ABSTRACT
Overview Organizations locate facilities for many reasons. Some of these include lower production costs, to obtain technological advantages not available locally, to minimize risk, to expand system capacity and increase operational flexibility, to reduce supply-chain lead times, to be near suppliers or customers, as well as others. When an organization decides to locate a new facility or close an existing facility, an analysis should be conducted to consider all relevant factors involved in the decision. To some people, relocation decisions should also be based on productivity considerations and the needs of various organizational stakeholders, such as employees, customers, suppliers, and the surrounding community. However, business organizations are open systems versus closed systems, such as countries. An open system is not necessarily accountable for its actions as they impact other societal groups. As an example, without laws and regulations, a corporation might be able to pollute at will, fire workers indiscriminately, and heavily use public infrastructure without incurring additional cost. But a closed system, such as a country, cannot do these things without incurring costs. As a result, society has a vested interest in ensuring
its environment remains clean, workers have access to jobs, and its infrastructure is created and maintained for its citizens. In contrast, if a business organization closes a facility, its employees must find other work within the surrounding community. A business organization has little obligation to help employees find work unless it has voluntary internal policies regarding such situations, or local laws and regulations require notification or place other responsibilities upon the organization. However, being a closed system, society must provide displaced employees with unemployment, health, and related types of insurance as part of its social safety net. But this varies by society. Recognizing these facts, society places boundaries on business behavior as it impacts other societal groups. is forces business organizations to follow local laws and regulations, restricting their actions, to avoid sanctions and penalties by government. Using this logic, facility location is a set of economic activities by an organization to increase its productivity and shareholder economic value added (EVA). Political, demographic, cultural, technical, and other factors are considered relevant only to the extent they constrain an organization’s economic activities or other business interests. As a result, from an organizational viewpoint, an organization must fully consider the costs of entering and leaving global markets over the useful life of its relocation investment and in the context of local laws, regulations, and cultural norms. As an example, several years ago I consulted with a very well established New England manufacturer of capital equipment. is company had been in business for over 100 years when it made a poor decision regarding facility location due to the purchase of another company in Southern Europe. After it expanded into this country, it found that productivity rates were low and profits were negative. As a result, it closed its Southern European facilities. Unfortunately, it was required to pay its employees several years’ worth of salary due to local laws. As a result, the company went bankrupt and was sold to a competitor within two years. is is an example where a facility location decision was not well thought out. e project team did not do the necessary work to fully evaluate all project risks. In summary, facility location decisions should be based on a full understanding of productivity opportunities and project risks over the useful life of an investment.
