location decisions – Page 4 – The OM Blog by Heizer, Render, & Munson

OM in the News: Heinz Goes on a Diet

Heinz's Pocatello factory scheduled for closure — Heinz’s Pocatello factory scheduled for closure

For years, H.J. Heinz Co. managers considered their frozen-food plant in Pocatello, Idaho, the heart of potato country, a model factory, ranking it the best in the U.S. in 2009 and 2011 for safety, cleanliness and efficiency. But in November, 2013, Heinz said it would close the Idaho plant this year. It may have been a model factory, writes The Wall Street Journal (Feb.11, 2014), but it also was an example of the kind of dubious logistics that were costing Heinz money. Frozen enchiladas, for instance, were trucked nearly 1,000 miles from a factory in San Diego, packaged with rice and sauce by workers in Pocatello then shipped across the country to distribution centers on the East Coast.

The market for packaged frozen foods had been hit hard by a broad consumer shift to fresher foods. And Heinz had too much production capacity in that sector. It had built a new frozen-food factory in South Carolina in 2009. Moreover, Pocatello was situated far from Heinz’s other factories and from its main markets. Roughly 70% of all ingredients used in the factory are shipped in from east of the Mississippi, well over 1,000 miles away. Others came from Denver, nearly 600 miles to the south.

A similar announcement at another plant last November proved tumultuous. Managers at a century-old Heinz ketchup factory in Leamington, Ontario, told several hundred employees that their plant also was to be closed. Some started cursing, crying and knocking over chairs, and others stormed out. The company will consolidate its frozen-meal operations at its factory in Ohio, which, according to its spokesperson, is “the most central location to customers, distributors and the supplies we need.” He added that the decision to close the Idaho plant “is based primarily on factory location in relation to our customer/consumer base and the need to improve transportation efficiencies and the fact we have we have excess frozen manufacturing capacity.”

Classroom discussion questions:

1. Why is Heinz closing the two factories?

2. Which of the factors that affect location decisions (see Chapter 8) influenced Heinz?

OM in the News: Trying to Close French Factories Can Lead to “Boss-napping”

Workers set tires on fire at this French Goodyear plant where 2 execs were held hostage

Negotiations broke down last week at a Goodyear tire factory scheduled for closing in northern France, so employees kidnapped the bosses. Hundreds of employees held two senior executives captive, threatening to detain them until the company agreed to pay out “huge amounts of money” to nearly 1,200 workers about to lose their jobs. The revival of the French unions’ “boss-napping” tactic clearly causes concerns of multinationals about France as a place to locate, reports The New York Times (Jan. 8, 2014). “This happened because workers were desperate,” said a French prof. “But it is still an act that will underline the perception that it’s difficult to do business in France.”

Tension at the Goodyear plant flared last year after Maurice Taylor, CEO of an American tire company, Titan International, rejected a government appeal to step in and buy the plant. Taylor described French workers as loafers of minimal productivity. “In the U.S., we call this kidnapping,” he stated. “These people would be arrested and prosecuted. But in France, your government does nothing — it’s crazy.”

France’s rigid labor market and the influence of labor unions has long been a source of aggravation to employers. The country’s 3,200-page labor code embodied what the government acknowledged was a “cult of regulation” that choked business. Procedures for shedding workers when economic conditions deteriorate are lengthy and expensive, and businesses pay high taxes to help fund France’s social welfare system. For an employee earning 1,200 euros a month, employers pay an additional €1,000 in tax and pension costs. Unions at the Goodyear plant had been demanding severance packages of €80,000 ($110,000) plus €2,500 for each year worked.

In recent years, French employees took executives of Caterpillar hostage when talks over revamping the company’s operation broke down, trapped the CEO of the group that owns Gucci, while bosses at 3M and Sony were held in an attempt to get bigger severance packages.

Classroom discussion questions:

1. How else can companies in France deal with overcapacity?

2. Why does the French government seem to favor unions?

OM in the News: Reinventing the Maquiladoras

Jordi Muñoz, a 27-year-old Mexican entrepreneur, makes small drones for civilian use. Muñoz’s Tijuana plant is a maquiladora, a factory that enjoys special tax breaks. When Mexico set up the first maquiladoras 50 years ago, they were sweatshops that simply bolted or stitched together imported parts, then exported the assembled product across the border to the US. America got cheap goods; Mexico got jobs and export revenues. “Now, with competition growing from other low-cost locations (such as Haiti), and with the government cutting some of their tax breaks, the maquiladoras are having to step up their efforts to become innovative,” writes The Economist (Oct.26, 2013).

Over the years, the maquiladoras have already lost much basic work, such as stitching fabrics, to cheaper places in Asia. Recently, rising pay in Chinese factories has made Mexico an attractive location again. Exports grew by more than 50% between 2009 and 2012, to $196 billion. Carmakers, in particular, have been investing heavily in Mexico in response to a recovery in US sales. Increased Mexican taxes risk prompting a fresh wave of departures to cheaper shores. So the maquiladoras are having to move into more sophisticated types of manufacturing and do more product design. On the first score, there has been some progress: much of the stitching done in Tijuana these days is not of T-shirts but of medical devices such as stents, made of fine pig tissue. The aim of Muñoz’s company and others is to go a step further and to get involved in design and development.

Aerospace and defense companies are among those thought likely to “nearshore” some of the manufacturing currently sent to China. The Tijuana maquiladora zone already has more than 50 firms in these industries, and it is here that the efforts to become more innovative are most visible. To become a plausible aerospace “cluster” and attract more investment from the world’s top manufacturers, the maquiladoras need to bolster the local supply chain, as well as produce more engineers capable of product design.

Classroom discussion questions:

1. What are the advantages of locating manufacturing plants in maquiladoras?

2. Why has Mexico announced a tax increase (from 17% to 30%) on maquiladora exports?

OM in the News: Alabama Opens Its Wallet to Airbus

Following a year of secret negotiations, Airbus broke ground this month in Mobile, Alabama, for its new plant that will produce the popular A320 jet. Businessweek (April 22-28, 2013) provides the details of the final location decision and incentives: After looking at “just about every site in the US that had industrial capacity,” Airbus promised to bring an estimated $600 million in investment and 4,000 jobs to the state, no fewer than 1,000 permanent. Alabama, for its part, offered incentives totaling $158 million. They include $82 million in funds for capital investments in the plant and other expenses; and $51.9 million for a 40,000-sq.-ft. on-site training center where workers will be prepared, at state expense, for their new jobs. Faculty from the aerospace departments of colleges in the state will provide the training. The deal also includes tax breaks on manufacturing equipment and a state corporate income tax credit.

The State’s governor says Alabama taxpayers will recoup the investment more than 2-fold within 3 years.

Settling in Alabama, a right-to-work state, will mean lower labor costs for Airbus since plant employees won’t be unionized. Yet opening up shop in Alabama isn’t just about saving Airbus money. The facility won’t make entire airplanes—it will assemble pieces made overseas. Partially completed sections, from cockpit to tail, will be transported by barge from the company’s European factories to Alabama, where they’ll be put together. The cost of transporting the pieces means that even with lower labor costs, planes completed in the U.S. will cost more to manufacture than those made start to finish in Europe.

But having a presence in the U.S. is worth the cost and complications if it helps the company to sell more planes. “Being close to the customer always works—in any industry,” says one French industry analyst. “We believe, similar to other industries, including the auto industry, that if we create an industrial presence in the U.S. our market share will go up.”

Discussion questions:

1. Why did Airbus open a factory outside of Europe?

2. Were the incentives provided unusual or unreasonable?

OM in the News: Will Chip Makers Locate in India?

Dell sells in India, but does not make components there

India, home to many of the world’s leading software companies, wants to replicate that success by creating a homegrown industry for computer hardware. But unlike software, which requires little infrastructure, building electronics is a far more demanding business, writes The New York Times (April 16, 2013). Chip makers need vast quantities of clean water and reliable electricity. Computer and tablet assemblers also depend on economies of scale and easy access to cheap parts. When you are discussing multinational location decisions in Chapter 8, this article will highlight many of the factors that are considered in Figure 8.1.

“Nobody disputes India’s need to build up manufacturing. But the government needs to not mandate this, but create an ecosystem,” says the head of the U.S.-India Business Council. Another executive doubted that India could provide a new chip-making facility with the basic infrastructure it needed to even keep the lights on. Dot-matrix printers, outdated in most of the world, are one of the few electronic products that India manufactures. India’s import bill for semiconductors alone was $8.2 billion in 2012, and demand is growing at around 20% a year.

The big fish the government would like to land is a factory to produce microprocessors for computers. A computer processor typically accounts for 25% to 35% of the total cost of a PC or laptop. India hopes that such a plant, which could cost as much as $5 billion to build, would help spur a bigger high-tech manufacturing industry. Spurred by a new “Buy India” government requirement, Dell, the largest PC retailer in India, explored the possibility of setting up manufacturing facilities there. “They flew in their suppliers from China and Taiwan to see if they could set up facilities. They said no,” said an industry official. “Logistically it is a nightmare.”

Discussion questions:

1. Why do manufacturers hesitate to manufacture computers in India?

2. What are the key operations concerns?

OM in the News: Rethinking The Decision To Locate in Bangladesh

As we discuss in Chapter 8, there are many factors that go into global location decisions. For the past few years, Bangladesh had been one of the biggest beneficiaries of a major reordering of the world’s low-end manufacturing. Rising pay in China has forced companies to find less-costly production locales, especially for goods that require armies of laborers such as apparel, shoes and linens. Bangladesh’s exports of clothes have nearly doubled since 2008, creating thousands of jobs in a country with a long-struggling economy. But what many companies have found is that countries like Bangladesh—which seem like alternatives to China, including Cambodia, Vietnam and Indonesia—have their own obstacles, reports The Wall Street Journal (March 22, 2013). While salaries might be lower, political instability, poor infrastructure, recurring strikes and labor-law complexities can add their own costs.

Troubles in Bangladesh are beginning to spoil its reputation among foreign companies that had flooded into the country—and are highlighting risks to investors looking for new manufacturing bases cheaper than China. Violent protests have led to at least 60 deaths and widespread strikes. The protests come on the heels of two recent apparel factory fires which killed 119 garment workers. Thousands of trucks carrying goods to Chittagong port have been burned or damaged.

“Bangladesh was a good place to do business. But you have to read the political trends in the world,” says Tesco’s CEO. “We are already moving away from Bangladesh,” adds the VP of VF, the company that owns Wrangler, Timberland and Nautica. “How many eggs do you want in a basket that’s basically a powder keg?”

It seems that China’s deep supply chain network is hard to replicate quickly elsewhere. Nike recently said only eight of the 896 factories it worked with were in Bangladesh as it reduces its exposure to countries presenting reputational risks.

Discussion questions:

1. What advantages does China have for apparel makers over Bangladesh?

2. Discuss each of the location factors in Chapter 8 vis-à-vis Bangladesh.

OM in the News: U.S. CEO to France: “How Stupid Do You Think We Are?”

“How stupid do you think we are?” With those choice words, writes The New York Times (Feb.21, 2013), Maurice Taylor, CEO of American tire manufacturer, Titan International, touched off a furor in France as he responded to a government plea to take over a Goodyear factory slated for closing in Amiens, France. “I have visited the factory,” said Taylor. “The French work force gets paid high wages but works only 3 hours. They have 1 hour for their breaks and lunch, talk for 3 and work for 3. I told this to the French unions to their faces and they told me, ‘That’s the French way!’ ”

Taylor’s assessment quickly struck a nerve in France, where concerns about declining competitiveness have led economists to ask whether the nation is at risk of becoming the next sick man of Europe. But Industrial Minister Montebourg released a letter calling the executive’s comments “extreme” and “insulting,” adding that they pointed to a “perfect ignorance” about France. French media outlets also minced no words. “Incendiary!” and “Scathing!” were just a few of the terms replayed in French newspapers. And the head of France’s main labor union wasted no time in weighing in, saying Mr. Taylor belonged in a “psychiatric ward.”

“Goodyear tried for over 4 years to save the Amiens jobs that are some of the highest-paid, but the French unions and the French government did nothing but talk,” said Taylor. “Titan is the one with the money and the talent to produce tires. What does the crazy union have? It has the French government.” He said his company would seek to produce cheaper tires in India or China, where he said Titan would pay the workers less than 1 euro an hour, and then sell the tires back to the French. He predicted that Michelin, the French tire maker, would not be able to compete with lower prices and would have to halt production in France within 5 years. “You can keep your so-called workers.”

Discussion questions:

1. How does France rank in the Global Competitiveness Index (see Table 8.1 and www.weforum.org)?

2. Relate this discussion to the major location decisions listed in Chapter 8.

OM in the News: The Continuing Use Of Incentives in Location Decisions

States and cities across the U.S., hungry to create jobs, are using increasingly controversial incentives to compete for some of the world’s most sophisticated manufacturers: passenger-jet makers. The trend, writes The Wall Street Journal (Dec.12, 2012), has accelerated since the recession, with states providing at least $1 billion in various incentives since 2008 to draw aerospace investments. That includes $450 million to attract Boeing to S. Carolina, $158 million from Alabama for rival Airbus, and $57 million from Virginia to draw engine-maker Rolls-Royce. But the escalation of local sweeteners also faces opposition from critics who say politicians are using public funds inefficiently to pick winners that market forces should be lifting.

Discussing the issue over lunch with my friend Michael yesterday, we agreed that these incentive packages don’t do much to help the overall economy. The benefit to one state is simply a loss to another. Michael, the retired CEO of 2 major multinationals, has made many location decisions in his career. In almost every case, the location selection hinged on a slew of other factors (qualified employees, distribution channels, right-to-work, among others). Incentives were the bonus that he fought for after finding the best site–never the #1 criterion.

But backers of incentives say aerospace factories are especially attractive because they lead to follow-on investment and other jobs at suppliers. Alabama Gov. Robert Bentley admits wooing Airbus “was an expensive project.” The funding will support training for many of the 1,000 new staff, new equipment and local infrastructure. For every new position at the Airbus facility, Bentley predicts 4 additional jobs at suppliers and service businesses will be created. Similarly, S. Carolina estimates the Boeing factory, employing more than 6,000 people, will create thousands more jobs in the local supply chain and generate $4.6 billion in annual economic benefits to the region.

Discussion questions:

1. Refer your students to the Chapter 8 OM in Action box regarding Mercedes decision to open a plant in Alabama. What do the auto and aerospace industries have in common?

2. What factors should OM managers focus on in decisions such as these?

OM in the News: South Carolina and the Auto Cluster

Here’s a pop quiz: Where did French tire-maker Michelin, just announce it will build a new global factory—China, Mexico or South Carolina? Answer: South Carolina.

What state is about to become the biggest manufacturer of tires in the U. S.? Answer: That would be South Carolina, too, with Michelin’s new plant (cost $950 million and employing 800 people). Other tire makers in the state are also expanding, reports The Wall Street Journal (April 20, 2012). The port of Charleston is adding capacity to handle cargo going in and out of the area.

“Ten years ago, everyone thought Mexico would be the place for expansion,” says the head of Michelin– North America. “But we can’t tolerate the level of instability there.” As for China, labor costs are rising quickly and there’s still concern about protecting intellectual property.”

A new survey of 106 big U.S. manufacturers picked up a similar sentiment. Thirty-seven percent of the companies said they plan to bring production back to the U.S. from China, or are actively considering it. Seventy percent said sourcing in China is more costly than it looks on paper.

In Chapter 8, we write about the unique vitality of manufacturing hubs or “clusters”—the co-location and interconnection of related industries and schools. Silicon Valley is a prime example. So too the tech corridor in upstate New York, aircraft design in Seattle, chemicals in West Virginia, and advanced engineering in Prince George County, Va., where Rolls-Royce and a group of universities recently tied up.

Michael Porter of Harvard, in a 1998 paper “Clusters and the New Economics of Competition,” wrote: “Paradoxically, the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, and motivation that distant rivals cannot match.”

Discussion questions:

1. Name some cluster zones of business expertise outside the US.

2. Why did Michelin select S. Carolina for its original plant and for the new one reported here?

OM in the News: Volkswagen Rediscovers Manufacturing in the US

The Wall Street Journal’s (May 25,2011) headline “VW Evaluates US Audi Plant” is more good news for American manufacturing. With its new $1 billion plant opening 2 days ago in Chattanooga, VW aims to triple its US auto sales.The complex is designed to build 150,000 Passat sedans and can be expanded to 300,000 units.

Why the American plant and why Tennessee? VW believes it cannot compete against rivals Ford, GM, and Toyota without the cost benefits from a factory here. The firm has lost money in the US for a decade (with cars made in Germany) because of unfavorable exchange rates. The new plant makes it possible to lower the price of the mid-sized Passat by an amazing $8,000 –down to $20,000, in line with competitive vehicles. The VW plant is paying $14.50 an hour, half of what auto workers make at older Toyota plants and at unionized Ford, GM, and Chrysler facilities. VW can now also produce 85% of its parts locally, lowering the impact of the currency translation.

With the new plant barely open, VW is already considering building its luxury Audi line in the US for the 1st time, for the same cost reasons. The firm thinks it can double Audi sales to 200,000 units with a facility closer to its customers. (Businessweek features a similar article called “VW Rediscovers America” ,May 21-27, 2011).

Discussion questions:

1. Why is VW interested in expanding its manufacturing to the US?

2. Why did it select Tennessee for its first US site?