Operations Management - EDC Plant Location Puzzle

Operations Management Reflective Week Assignment Prepared by: Arun Arunachalam (MGB12GLM001), Prachirr Verma (MGB12IBWM044), Rishit Mehta (MGB12GLM020), Sahil Sheoran (MGB12IBWM052) and Swajot Singh (MGB12GLM025)

Table of Contents EDC PLANT LOCATION PUZZLE INTRODUCTION THE PROBLEM

2 3 3

ISSUES IN FACILITY LOCATION

4

PLANT LOCATION METHODS

7

WHY THAILAND?

10

POSSIBLE STRATEGIES

10

FIRST STRATEGY

10

SECOND STRATEGY

11

THIRD STRATEGY

11

FOURTH STRATEGY

12

FINAL STRATEGY

12

SCHMENNER’S MATRIX

14

QUADRANT 1

15

QUADRANT 2

18

QUADRANT 3

20

QUADRANT 4

22

BIBLIOGRAPHY

24

EDC Plant Location Puzzle

Introduction EDC is the leading cycle manufacturing company in USA with 30% market share. Ann Reardon, CEO of the Eldora Co. (EDC), has led her organization to become the largest and most profitable bicycle maker in the U.S. market. When her competition was moving its operations overseas because of lower labor costs, she chose to keep EDC's plant on the same campus as corporate headquarters in Boulder, Colorado. Two of company’s major strengths were company culture and common campus for all departments such as marketing, manufacturing, sales etc. which helps EDC in faster communication and changes in the style, production plan and making responsive supply chain. EDC specializes in producing good quality bicycles at a cheaper price than other competitors in the market.

The Problem The problems faced by Ann Reardon and her team are: •

The market in the U.S.A. is saturated, and is growing at mere 2% per year §

•

The competition in U.S.A. is increasing

Eldora Co. is not present in Asia, where growth rates are in the double digits §

Its two main competitors have already setup manufacturing plants in China and Taiwan

§

EDC cannot compete in the Asian markets with its manufacturing based in the U.S.A. as the labour costs in China and Taiwan are five to ten percent lower

Issues in Facility Location The problem of facility location is faced by both new and existing businesses, and this is critical to a company’s success. An important element in designing a company’s supply chain is the location of its facilities. Manufacturing and service companies’ location decisions are guided by a variety of criteria defined by competitive constraints.

A few major factors to be taken into consideration when deciding on the location of a manufacturing plant are: •

Proximity to Customers: Proximity to customers helps ensure that customers’ needs are incorporated into products being developed and built. This is a major advantage for EDC that it is present in Boulder, Colorado, which is considered to be a bicyclists’ Mecca. For example, Japan’s NatSteel Electronics has built its two largest plants in Mexico and Hungary to be closer to major markets in the United States and Europe, whose buyers want their goods delivered yesterday.

•

Business Climate: An ideal business climate essential for businesses to flourish. A favorable business climate can include the presence of similar-sized businesses, the presence

of companies in the same industry, and, in the case of international locations, the presence of other foreign companies. Pro-business government legislation and local government intervention to facilitate businesses locating in an area via subsidies, tax abatements, and other support are also factors. Business climate fosters innovation.

•

Total Costs: The objective is to select a site with the lowest total cost. Costs include regional costs, inbound distribution costs, and outbound distribution costs. Land, construction, labor, taxes, and energy costs make up the regional costs. There are hidden costs that are difficult to measure, which are: §

Excessive moving of preproduction material between locations before final delivery to the customers

§

Loss of customer responsiveness arising from locating away from the main customer base.

•

Infrastructure: Since EDC also manufactures bicycles for the high-end market, with its joint venture with the Italian bicycle manufacturer Rinaldi, infrastructure will carry a lot of weightage in deciding the new plant location. Adequate road, rail, air, and sea transportation are vital. Energy and telecommunications requirements also must be met. In addition, the local government’s willingness to invest in upgrading infrastructure to the levels required may be an incentive to select a specific location.

•

Quality of Labour: The educational and skill levels of the labor pool must match the company’s needs. Even more important are the willingness and ability to learn.

For EDC to decide on a location to setup their new plant, the availability of skilled labour will prove to vital.

•

Suppliers: A high-quality and competitive supplier base makes a given location suitable. The proximity of important suppliers’ plants also supports lean production methods.

•

Other Facilities: The location of other plants or distribution centers of the same company may influence a new facility’s location in the network.

•

Free Trade Zones: A foreign trade zone or a free trade zone is typically a closed facility (under the supervision of the customs department) into which foreign goods can be brought without being subject to the normal customs requirements. The option of setting up a plant in a free trade zone will be a very lucrative proposition for EDC, as a major portion of the produce will be exported into various countries like U.S.A., in the continent of Europe and Asia.

•

Political Risks Most of the Asian countries are going through transformational phase, politically and economically. This extended phase of transformation makes the decision to locate in those areas extremely difficult. Political risks in both the country of location and the host country would influence location decisions.

•

Government Barriers Barriers to enter and locate in many countries are being removed today through legislation. Yet many non-legislative and cultural barriers should be considered in location planning may impede business growth.

•

Environmental Regulation The environmental regulations that impact a certain industry in a given location should be included in the location decision. Besides measurable cost implications, these regulations influence the relationship with the local community.

Plant Location Methods The evaluation of alternative regions, sub-regions, and communities is termed macro analysis while the evaluation of specific sites in the selected community is termed microanalysis. Techniques used to support macro analyses are: •

Factor-rating system

This method is the most widely used of the general location techniques as it provides a mechanism to combine diverse factors in an easy-to-understand format.

While deliberating, major factors affecting a set of possible sites are given a range of points, denoting their weights in the decision making process. Each site was then rated against each factor, and a point value is selected from its as signed range. The sums of assigned points for each site are then compared. The site with the most points is selected. A major problem with simple point-rating schemes is that they do not account for the wide range of costs that may occur within each factor.

•

Linear programming: The transportation method is a special linear programming method. It uses the ‘Solver’ function of Microsoft Excel to assist in deciding the most suitable site for the plant from the various other prospects. The two common objectives of such problems are:

•

§

Minimize the cost of shipping n units to m destinations

§

Maximize the profit of shipping n units to m destinations.

Centroid method: The centroid method is a technique for locating single facilities that considers the existing facilities, the distances between them, and the volumes of goods to be shipped. The technique is often used to locate intermediate or distribution warehouses. In its simplest form, this method assumes that inbound and outbound transportation costs are equal, and it does not include special shipping costs for less than full loads.

For deciding the ideal plant location for Eldora Co., we used the Factor-Rating Method.

A major problem with simple point-rating schemes is that they do not

Why Thailand? The bicycle industry boom in Thailand was led by Bangkok Cycles. In 2007, bicycles exports reached nearly 1.5 million units, more than doubling in one year and rising some four-and-a-half times within five years. The value of Thai-made bikes was 110 million euros ($160.5 million at Dec. 31 exchange rates), with average price reaching 74.12 euros ($108.22). The United Kingdom, which once was Vietnam’s biggest European customer, is now Thailand’s biggest market, taking 892,000 Thai-made units in 2007. Imports rose by 300,000 units to 2.76 million bikes, led by Taiwan (425,000 units), Poland (348,000) and Thailand (311,000). As seen above, the bicycle market in Thailand is booming. There is an increasing demand and because of the pro-business environment, we as a team have chosen Thailand as our suggestion to Eldora Co. to set up their new manufacturing plant.

Possible Strategies The following strategies can be followed by EDC to ste up amanufacturing plantin a foreign country:

First Strategy Source the components from the local market and assemble them in the Asian market. •

Advantage: v Reduce to cost as labor is cheap and also company will not have to pay excise duty on components.

•

Risk: v Company might not be able to produce a quality product (EDC’s primary competitive advantage) v EDC might not be able to produce sophisticated bicycles that require high technology.

Second Strategy Outsource whole business to some Asian company and sell the bikes with its brand name. •

Advantage: v Company can start manufacturing in a very short time and investment will be low. v Lower cost of labor and raw material.

•

Risk: v Less control over the flexibility and quality of the cycles. v Outsourced company might become a competitor to EDC after learning the know-how in cycles.

Third Strategy Form a Joint Venture (JV) with an existing company in Asia. •

Advantage: v Initial investment will be low and production can be started in a short time.

v Use the connections of the local company and also the knowledge of the local market and local demands. •

Risk: v Culture of EDC (which provided the company a strategic advantage over others) might be difficult to imbibe in the other company. v The company may lose flexibility and control over the production quality.

Fourth Strategy Open own plant in Asia. •

Advantage: v Full control over the plant and also the quality of production. v Lower cost of labor and also raw material. v EDC can reproduce the same culture and also use the technological know-how to produce quality products.

•

Risk: v The disadvantage would be that initial investment will be high and company will have to build a plant from scratch.

Final Strategy As EDC is looking for a long term strategy and company will use the plant to export to other Asian countries, it makes much more sense to start its own plant.

•

After considering above factors and comparison with other countries, we suggest that EDC should setup a plant in Thailand. Thailand is also well connected to other Asian countries so EDC can easily import to other countries.

•

Open a small office in Thailand and hire few local employees.

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Gather information about the Thai culture, market, competition and government policies.

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Finalize a location considering various parameters of road connectivity, air connectivity and cost while keeping in mind the long-term strategy.

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Invest in adequate production technology considering technical skills of local labor and low costs of labor.

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Before production starts training employees to improve productivity.

Schmenner’s Matrix Degree of Interaction and Customization Low •

High

Bus Service plying between

Low

Mumbai and Nasik •

Rent-a-car Agency

•

Amusement Park

•

Car Wash company having

•

Taxi Service in Dubai having fleet of 500 cars

•

Automobile Repair Garage

•

Travel Agency dealing with

Degree of Labour

200 franchises •

Casino

•

Fast Food Joint – 150 Outlets

•

General Entertainment

High

Broadcasting Channel •

Low Cost Airlines

•

Call Centre with 400 employees, for US based insurance company

•

Courier Service

•

Mobile Phone Service Provider

corporate clients •

Recruitment Agency

•

Banking – Portfolio Management for high income market

Quadrant 1 Low Degree of Labour Intensity and low degree of interaction and customization

1. Bus Service plying between Mumbai and Nasik Few of issues that this company can face due to low degree of labour intensity: •

Attention to maintenance of the vehicle.

•

Threat to theft of parts or claims of unrealisable bills.

Few of the issues that this company can face due to low degree of interaction and customization: •

Lack of Marketing content as the there is no major product differentiator.

•

Service staff not being civil to the passengers

•

Empathy to the customers

2. Rent a Car Agency Few of the issues that this company can face due to low degree of labour intensity: •

Maintenance of the car in terms of proper physical care and the paper work needs to be taken timely care of

•

Support for any accident or mishandling of the vehicle

•

Maintaining the optimum level of fuel in the cars

•

Regulating the service and fuel bills

Few of the issues that this company can face due to low degree of interaction and customization: •

Difficult to create goodwill in the market

•

Managing the supply of the cars during the peaks and falls

•

Effective utilization of all the resources available

•

Building strong customer relationship

3. Amusement Park Few of the issues that this company can face due to low degree of labour intensity: •

Maintenance of the rides and buildings (all the fixed assets)

•

Support for any accident during functioning of the ride

•

Creating a warm atmosphere for the visitors

•

Training the support staff

Few of the issues that this company can face due to low degree of interaction and customization: •

Managing the brand value

•

Seasonal marketing to keep the interests of the visitors to a healthy level

•

Slow to react to change in demand in the market

•

Creating a product differentiator strategy

•

Building a strong customer loyalty base

4. A Car Wash company having 200 franchisees (Assuming automated washing infrastructure) Few of the issues that this company can face due to low degree of labour intensity: •

Maintain standardized cycle time to avoid any backlogs or delays

•

Creating a service that adds value to image of car washing company as its not a service that is very high value

•

Creating a warm atmosphere for the drivers and co-passengers

•

Maintaining the ambience of the car wash

Few of the issues that this company can face due to low degree of interaction and customization: •

Lack of marketing content: As the service provided is similar across industry. Have to look for differentiating factor

•

Standardized operating procedures across all the centres

•

Capital decision making: when to invest in new technology

5. Casino Few of the issues that this company can face due to low degree of labour intensity: •

Attention to the physical surroundings and legal variables

•

Warm and courteous service environment

•

Maintaining an optimum level of security personnel to safe guard the interests of the guests

•

Maintaining an ambience that suits the mood and taste of the guests

•

Infrastructure investment should be high and sufficient to cater the expectations of big casino players

Few of the issues that this company can face due to low degree of interaction and customization: •

Perception Marketing: Create a brand name with famous personalities associated to it or people who have made a fortune.

•

Managing fairly rigid hierarchy: how much authority and leverage to be given to customer associates.

•

Revenue management

•

Yield management :ways to increase “per visitor “ revenue

Quadrant 2 Low Degree of Labour Intensity and High degree of interaction and customization

1. Taxi Service in Dubai having a fleet of 500 cars Few of the issues that this company can face due to low degree of labour intensity: •

Attention to maintenance of the vehicle

•

Threat to theft of parts

•

Maintaining high quality drivers at service

•

Rotation of drivers between their respective shifts

Few of the issues that this company can face due to high degree of interaction and customization: •

Security of passengers specially female passengers

•

Drivers need to be receptive to customer requirements and complaints as they are the sole point of contact during the journey

•

Minimizing the customer waiting time

•

Maintaining back up for any contingency

• 2. An Automobile Repair Garage Few of the issues that this company can face due to low degree of labour intensity: •

Maintaining the environment of operation clean

•

Quality check of the parts being employed in the customer’s automobile

•

Maintenance of the Power lifters and other equipment

•

Security of the working staff

Few of the issues that this company can face due to high degree of interaction and customization: •

Maintaining optimum level of spares and lubricants, etc. for the customers to choose from for their vehicle

•

Minimizing the customer waiting time

•

Maintaining a friendly and clean waiting area for the drivers

•

Minimizing the variable cost

•

Maintaining a pick up and drop facility

•

Maintaining back up for any contingency

Quadrant 3 High Degree of Labour Intensity and Low degree of interaction and customization 1. Mobile Phone service provider Few areas this company needs to work upon due to high degree of Labour Intensity and low degree of interaction and customization: •

Wide range of options on menu card should be available

•

Warm service

•

Maintain consistency in quality and taste

•

Physical surroundings should be clean

•

Competitive prices

2. General Entertainment broadcasting channel Few areas this company needs to work upon due to high degree of Labour Intensity and low degree of interaction and customization: •

Good communication skills

•

Employees hired should be confident and presentable enough

•

Huge losses should be controlled and avoided

•

Additional revenue can be generated by selling some program-making services (e.g. through studios)

3. Mobile Phone service provider Few areas this company needs to work upon due to high degree of Labour Intensity: •

Training to employees

•

Operating procedures should be standard

•

Increase customer base to maximize returns

Few areas this company needs to work upon due to low degree of interaction and customization: •

Best suited package should be offered to the customers

4. Courier service Few areas this company needs to work upon due to high degree of Labour Intensity: •

Training to employees

•

Employees should be active

•

Improve network and reach of the network

Few areas this company needs to work upon due to low degree of interaction and customization: •

Delivery speed improvement

•

Reduction in number of delays

•

Customer satisfaction and feedbacks

•

Minimization of packets misplaced

5. Call center in India for a US company Few areas this company needs to work upon due to high degree of Labour Intensity: •

Constant training to employees to keep them updated

•

Employees should be active

•

Motivation and rewards

Few areas this company needs to work upon due to low degree of interaction and customization: •

Updated knowledge of the products

Quadrant 4 High Degree of Labour Intensity and High degree of interaction and customization 1. A Recruitment Agency Few areas this company needs to work upon due to high degree of Labour Intensity and high degree of interaction and customization: •

Training to employees on communication skills

•

Employees should be active and should maintain good relations with clients

•

Train the employees to meet client requirement

•

Strong database of employees and employers should be created

•

Motivation and rewards for employees

•

Set rules and control for processes

2. Banking – Portfolio Management for high income market Few areas this company needs to work upon due to high degree of Labour Intensity and high degree of interaction and customization: •

Training to employees on communication skills

•

Constantly training the employees to keep their knowledge and skills updated

•

Motivation and rewards for employees to keep them happy

•

Employees should be trained to understand the customer needs and custom make solution

•

Huge losses should be controlled and avoided

•

Warm service to maintain customer accounts

3. A Travel Agency dealing with corporate clients Few areas this company needs to work upon due to high degree of Labour Intensity and high degree of interaction and customization:

•

Training to employees on communication skills

•

Training to employees as they represent the company

•

Warm service to retain the customers

•

Customer intervention should be controlled in descent ways

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