EMPIRICAL STUDY

1 Research Methodology

1.1 Research Design

The aim of this study is to identify common patterns in the process of long-term capacity planning by firms so as to compare with the current theory and draw conclusions on how the results can be generalised. It is thus essential that the study is carried out within the real-life context of a business in order to get a useful insight into how the process is done in practice. The case study approach is appropriate because the research question is in the form of how about contemporary issues/events within a firm beyond the control of the investigator (Yin, 2003).

1.2 Study Proposition

The main objective of the project is to explore the importance of capacity planning and facility location decisions for manufacturing firms in reaction to changes in demand for their products and/or services or changes in the supply of necessary inputs. Thus the research question is;

How do firms make capacity expansion decisions involving a change of location?

Proposition 1: It is expected that the major motivations of manufacturing firms making location decisions today are; access to low manufacturing-related costs, access to markets, access to natural resources, technologies, skilled personnel and materials and access to investment incentives (and avoidance of tariff barriers).

Proposition 2: It is expected that the major location factors considered by manufacturing firms today are costs, labour, infrastructure, quality of life, market proximity, proximity to raw materials and suppliers, proximity to competition, proximity to parent firms facilities, economic factors, government and regulatory factors and site characteristics

1.3 Unit of Analysis

The unit of analysis will be the firm that is described in each of the case studies as the nature of analysis is comparative. Owing to the time constraints of the project, it is envisaged that up to ten cases shall be used in this study so as to enable a comparative study to be done.

1.4 Data Collection Strategy

It is proposed to collect the mainly qualitative data using documentary evidence from previously prepared case studies of organisations evaluating their capacity planning and facility location options. The data search will involve electronic database searches as well as reference list searches in research journals, dissertations, conference papers and teaching cases in text books. Different search methods and sources shall be used in order to minimise search-specific as well as source-specific biases in data collection.

1.5 Criteria for selecting cases

In order to have a useful selection of cases for analysis, the following criteria have been devised for the selection of the case studies to be used.

The case studies should be from the refereed journals, academic text books and the European Case Clearing House (ECCH) at Cranfield.

The case studies must identify and discuss the factors involved in long-term capacity planning especially facility location.

The case studies must have been written within the last 15 years.

1.6 Criteria for judging quality of the research design

1.6.1 Construct validity

This requires the establishing of correct operational measures for the concepts being measured. One of the strategies that Yin (2003) identifies is that of the use of multiple sources of evidence in the data collection for the case study. Whereas the author is not involved in the case study writing per se, it is proposed that the case studies chosen would have to fulfil this requirement.

1.6.2 Internal validity

Given that the case studies to be utilised have been conducted by other authors, the author proposes to use cross-case synthesis between the cases in order to determine any causal relationships within the cases.

1.6.3 External validity

This involves establishing the domain to which a studys findings can be generalised. It is proposed to use the replication logic as advised by Yin (2003) since the study involves multiple case studies. Therefore the more a theory is replicated within the cases then the more likely that it can be generalised.

1.6.4 Reliability

This involves demonstrating that the operations of the study can be repeated. This can be ensured by having a case study database and protocol (Yin 2003). Given that the case studies are drawn from refereed journals, academic text books and the ECCH then it would be safe to say that the case study databases and protocols exist which would allow the case studies to be repeated with similar results.

1.7 Data Analysis

Qualitative analysis is appropriate because the factors to be compared across the cases are of a qualitative nature. Cross-case synthesis is the preferred mode of analysis given the need to find common patterns of factors and decisions within different firms faced with a problem of long-term capacity planning. It is particularly useful because it can be carried out among cases conducted by different authors as part of independent studies (Yin 2003). Using the cross-case synthesis will make the analysis of multiple cases easier with the findings likely to be more robust than having a single case study. Word tables shall be used to display the data from the individual cases according to a defined framework of factors.

This analysis will thus be able to ascertain which factors are commonly present when capacity and location decisions are made which can then serve as a springboard for further research into developing a checklist for firms to use in this task.

2 Case Study A BMWs Location Decision in the U.S.A.

(Source: Czinkota et al. (1994))

BMW is one of the leading luxury car and motorcycle manufacturers in the world. Prior to 1995 the German car maker only had plants in its native country and thus would export its cars to the areas of demand. Faced with a strong German currency, BMW had to contend with increasing final costs of the cars to its end users around the world. Furthermore in the United States of America, the largest market for luxury cars, the introduction of a new luxury tax in 1991 had made the cost of buying a BMW in the U.S.A. even more expensive. The firm had thus seen its market share whittled down by newly launched competitor products from Toyota (Lexus) and Nissan (Infiniti).

2.1 Location decision process of Case A

The decision to locate its first full production facility outside Germany was the culmination of a three-year search that involved evaluating 250 sites in 10 countries. The evidence from the case study suggested that the following major factors influenced the location decisions;

• Costs Labour costs in Spartanburg in the State of South Carolina in the U.S.A. were about one-third less than those in Germany which when coupled with production efficiencies could save about $2,000 to $3,000 per car. In addition, for the cars made and sold in the U.S.A. shipping costs of $2,500 would be saved thus making the BMW car even more attractive to purchase.
• Labour South Carolina boasted of an excellent technical school system which they were willing to tailor to suit the firms training program. In addition, the state not only had an ample supply of a competent and qualified workforce but was also willing to subsidise their further training to suit BMWs requirements. One other attractive factor was that the state, such as many Southern states in U.S.A., also had a low union presence thus guaranteeing harmonious labour relations.
• Infrastructure Given the fact that the firm intended to initially source all its components from Germany, it was imperative that adequate and efficient transportation modes existed close to the facility. In this regard the considerations were roads and air transport facilities especially cargo handling.
• Quality of Life The firm was swayed by the communitys attitude to new business and industry as well as the states education system.
• Market proximity The U.S. luxury car market is the worlds biggest, thus locating within it would improve customer service as well as reduce purchase prices due to savings in taxes, shipping and labour costs. It was also projected to grow from 1.25 million in 1992 to 1.5 million in 1995 when the first car was expected to roll off the BMW plant. The new, more affordable model was aimed at the American market specifically the greying baby boomers.
• Economic factors The state offered favourable tax and financial incentives of up to $130 million as well as promises of a stable but low tax rate for 20 years. Important considerations were the taxes, customs duties and tariffs for imported inputs, as well as a free trade zone that would allow it to avoid paying taxes on inputs for cars that were eventually exported to other markets.
• Government and regulatory factors The attitude of the state government was a clear winner especially the personal involvement of the State Governor, who made a number of trips to BMWs Headquarters in Germany to sell his states case.
• Site considerations The attitude of the local community as well as the physical conditions of the site were important considerations.

From the above it may be concluded that the motivations behind the firm setting up a plant outside its native Germany were to;

• access the market in the U.S.A., which is the worlds largest market for luxury cars, where it had lost its market share to new competitor products
• access lower manufacturing related costs in order to lower costs of production

3 Case Study B Mercedes Benzs Location Decision in the U.S.A.

(Source: Chase et al. (1998))

Mercedes Benz is a German automobile manufacturer dealing in luxury cars as well as buses, light-duty and heavy-duty trucks. The firm had always pursued automotive excellence with little regard to costs. However in early 1993, it faced a 30% cost disadvantage against its Japanese and U.S. competitors, and it had also seen its share of the luxury car market slip since the late 1980s. After some market research, the firm decided to launch its luxury sports-utility vehicle as a way to reinvent itself. The choice of vehicle was deliberate as the firm was targeting the U.S. luxury car market which is the worlds largest market for this kind of vehicle. The firm then set out to find a site outside Germany for the project.

3.1 Location decision process for Case B

The world wide site search began in January 1993, and in April 1993 the firm announced that it would locate the plant in the U.S.A. Then after considering more than 100 sites in 35 states, the firm announced in September 1993 that it would locate in Vance in the State of Alabama. The evidence from the case study suggested that the following major factors influenced the location decisions;

• Costs The combination of labour, shipping and input costs would be lowest at a location in the U.S.A. This was key to reducing the cost disadvantage that the firm had.
• Labour The firm needed an adequate available workforce.
• Infrastructure Access to transportation infrastructure in the form of roads, highways and ports.
• Quality of life Community attitudes towards the kind of industry; availability and quality of health & education facilities; crime rate, standard of living and the state of the environment.
• Market proximity Locating within the U.S.A., the worlds largest luxury car market, would enable it to easily access the market thus giving better customer service as well as reduced costs of purchase.
• Economic factors The state offered financial and tax incentives that totalled about $253 million.
• Government The attitude of the state government, as evidenced by their dedication to the pursuit of the project, helped sway the decision.
• Site considerations Attitude of the local community and the physical conditions especially the wooded rolling hills around the site which reminded the Germans of the Swabian countryside near their Stuttgart headquarters.

From the above it may be concluded that the motivations behind the firm setting up a plant outside its native Germany were to;

• access the market in the U.S.A., which is the worlds largest market for luxury cars, where it had seen its market share drop
• access lower manufacturing related costs in order to lower costs of production in order to make its products more affordable as well as profitable

4 Case C J.M. Textiles Location Decision in the Caribbean Basin

(Source: Brenes et al. (1997))

J.M. Textiles, a subsidiary of a multinational corporation, is a U.S.-based manufacturer of athletic apparel. By the end of 1991, the firm already had two plants in the Dominican Republic as well as plants in Jamaica, Honduras and Costa Rica. The firm wanted to expand its manufacturing operations of athletic shorts for boys and men. It was thus looking for a country within the Caribbean Basin in which to locate its sixth plant in the region. Just as in its other operations in the region, the nature of the operation consisted of assembling pre-cut materials shipped from the United States to the Caribbean, and then returned to the United States as finished products.

1 Location decision process of Case C

After some initial research within the Caribbean, the choice was finally down to two countries Guatemala and Costa Rica. The site location was expected to be in a free trade zone since both governments had generous incentives for firms locating in their free trade zones. The evidence from the case study suggested that the following major factors influenced the location decisions;

• Costs The cost of labour was one of the most important factors in the firms decision. Likewise the cost of utilities, factory leasing costs and transport costs were important.
• Labour Availability and quality of labour was important since the plant required a workforce with a wide range of skills. The nature of labour relations as well as the presence of unions was another important consideration.
• Infrastructure With the expected constant inflow of pre-cut materials and outflow of finished products, the firm required good infrastructure by way of sea ports, roads, electricity, telephones and water.
• Economic factors Financial and tax incentives offered by the two countries included income tax exemption for a certain number of years, exemption from taxes, customs and import duties for imported inputs, machinery and raw materials. The stability of the exchange rates were also an important consideration as any unfavourable move would make the costs of operations escalate.
• Government and regulatory factors Political and economic stability were important considerations in minimising the risk involved in setting up the plant. Support/attitude towards new industry especially the textile industry and the ease of repatriation of capital were other considerations.
• Site considerations The suitability of the export processing zones in regards to the support services provided was key to the decision as the firm wanted to benefit from government incentives by locating in these zones.

From the above it may be concluded that the motivations behind J.M. Textiles seeking a location plant outside the U.S.A. were to;

• access lower manufacturing related costs in order to lower costs of production
• access the investment incentives (tax and financial) on offer which would further reduce the operating costs

5 Case D Du Ponts Site Selection Decision in India

(Source: Dilworth, J. B. (1996))

Du Pont is an American firm that is a world leader in the provision of chemicals, materials and energy. Du Pont strives to put science to work in solving problems in ways that make life better and safer. It delivers science-based solutions that make real differences in people's lives around the world in areas such as food and nutrition, health care, apparel, safety and security, construction, electronics and transportation.

5.1 Location decision process of Case D

In 1989, the firm realised that it could no longer afford to stay away from India, which with a population of over 700 million then represented a huge market potential for its products. The government of India required that a foreign firm dealing in the kind of products that Du Pont intended to manufacture, needed to have an Indian joint venture partner so the first decision was the choice of a partner. Furthermore in order to manufacture in India, the firm needed to obtain a licence from the government for a particular area, which tended to limit the number of alternative sites given the difficulty of getting the licences. On average it would take up to 2 years to obtain a licence thus the decisions of where to locate had to be made rather quickly. The evidence from the case study suggested that the following major factors influenced the location decisions;

• Costs Labour costs and site acquisition costs.
• Labour Availability and quality of the workforce, as well as the nature of the labour relations.
• Infrastructure Availability of specialised transportation modes for the transportation of the raw materials which was potentially dangerous. Access to a good road network and a sea port was essential as the raw materials were imported. Access to reliable power supply was key given the nature of the operations.
• Quality of life Community attitude towards the industry was deemed important in light of the chemical spill at Bhopal in 1982 of coincidentally the same kind of material which resulted in many deaths. Availability and quality of housing, medical and educational facilities for expatriate staff and their families. Environmental concerns for the disposal of liquid waste from a chemical industry.
• Market proximity Locating within India, with a population then of 700 million people, would enable the firm offer a better customer service and response. The potential for growth in this market was equally huge.
• Proximity to parent firms facilities In this case the issue was proximity to Delhi, the location of the headquarters of Du Pont and its Indian partner.
• Economic factors Financial incentives.
• Government and regulatory factors State government stability, attitude of the state government toward the industry since co-operation was expected from them, ease of obtaining a licence and pollution clearance.
• Site considerations Attitude of the local community towards the location and nature of the industry. Environmental concerns for the disposal of liquid waste from the chemical industry.

From the above it may be concluded that the major motivation behind Du Pont setting up a plant in India was to access the market in India, which with a population then of 700 million people represented a huge potential for sales.

6 Case E - Huxley Maquiladora

(Source: Beamish et al. (2002))

Huxley Manufacturing Co. was part of the materials technology division of a holding firm based in the eastern United States, which had interests in chemicals, aluminium, packaging and aerospace. Huxley employed 1,800 people in three defence-related businesses and recorded $472 million in annual sales in 2001. Huxley headquarters were located in San Antonio in the State of Texas.

During the 1990s, Huxley faced a number of challenges that converged to profoundly reshape the U.S. defence industry. First, increasing knowledge intensity of defence products had resulted in increased development costs. Secondly, with the end of the Cold War the funding levels for equipment in the defence budget had been drastically reduced. This resulted in the US government moving away from the use of sole vendors to more competitive bidding for contracts to supply military hardware. These two factors thus motivated Huxley to search for a reduction in its production costs. In 2001, the management then identified a number of labour-intensive activities in one of their plants that they thought could be moved to a low wage country so as to save on costs.

6.1 Location decision process of Case E

In deciding where to locate the facility, consideration was given to the sensitivity of the firms principal customer (U.S. Military Establishment) thus it was felt that the location should not be too far from the U.S.A. so as to be able to retain effective control of the process. Therefore Mexico was the only country eventually considered and the firm chose the Mexican State of Coahuila given its proximity to Texas. The actual site selection decision consisted of choosing between having a border location or an interior location. The evidence from the case study suggested that the following major factors influenced the location decisions;

• Costs Labour costs, transport costs, cost of local input materials, cost of utilities (water and electricity), cost of telecommunications and land/leasing costs.
• Labour Availability and quality of workforce, labour relations in view of cultural differences, labour turnover, and attitudes towards work. Availability of technical schools to ensure supply of qualified workers, as well as potential local managers.
• Infrastructure Availability of and accessibility to road, rail and air transport modes. Proximity to airport, frequency of air flights and cargo handling capacity of airport. Availability and quality of utilities (water and electricity) and telecommunications.
• Quality of life The availability and quality of housing (for both expatriates and locals), schools/education system, hospitals, shopping centres, standard of living.
• Proximity to parent firms facilities This was deemed important owing to the need for co-ordination and troubleshooting by U.S. based managers and engineers.
• Economic factors Tariff reductions enjoyed due to Mexico being a part of the North American Free Trade Area (NAFTA).
• Government and regulatory factors Political and economic stability.

From the above it may be concluded that the major motivation behind Huxley setting up a plant outside the U.S.A. was to access lower manufacturing related costs in order to lower its costs of production.

7 Case F - Acer Groups China manufacturing decision

(Source: Tsai et al. (1999))

In 1998, the Acer Group was one of the worlds largest PC and computer component manufacturers having achieved a turnover of $6.5 billion at the end of 1997. The Acer Group had 17 production sites and 30 assembly plants located in its Taiwan headquarters and 23 other countries around the world that manufactured computers, peripherals and related high-tech components. Faced with increasing demand for lower priced computers, the PC industry had to find ways of lowering their production costs. Acers global manufacturing strategy involved not only expanding manufacturing plants around the world, but also shifting the assembly of computers from Taiwanese plants to areas where the computers would be distributed. This model ensured reduced inventory plus a faster time to market and was more responsive to changes in local market conditions. This also enabled product adaptation to suit local market language, tastes, trends, conditions and technological innovation.

7.1 Location decision process of Case F

In the middle of 1998, the firm was considering the start up of a manufacturing operation in China. The evidence from the case study suggested that the following major factors influenced the location decisions;

• Costs Labour costs (a tenth of Taiwanese labour costs), cost of local input materials and operating costs.
• Labour Availability and quality of workforce, labour relations in view of cultural differences between Taiwanese & Chinese and attitudes towards work.
• Infrastructure Availability and quality of road, rail, sea and air transport modes. Proximity to and cargo handling capacity of airport and seaport; and frequency of air flights. Availability, quality and reliability of utilities (water and electricity) and telecommunications.
• Quality of life The availability and quality of housing, schools/education system and hospitals. The standard of living, the community attitude to Taiwanese industry and people, and the crime rate.
• Market proximity Locating in China offered easy access to a large and growing market without having to incur import tariffs and delays in getting the product to market, thereby avoiding the storage of excess inventory of finished goods. 
• Government and regulatory factors Political and economic stability as well as the state of relations between China and Taiwan would affect the government attitude to Taiwanese investment in China.
• Site considerations Availability of space for future expansion, attitude of local community to the industry, quality of input materials sourced from local suppliers.

From the above it may be concluded that the motivations behind Acer Group in seeking to set up a plant in mainland China were to;

• access the large and growing market in China 
• access lower manufacturing related costs in order to lower costs of production

8 Case G Intels Site Location Decision in Latin America

(Source: Nelson, R. (2000))

In 1996 Intel was (and still is) the worlds leading producer of microprocessors with reported sales of over $20 billion in that year representing 85% of global microprocessor sales. The growing range of applications for microprocessors meant that sales were projected to grow at a rate of 20% per year. Given the speed of developments and growth in the industry, Intel needed to open a new plant at a rate of almost one every nine months. However faced with the increasing research and development costs required to keep ahead of its competitors, Intel had realised that it would have to build at least some plants in countries where costs would be lower than in the U.S.A. The proposal of where to locate a new assembly and testing plant required a low labour cost area given that labour costs amount to 25-30% of total costs in an assembly and testing plant.

8.1 Location decision process of Case G

The firm already had plants in Malaysia, Israel, Philippines, Ireland and China. In early 1996, firm decided to commission a world-wide study of potential locations for a new assembly and testing plant. Though the Asian countries offered low labour costs, the firm felt that it needed to diversify the geographic location of its plants in order to minimise risks thus the regional decision was confined to Latin America. In Latin America, the choice was then narrowed down to between Mexico, Costa Rica, Brazil and Chile. The evidence from the case study suggested that the following major factors influenced the location decisions;

• Costs Labour costs, costs of local input materials, and cost of power supply.
• Labour - Availability and quality of labour, labour unions, relations and regulations, and quality of technical schools to meet industry labour training needs.
• Infrastructure Availability of and accessibility to road and air transport modes. Proximity to airport, frequency of flights and availability of cargo facilities at airport. Availability and reliability of power supply.
• Quality of Life Community attitudes to industry, crime rate (safety of goods in transit and security of expatriate staff), quality of education system and hospitals.
• Economic factors Exchange rate stability, corporate tax rates, investment (tax and financial) incentives.
• Government and regulatory factors Attitude of government towards the investment, political and economic stability and ease of capital repatriation.

From the above it may be concluded that the motivations behind Intel setting up a plant in Latin America were to;

• access lower manufacturing related costs in order to lower costs of production
• access investment incentives (tax and financial) which would further reduce its costs of operations

9 Cross-case synthesis

Figure 1 and Table 3 below summarise the findings of the motivations for the case firms in seeking new foreign plant locations. Access to lower manufacturing-related costs was the most cited motive for seeking a new location which is in line with the literature that suggests that manufacturing firms typically seek new locations that minimise costs. Access to market was cited by four case firms, however it must be noted that three of the case firms (C, E and G) set up their plants to produce products that were to be exported to the U.S.A. thus they were not interested in access to domestic market per se. In this regard then it may be concluded that access to market, in line with the literature, is an important motive in location decisions. Access to investment incentives was cited by only two firms (C and G) who coincidentally were only interested in setting up export processing industries thus they needed to take advantage of investment incentives in order to further reduce their cost of operations. Access to natural resources, special technologies, skills and materials received no mention by any of the firms and this was probably due to the nature of the processes involved that did not necessarily require world-class technology.

Figure Motivations for the location decisions of the 7 case firms

Table 1 below summarises the characteristics of the seven firms on the basis of the following parameters; business size, products to be manufactured, source of inputs (raw materials), location of parent firm, plant location (country or region) and the market that the new facility is targeting. Evidence of the consideration of the major factors earlier identified in Chapter 3 was found in the case studies. A number of similarities were noticed among the different firms as evidenced by the replications summarised in figure 2 below.

Figure Major factors in the location decisions of the 7 case firms

Cost-related factors were identified in all the case firms as being a major influence on location decisions. This was expected as a review of the literature had indicated that existing manufacturing firms tend to plan new locations in order to minimise costs of operation. Labour management issues and infrastructure were also identified by all the case firms as being important, highlighting the pre-eminence of these factors in location decisions. Economic and government & regulatory factors which affect the ease of doing business in an area were also rated by all the case firms as being major determinants.

Quality of life factors received six mentions out of the seven firms (86%) which seems to concur with the literature about its increased prominence in location decisions. Market proximity was cited by four out of the seven firms, however since three of the firms were setting up foreign manufacturing locations with the intention of exporting the final product back to their home countries it may then be concluded that proximity to market is a major determinant for firms targeting the domestic markets.

Factors related to site considerations were cited by five out of the seven firms reinforcing the literature on the importance of the site characteristics for the viability of a facility. Proximity to the parent firms facility was cited by two firms owing to the specific needs of those industries while the surprising finding was that none of the firms considered proximity to suppliers and competitors as important notwithstanding the prominence that these two factors have in the literature.

An analysis of the sub-factors indicates that the traditional factors (market-related, labour-related and transport-related issues) dominate the location decisions while quality of life issues (community attitudes to industry and the quality of the education system) closely follow in dominance. Economic factors (financial incentives & tax structure and incentives), government & regulatory factors (government attitude to investment & political and economic stability) and the quality and reliability of utilities and telecommunications are also found to be important across the majority of the companies.

Figure Major sub-factors in the location decisions of the 7 case firms

Table : Characteristics of the 7 case firms

Table Major factors in the location decisions of the 7 case firms

Table Motivations for the location decisions of the 7 case firms

Table Major and sub-factors in the location decisions of the 7 case firms

10 Conclusion

The empirical findings from case studies indicated that the following factors were identified as being important considerations by a majority of the case firms involved; costs, labour, infrastructure, quality of life, economic factors, government and regulatory factors, site considerations and market proximity. A minority of the firms cited proximity to parent firm facilities while no firm cited proximity to raw materials and suppliers; and proximity to competitors as factors for consideration.

The main motivations for location decisions that the majority of firms cited were the need for access to lower manufacturing-related costs and access to markets, while access to investment incentives was cited by the firms that sought to export their products. Access to natural resources, special technologies, skills and materials was not cited as a motivator given the nature of the industries involved.

Having identified the main motivations as well as the major factors involved in location decisions, the next chapter will discuss these findings in detail as well as their significance and relation to the literature on the subject of facility location.