Tag: location

OM in the News: Locating in China and Avoiding Mexico

Chapter 8 opens with a list of key success factors companies use in making location decisions, and Table 8.1 ranks the global competitiveness of 133 countries. China comes out #29 and Mexico #60. Back-to-back headlines in The Wall Street Journal (Dec.16 and 17, 2010) deal with two very different location strategies. The 1st involves US firms opening outlets in China.

We may be losing manufacturing  jobs to China by the hundreds of thousands, and outsourcing engineering jobs to India and call center jobs to the Philippines by the 10,000s. But US companies are making very successful inroads in China in one field—fast food! McDonald’s is opening  200 new stores in China next year, adding to the 1,100 locations it already has. (KFC, by the way, leads with 3,200 outlets, including many in lesser-developed cities where there is less competition). California Pizza Kitchen  plans to expand, while Starbucks is tripling its stores to 1,500 in the next 5 years. Half of the new McDonald’s will have drive-thrus and 550 will include delivery service. Currently, the firm just does not have the supply chain to allow it to expand beyond the 150 cities it is already in.

On a less favorable location note, the Journal headline declares,”Companies Shun Violent Mexico”. Electrolux just announced it had chosen Memphis over locations in Mexico for a $190 million appliance factory sporting 1,200 jobs. The decision involved factors such as proximity to suppliers,but Mexico’s deteriorating security and spiraling drug-related violence played more than a minor role. “We won’t put a factory in Mexico until some of this violence gets addressed”, says the CEO of Terex,  a heavy equipment maker. Whirlpool’s concern about safety was also a factor in building an oven plant in Tennessee, rather than Mexico. Toyota’s approach was to build a plant deeper inside the country, in a relatively safer area.

Discussion questions:

1. What is the long-term danger to Mexico in terms of foreign investment?

2. Why are US fast-food chains trying to penetrate Chinese markets?

3. Discuss the difficulty McDonald’s faces in  a rapid expansion abroad.

OM in the News: Incentives Spur Utah’s Growth

We raise the question in Ch. 8 as to why firms choose to locate in one area vs. another—and clearly incentives are one major factor. Today’s Wall Street Journal (Nov.27-28,2010) describes how Utah’s aggressive approach to courting businesses has fueled its high ranking job growth.

Adobe Systems, for example, is setting up a new technology campus there (which hopes one day to create 1,000 new jobs) , after Utah offered $40.2 million in tax credits. Other firms in the article are  also mentioned having responded to cash incentives.

But as Jay wrote in his Sept. 23 blog, in the long run, communities  are better off investing in honest government, good workers compensation programs, education, and quality of life. Utah seems to recognize this by offering  support from local colleges. The U. of Utah, for example, put together 5 new graduate programs in engineering to meet demand in the state’s growing medical devices industry.

Out of state firms say they are impressed with Utah’s pro-business strategy. “More so than any incentives, what makes Utah attractive to businesses is the state’s stable, predictable regulatory and tax environment”, says IM Flash Technology’s CEO. This pretty well agrees with Jay’s assessment. Its not so much the money, its a whole list of other factors that are at least as important.

Discussion questions:

1. Why are some incentives more important than money?

2. Why isn’t every state and county as aggressive as Utah?

3. Provide some examples of situations where financial incentives backfired.

OM in the News: Where Should Starbucks Open More Stores?

Under pressure to increase sales and share prices,  Starbucks needs to add new stores in the right locations. The trouble is, the US market is saturated. So far, Starbucks has done very well in a handful of overseas markets. About 55% of its sales are in Canada, Japan, the UK, and China. But now even the UK and Canada are near capacity.  Toronto, Vancouver, and London already have more Starbucks per person than NY or Philadelphia.

So the title of The Wall Street Journal article (Nov.4,2010) on the subject tells it all: “Starbucks Must Open More Stores–Overseas“. The Journal suggests Starbucks follows the McDonald’s international expansion. Where will the growth be? Germany and France are two prime candidates, as Starbucks has relatively few locations in each.

While McDonald’s draws about half its operating profit from overseas, Starbucks gets only 15% abroad. The Journal concludes: “Whether dry or wet, tall or grande, Starbucks needs to find a  combination for similar overseas success”.

Discussion questions:

1. Why was McDonald’s so successful in its expansion abroad, and why will it be harder for Starbucks?

2. How can Starbucks increase profits without going overseas?

Teaching Tip: Location, Location, Louisville?

We open Chapter 8, Location Strategies, with a Global Company Profile on why FedEx selected Memphis as its US superhub. But Fortune (Oct.18,2010) expands on this topic, with a feature called “Louisville Flies High”.

It turns out that Louisville has great geography, economic incentives, and high tech logistics that have attracted more than 100 corporations this past decade. The city is within a 2-hour flight to 75% of the US population and sits just 40 miles from the exact center of the continental US on a population density map. Its also one hour below the frost line.

The clear supply chain draw is UPS, whose $2 billion Worldport has 30,000 conveyors and can sort 416,000 packages per hour. Toshiba now trains UPS employees to fix computers on site–and return them within 48 hours. Zappos moved to Louisville to be near the giant UPS facility also. If a package leaves the online shoe retailer (which my wife adores) at 12:45am, UPS will deliver the shoes anywhere in the country the same day.

This makes for a nice discussion in both the Location and Supply Chain(Ch.11) chapters.

OM in the News: BMW Loves Making Cars in the U.S.

As the Big 3 auto makers still struggle to reclaim markets and manufacturing leadership, BMW announces that employment will hit 7,600 workers in its South Carolina plant next year. Its $750 million expansion means the plant will be the largest car factory in the U.S., dwarfing any Detroit operation.

Of course, with the economy so bad, this is good news, even if some profits end up in the company’s German headquarters. And because of high-tech firms like BMW, South Carolina is the 4th largest net importer of college-educated adults.

Why did BMW decide to make its luxury SUVs here, when it exports 70% of these vehicles to the rest of the world? The Wall Street Journal (Oct.14,2010) reports that US production helps BMW hedge against currency fluctuations around the globe. Another reason…according to U.S.-BMW President Josef Kerscher (in Fortune, Oct.15,2010): This U.S. group has absenteeism of “less than 3%, better than in Germany”.

 Similar good news is that Mercedes plans to shift some production of its best-seller, the C-class sedan, from Germany to the US in 2014. Its not only a currency issue for Mercedes, but the strategy reduces labor and other costs. As we note in Ch.8 (Location), Mercedes already makes SUVs in it Vance , Alabama plant.

Discussion questions:

1. What others reasons are there for foreign car makers to be attracted to the US?

2.Why is South Carolina  a primary destination for auto manufacturers?

3. What brought Mercedes to Alabama (see Ch.8’s OM in Action box)?

OM in the News: Location Incentives

As reported in the WSJ (Sept.22, 2010 p.C8)  Navistar International Corp. has just accepted a location incentive package from Illinois. The package equate to over $22,000 per job. The journal reports that about $15,000 for each new job is the national average, but some equate to more than $200,000 per job.

In addition to jobs Navistar is expected to also spend about $205 million including an upgrade of it’s headquarter and a new parts facility.Some research suggests that in the long run a city/county/state is better off investing in honest government, good worker’s comp. practices, education, and other quality of life issues. And as the text notes, some of these incentive deals do not always work out for the company or the state.

Location incentives,  potential job creation, and expense to tax payers vs other uses for tax money, can generate a lively class discussion.

Discussion Question:

1. How do location incentives relate to the location criteria discussed in Chapter 8?

2. Can you identify some ‘not so good’ results from location incentives?

3. Is there any consensus regarding how tax payer should be spent vis-a-vis incentives or quality of life issues that  benefit all taxpayers?