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The final component of your supply chain configuration includes the decisions you make regarding your company s asset network the factories, warehouses, production equipment, order desks, and service centers that make up your business. The location, size, and mission of these assets have a major impact on supply chain performance. Most companies choose one of three network models based on such factors as business size, customer service requirements, tax advantages, supplier base, local content rules, and labor costs:
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Global model Manufacturing of a given product line is done in one location for the global market. The choice of this model is
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CHAPTER 1 Core Discipline 1: View Your Supply Chain as a Strategic Asset
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driven by factors such as the need to colocate manufacturing with research and development (R&D), the need to control unit manufacturing costs for very capital-intensive products, or the need for highly specialized manufacturing skills. Regional model Manufacturing is done primarily in the region where the products are sold, although some cross-regional flows may exist based on production-center specialization. The regional model is often chosen based on a mix of factors, including customer service levels, import duty levels, and the need to adapt products to specific regional requirements. Country model Manufacturing is done primarily in the country where the market is. This is the model of choice for goods that are prohibitively expensive to transport. Other factors include duties and tariffs and market access that is conditional on in-country manufacturing.
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Due to price competition, many companies are manufacturing in low-cost countries to lower unit production costs. When choosing such a location, key considerations include manufacturing costs, corporate tax rate, export incentives, the presence of key suppliers or duty-free imports, infrastructure, and skilled labor. While unit costs are important, supply chain leaders know that supply chain flexibility and total supply chain cost are also critical considerations when designing an asset network, particularly for products with highly variable demand and short product life cycles. China has emerged as a favored lost-cost manufacturing spot among electronics companies because of the presence of component suppliers and contract electronics manufacturers, as well as the quality of its infrastructure (roads, electricity, etc.). Although electronics assembly may take only one to two days, transporting goods by ship between China and Europe takes three weeks. Add to this the time needed to reach the regional or country distribution centers, and the total fulfillment cycle can be six weeks. In a highly volatile market, these long fulfillment times can result in inventory that is out of sync with market demand the problem that Michael Dell designed out of his supply chain. Companies can reduce this risk with several different options. One approach is to increase manufacturing flexibility to ensure that the supply chain plan is refreshed weekly instead of monthly to better meet changing market demand. Another approach in-market postponement creates standard products in the low-cost production center but does final configuration and packaging at a distribution point closer to the customer. Yet
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Strategic Supply Chain Management
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another option is to move to a low-cost manufacturing base closer to the target market. For example, many companies serving the European market have moved production from Asia to central European locations such as Romania and Hungary. This approach lowers both production costs and in-transit inventory levels. The product life cycle drives many asset network decisions. In rapidly evolving industries such as consumer electronics, companies may start with a global model during new product ramp-up to test the manufacturing process or to benefit from colocation with R&D and then transition to a regional model to improve customer service. At the end of the product life cycle, the global model once again may be a better choice as a way to fulfill demand at the lowest product cost and inventory investment.
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