Plant Location in a Global Economy

The Economist recently published an survey on Offshoring and Outsourcing.  If you follow manufacturing trends, this article is great read.

The survey covers trends in both manufacturing and services.  It goes in-depth into the manufacturing trend we are now seeing with many companies bringing manufacturing back to the US or to the market where the demand is.

The survey highlights the fact that companies are discovering the “all the disadvantages of distance.”  This includes the high transportation costs along with the extra risks.  But, it also points out that the wage gap is shrinking between China and the US, natural gas is driving down energy costs, and automation is removing a lot of labor anyway.

The article quotes one consultant who claims that if total labor costs are less than 15% of the product’s cost, then it is not worth it to pursue cheap labor.

Also, there was a nice quote that reminds us of the value and limitations of network design:

Choosing the right location for producing a good or a service is an inexact science, and many companies got it wrong.

They are correct, that network design is not an exact science, but using network design tools can help you better narrow your choices and pick good solutions.  With network design, you have a better chance of getting it right.  And, if you continually model your supply chain, you can better adjust as conditions change.

What To Do About Cheap Energy and Low Manufacturing Costs?

Cheap natural gas has to be one of the top stories of the year.   It is all over the press. Wall Street Journal had stories on cheap natural gas helping the rust belt, low-cost gas being the real economic stimulus, and new plants being built in the US because gas is a key input.  Supply Chain Digest’s, Dan Glimore thinks natural gas trucks will have big impact as well.

And, the list goes on and on.

At Northwestern’s Masters in Engineering Management blog, we had a discussion on what  managers should do about this:  The simple answer is to make more products in the U.S. The more complex answer, of course, is that network modeling will help you figure out what to do.

Production Moving Back to the US and Mexico

On Sept 19, the Chicago Tribune ran a story from McClatchy Newspapers on companies moving production from China to Mexico as the wage gap closes.

Interestingly, besides just the cost of wages, the article sites examples of some of the hidden fixed costs in production. For example, problems will always surface in a plant.  How much does it cost in terms of time, wear and tear, and money to get the right engineers to the plant to fix the problem.  The article quoted one firm saying that if there there is a problem in Mexico, the US engineers can leave in the morning and start working on the problem several hours later.  China requires much more.

This is similar to an article from the Wall Street Journal this summer where David Simchi-Levi’s study was quoted as showing that companies were moving production back to the U.S.  He called this “reshoring.”

Among the main reasons cited for reshoring: a desire to get products to market faster and respond rapidly to customer orders; savings from reduced transportation and warehousing; improved quality and protection of intellectual property.

In a very short time, the factors that determine where you should produce can change.  This also impacts your distribution network.  It is not clear what the landscape will look like three years from now, but these examples highlight the importance of network modelling.  A model of your business and the key drivers allows you to keep your supply chain as efficient as possible.

WSJ Article on the Impact of Natural Gas Prices and Plant Location

Network design is not just driven by transportation costs.

Yesterday’s Wall Street Journal article about an Egyptian firm investing $1.4 billion in a fertilizer plant in Iowa.  Why Iowa?  Well, according the article, natural gas is a key raw material in fertilizer and the low natural gas prices in the US are encouraging investment.  This firm is not the only one:

Low gas prices have spurred other investments by chemical makers. Deerfield, Ill.-based CF Industries Inc., another big fertilizer producer, increased its projected capital spending on new nitrogen capacity to $2 billion through 2016, up from a prior forecast of $1 billion to $1.5 billion. Much of the capacity is expected to debut in 2015.


Dow Chemical Co.announced earlier this year it will build a multibillion-dollar plant to convert natural gas into the building blocks of plastic in Texas, creating 2,000 construction jobs before the plant is completed in 2017.


That news followed Royal Dutch Shell PLC’s announcement it would build a similar, $2 billion chemicals plant near Pittsburgh, above the Marcellus Shale.

Currently 50% of the fertilizer used in the US is imported (incurring extra transportation costs, but the article doesn’t mention how much might come from Canada).  So, with the lower price of natural gas, the balance tips in favor of investing close to the source of natural gas and demand points.

It will be interesting to see how the price of nature gas impacts other manufacturing firms. Network modeling can help a firm understand when it makes sense to take advantage of the price of natural gas and move plants to the US.

Production Sourcing Optimization at Pepsi

Consumer Goods Technology (CTG) published a case study on the Pepsi Bottling Group (PBG) (now part of PepsiCo).

In the case, they discuss how Pepsi used a network optimization approach to production sourcing.  That is, they wanted to optimize what product is made when and where.  They wanted to do this considering the full supply chain.

The savings reported were significant.  The article quotes:

  • An increased number of cases available to sell due to reduced warehouse out of stocks
  • Reduction in raw material and supplies inventory from $201 million to $195 million
  • A 2 percentage point decline in the growth of transport miles even as PBG revenue grew
  • Increase in the return on invested capital

This example reminds us that an important part of network design is about deciding what products should be made in which locations.