Relative importance of plant location factors: A cross national comparison between Singapore and Malaysia

Journal of Business Logistics, 2003 by Bhatnagar, Rohit, Jayaram, Jayanth, Phua, Yue Cheng

During the last decade, two strategies - globalization and time-based competition - have fundamentally altered the way companies do business. Globalization has created a "borderless organization" in which production and distribution facilities and even the supply base is geographically dispersed while time-based competition (defined as the speed with which products are manufactured, delivered to market, and serviced) has led to exacting customer demands for a wide variety of products with short lead times.

In such a complex environment of global scope and short product life cycles, the ability to manage global supply chains efficiently is considered as a vital source of competitive advantage. In this paper, we define supply chain as a network of production and distribution facilities that link material, information, and money flows, from raw material supply to customer delivery in order to deliver a product to the final customer (Jones and Riley 1985).

A critical decision faced by supply chain managers is the optimal location of production facilities. This decision has a profound impact on firm competitiveness. In making this decision, the external factors described earlier - globalization and time-based competition - often impose opposing influences on the firm, and these influences are not readily apparent when the initial plant location decision is made. For example, a firm that sets up a manufacturing plant in a third world country to take advantage of lower labor costs may find its time-based performance eroded because of poor infrastructure or non-availability of skilled personnel. The location decision is thus a strategically important managerial challenge that significantly impacts the long-term performance of global firms, and in particular, long-term operational performance of global supply chains.

Prior models reported in the literature to resolve the tradeoffs associated with the plant location decision fall into two distinct categories. The first set of models predominantly focuses on quantitative analyses based on assumed costs of land, labor and transport, scale economies, and other cost-based variables. Key qualitative factors such as availability of skilled workforce, efficient business services and infrastructure, and stability of government policies are ignored, though these are critical for creating and supporting competitive advantage. The second category of models on plant location incorporates both quantitative as well as qualitative variables referred to above. However, there has been little research to assess if managers emphasize different variables in making the location decision in different countries.

The fundamental research question addressed in this paper is whether firms that eventually locate their plants in one country versus another differ in their emphasis on different qualitative variables while making the plant location decision. An empirical study is reported that was conducted to compare plant location procedures in Malaysia and Singapore. Data were collected from 327 firms located in Singapore and Malaysia. This is an important comparison from the perspective of international business, since Singapore and Malaysia are direct competitors in attracting foreign direct investment. Also, these two countries exhibit considerable variation in terms of level of economic development -Singapore, generally considered a highly developed country and Malaysia, a developing country. The rest of this paper is organized as follows. First, relevant segments of literature are reviewed, encompassing models that incorporate both quantitative and qualitative factors in the plant location decision. This is followed by a discussion of the research framework, hypotheses, and research methodology. Next, analysis of results and findings are presented. Finally, concluding comments and future research directions are outlined.

LITERATURE REVIEW

Globalization has led to a significant increase in foreign trade and foreign direct investment. Worldwide exports increased from 12% of world GDP in 1962 to more than 25% of world GDP (totaling $28.9 trillion) in 1998 (World Development Report 1999/2000). Further, trade in manufactured goods grew at a faster pace than general trade in the developed economies (The OECD Observer 1998). Investment in manufacturing facilities and the choices of their locations will therefore be a strategically critical managerial activity in the future. Are firms that emphasize certain factors in the location decision more likely to locate in one country versus another? This question is of consequence to both practitioners and academics.

As referred to earlier, prior literature on plant location can be categorized into two streams cost-based models and models that consider key qualitative variables in the location decision. Table 1 outlines the main segments of the plant location literature.

Cost-Based Plant Location Models

There is substantial research in the operations research literature that focuses on cost-related factors in making capacity expansion and facility location decisions. Rather than attempting a comprehensive review of this research, only the main directions will be outlined here. The objective of cost-based capacity expansion/location problems is the minimization of discounted costs associated with the plant location/expansion process. For example, costs of expansion, shortages, congestion, idle capacity, maintenance, and inventory are included as representative cost variables. Often the decision maker imposes limits such as budgetary constraints, upper bounds on expansion sizes, excess capacity, and capacity shortages. There is substantive early work relating to facility location models (Erlenkotter 1974, 1981; Freidenfelds 1981; Geoffrion and Graves 1974; Khumawala 1972; Marine 1967; Van Roy and Erlenkotter 1982). Luss (1982) conducted a comprehensive synthesis of the literature by classifying capacity expansion decisions into models that examined single facility and multiple facility location decisions. A typical problem in the former category dealt with plant location and expansion decisions in an environment of infinite and finite planning horizons. In the latter category of multiple plant locations, a representative problem dealt with identifying the optimum sequence for adding capacity during plant expansion given that there are multiple locations with varying constraints. In these problems, shipping plans between production facilities and demand locations become an additional factor. Several important models relating to capacity expansion and plant location are also discussed in Aikens 1985; Brandeau and Chiu 1989; Eppen, Martin, and Schrage 1989; Erlenkotter 1977, 1978; Fong and Srinivasan 1981; Francis, McGinnis, and White 1983; Hodder and Jucker 1985; Hwang, Mai, and Shieh 1998; Krarup and Pruzan 1983; Luss 1984; Martin 1983; Murphy and Weiss 1990; Revelle and Laporte 1996; Robinson 1989; Siha and Das 1996; and Thizy, Van Wassenhove, and Khumawala 1985. A recent article (Owen and Daskin 1998) reviews the literature related to stochastic or dynamic problem characteristics of the facility location problem. An interesting set of models described by the authors are those relating to scenario planning in which decision makers capture uncertainty by specifying a number of possible future states and then find solutions that perform well under all scenarios. A number of commercial software products that incorporate the cost-based facility location analysis are available in the market. See Ballou and Masters (1993) for a review.