7 keys to facility location - Number 5 - Production

By John T. Mentzer -- Supply Chain Management Review, 5/1/2008 8:32:00 AM

Facility location analysis typically treats production facilities as weight-losing, weight-neutral, or weight-gaining processes. A weight-losing process is one in which the final product weighs less than the sum of the inbound raw materials; that is, the outbound freight is lighter than the inbound freight. In such cases, there is usually an economic incentive to reduce system-wide transportation costs by building production facilities as close to the sources of supply as possible. Think of the lumber industry: Since logs lose a considerable amount of their weight (and volume) in being converted to lumber, lumber mills tend to be located near the forests. Thus, the expensive-to-ship logs move a short distance and the more-efficient-to-move lumber, while not greatly increasing the wood's value, gets shipped the longer distance to market.

In industries where the production process reduces weight but significantly increases value, production facilities tend more toward the markets and away from the sources of supply. For example, the assembly of desktop computers for sale in the U.S. often occurs in the U.S. rather than near the sources of the components in Southeast Asia, due to the greater value of the assembled final product compared to that of the sum of the component parts. Dell, for example, assembles its desktops in Austin, Texas, and Nashville, Tennessee, after a facility location analysis showed that it was cheaper to ship the component parts from Southeast Asia and create the final product near the markets.

Weight-neutral scenarios typically are found in distribution centers. Although DCs do not actually produce anything—with the exception of some light value-add assembly, perhaps—they are considered weight-neutral production processes. As a result, they tend to be located near sources of supply or near the marketplace. We'll look more closely at this situation in the next section.

On the face of it, weight-gaining supply chain processes might seem to be an anomaly. How can a final product weigh more than the sum of its component parts? That is the case when a production process adds a component that does not need to be transported because it is available everywhere. Water is the most common example of this type of component (called a “ubiquitous component”). When water is added, it affects the weight and cost of transportation, and thus, the location of production facilities differently in different industries. For example, since water must be added when beer is brewed, the brewing supply chain incurs the cost of moving water once the beer is made. To avoid this cost, breweries tend to be located near their markets to reduce the cost of moving the ubiquitous component. This has resulted in an industry with many market-positioned production facilities rather than one central production facility.

Contrast this with soft drink supply chains, where the water does not have to be added until the last minute (literally, at the fountain machine in restaurants). Coca-Cola, for instance, makes the syrup for its products in several locations worldwide because it does not have to incur the cost of shipping the water. The ubiquitous water is added locally by the bottler or in the soda-counter machine. Thus, weight-gaining processes lead to many local market-positioned production facilities.

Questions managers should ask:

1. Does your product gain or lose weight (or neither) in the production process?
2. Does your product significantly gain value in the production process?
3. Are there any “ubiquitous components” involved in your production process?

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