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EDC Plant Location puzzle
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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 2
INTRODUCTION 3
THE PROBLEM 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 suit-
able. 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.
• Gather information about the Thai culture, market, competition and government
policies.
• Finalize a location considering various parameters of road connectivity, air
connectivity and cost while keeping in mind the long-term strategy.
• Invest in adequate production technology considering technical skills of local
labor and low costs of labor.
• Before production starts training employees to improve productivity.
Schmenner’s Matrix
Degree of Interaction and Customization
Low High
Deg
ree
of L
abou
r
Low
• Bus Service plying between
Mumbai and Nasik
• Rent-a-car Agency
• Amusement Park
• Car Wash company having
200 franchises
• Casino
• Taxi Service in Dubai having
fleet of 500 cars
• Automobile Repair Garage
Hig
h
• Fast Food Joint – 150 Outlets
• General Entertainment
Broadcasting Channel
• Low Cost Airlines
• Call Centre with 400
employees, for US based
insurance company
• Courier Service
• Mobile Phone Service Provider
• Travel Agency dealing with
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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