

Infrastructure

92

3.4

Macroeconomic environment

78

4.5

Health and primary education

63

5.8

Higher education and training

54

4.5

Goods market efficiency

76

4.1

Labor market efficiency

76

4.3

Financial market development

81

4.0

Technological readiness

58

3.8

Market size

43

4.4

Business sophistication

93

3.5

Innovation

87

2.9

Global Competitiveness Index

67

The most problematic factors for doing business (% of responses)
Access to financing
Inadequate supply of infrastructure
Inefficient government bureaucracy
Tax rates
Tax requisitions
Policy instability
Corruption
Restrictive labor regulations
Inadequately educated workforce
Inflation
Poor work ethic in national labor force
Foreign currency regulations
Crime and theft
Government instability/coups
Poor public health

4.2

(adapted from World Economic Forum, 2010

0%

5%

10%

15%

20%

© 2012 R. Grünig/D. Morschett

9. Evaluating new production and sourcing locations

9.8

Labor costs and economic freedom in selected countries
40

Labor Cost in manufacturing in EUR per hour 2009

Switzerland

35

Germany

France

30
Italy

25
Spain

20

UK

USA

15
S. Korea
Portugal
Czech. R.
Slovakia
Estonia
Poland
Russia
Turkey
China
Romania
Bulgaria
Philippines

10
5
0

50

55

60

65

70

75

80

85

90

Economic Freedom Index 2011
(based on Institut der Deutschen Wirtschaft, 2010; Heritage Foundation, 2011)
© 2012 R. Grünig/D. Morschett

10. Evaluating foreign operation modes

10.1

Different alternatives for sourcing from abroad
Sourcing from a trade company Company

Import firm

Independent manufacturer Company

Manufacturer's sales subsidiary Independent manufacturer Company

Export firm

Sourcing from an independent foreign manufacturer

Independent manufacturer Buying agent

Company
Procurement office

Independent manufacturer Company

Independent manufacturer Company

Independent manufacturer Sourcing from a foreign contract manufacturer
Contract
manufacturer

Company

Taking up own production abroad Company

Production joint venture

Company

Wholly-owned production subsidiary

= Company
= Alliance/partnership
= Independent suppliers

Border

© 2012 R. Grünig/D. Morschett

10. Evaluating foreign operation modes

10.2

Process for evaluating foreign operation modes
1. Eliminate the less suitable operation modes based on external and internal conditions
2. Select the most suitable operation modes based on a detailed evaluation © 2012 R. Grünig/D. Morschett

10. Evaluating foreign operation modes

10.3

Fit between country attributes, production asset attributes and operation modes
Country
risk
Contract
manufacturing

Production joint venture

high

Sourcing from independent manufacturers
(or trading firms) Contract manufacturing medium

Sourcing from independent manufacturers
(or trading firms) Production subsidiary or production joint venture

Contract manufacturing or production subsidiary Production subsidiary low

Sourcing from independent manufacturers
(or trading firms) low

medium

high
Specificity of necessary assets

© 2012 R. Grünig/D. Morschett

10.4

10. Evaluating foreign operation modes

Scoring model for selecting the operation mode
Criteria

Importance of Options the criterion
Independent
manufacturer

Contract manufacturer Wholly-owned production Control over the production process and quality

3

1

3

4

Financial resources required

2

4

4

1

Cost per product unit

3

1

3

4

2

4

2

1

1

3

2

4

Supply security

3

1

2

4

Effectiveness of knowledge-transfer to the foreign production site

1

1

2

4

29

40

48

Flexibility to switch the sourcing location Risk of knowledge dissemination to another company

Overall evaluation
Scores: 4 = very positive 3 = positive 2 = negative 1 = very negative
Importance of the criterion: 3 = high 2 = medium 1 = low

© 2012 R. Grünig/D. Morschett

11. Developing an internationalization strategy for production and sourcing

11.1

Process for developing an internationalization strategy for production or sourcing
= usual sequence of steps
= most important possible loops 0. Preparing the strategy planning project
1a. Evaluating potential sourcing countries

1b. Evaluating potential operation modes

2. Determining suitable location - operation mode combinations

3. Developing feasibility studies for entering the sourcing country markets
3. Developing feasibility studies for production or attractive relocation
4. Developing the internationalization strategy 3. needed: Signing agreements with the partners
5. IfDeveloping feasibility studies for entering the attractive country markets

3. Developing feasibility studies sourcing relocation programs
6. Developing the production and for entering the attractive country markets

© 2012 R. Grünig/D. Morschett

11. Developing an internationalization strategy for production and sourcing

11.2

Location - operation mode combinations as result of Step 2
Product Most attractive locations Operation modes

Country

China

C1

a

C2

P1

Location within country

Sourcing from a domestic import firm

Sourcing from an independent manufacturer b c Vietnam
P2

Sourcing from a joint venture V1

Ukraine

U1

d

U2

e

Romania

R1

= selected operation mode at that location

f a - f = suppliers/partners

© 2012 R. Grünig/D. Morschett

11. Developing an internationalization strategy for production and sourcing

11.3

Table of contents of a feasibility study for a relocation option 1. Product and production step characteristics
2. Country characteristics
3. Characteristics of the specific location within the country
4. Operation mode
5. Supplier, contract manufacturer, partner and/or acquisition object
6. Supply chain
6.1 Transport and warehouses, including costs
6.2 Delivery times
6.3 Supply security
6.4 Other decision-relevant aspects of the supply chain
7. Legal aspects
7.1 Protection of intellectual property rights
7.2 Other aspects of contracts with foreign partners

8. Resources required
8.1 Human resources
8.2 Assets
8.3 Working capital
9. Quantitative objectives and forecasts with regard to labor costs, production volumes, etc.
10. Measures
10.1 Steps and time needed to build up activities 10.2 Steps and time needed to terminate current activities that will be relocated,
e.g. supplier contracts in home country
11. Responsibilities
12. Budget
12.1 Initial investments
12.2 Annual expenses
13. Economic evaluation

© 2012 R. Grünig/D. Morschett

11. Developing an internationalization strategy for production and sourcing

11.4

The Net Present Value of a relocation option
Elements of the NPV

Initial investment Maintaining production in the home country
Production joint venture in
China with a partner in location C2
Cost of closing down the production in the home country Difference

Cash flows year 1-15

NPV

-1,000

-2,900

-300

-600

-3,500

700

593.2

All figures in thousands of Swiss francs

© 2012 R. Grünig/D. Morschett

11. Developing an internationalization strategy for production and sourcing

11.5

Table of contents of an internationalization strategy for sourcing and production
1. Products and production steps
2. Countries and locations
3. Operation modes and partners
4. Quantitative objectives
5. Timetable
6. Responsibilities
7. Investment budgets and free cash flow targets

© 2012 R. Grünig/D. Morschett

http://www.springer.com/978-3-642-24724-8

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Chapter 9

...In the Thinking section of the chapter, I enjoyed reading the Building Blocks of Thought piece. I thought it provided a good foundation in understanding what activities occur when we are thinking about something. Creating mental images, I think, are a must, especially when it comes to details related to a task which requires making a physical object. I think we need a mental representation of the object so we can picture what we want the result to be. In the Thinking: Problem Solving and Making Decisions section, I was able to relate to the Trial and Error piece of this chapter. In my current job function, I preform User Acceptance testing; this is a form of the Trial and Error strategy. I agree with the chapter in that he Trial and Error strategy can be very time consuming, but is necessary to ensure the desired results are being returned. Also from the chapter, I was also able to acknowledge that myself and some of my work peers experience functional fixedness. We are so use to following a certain process or procedure a certain way, that we block new insight to a more efficient way of doing things. I know being more opened minded can help lower the chances of functional fixedness interfering with finding a more efficient solution. The Language piece of the chapter went over how language has its own syntax, and this I found interesting. The syntax (set of rules for combining words) piece shed some light for me on why people who speak different languages use the...

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