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Quantitative Data: Why Does Geography Matter?

It should be clear by now that the supply chain network design problem is just as much about geography as it is about business strategy. The two cannot be separated.

Take these supply chain considerations for example:

  • If you have a plant in the interior of China and some of your customers are in New York, you need to physically get the product out of China, across the ocean, and to New York.
  • If you make wood products (like paper or boards), you can locate plants either close to the raw materials (forest areas) or close to your customers (usually located a significant distance away from the large forest areas).
  • If you have a warehouse in Indianapolis, you are close to your customers in Chicago, but far away from customers in Miami. If the warehouse is in Atlanta, you are closer to Miami, but farther from Chicago.
  • If you make a critical product only in Miami, a hurricane may shut down your operation, causing a loss of revenue.

As the examples highlight, decisions about the location of your facilities impact many aspects of your business and require you to make trade-offs. Specifically, geography drives the following:

  • Transportation Cost—You need to move product from its original source to its final destination. The location of your facilities determines the distance you need to move product, which directly impacts the amount you spend on transportation. But, also, the location of your facilities determines your access to transportation infrastructure such as highways, airports, railheads, and ports. Finally, because of supply and demand, different locations may have different transportation rates.
  • Service Level—Where you locate relative to your customers impacts the time it takes to get product to your customers. For some products, you can negate great distances by using overnight air freight. But this usually comes at a premium cost.
  • Risk—The number and location of your facilities impacts risk. If you have just one location for a critical activity, there is always the risk that a fire, flood, some other natural disaster, a strike, or legal issues will shut down your operation. There is also political risk to consider. Your facility could get confiscated or shut down for political reasons, or the borders may shut down, isolating your facility.
  • Local Labor, Skills, Materials, and Utilities—The location of your facilities also determines what you pay for labor, your ability to find the needed skills, the cost of locally procured materials (which is often directly related to the local labor costs), and the cost of your utilities.
  • Taxes—Your facilities may be directly taxed depending on where they are located and the type of operations being performed. In addition, you also need to consider the tax implication of shipping product to and from your locations. In some industries, taxes are more expensive than transportation costs.
  • Carbon Emissions—Locating facilities to minimize the distance traveled or the transportation costs often has the side benefit of reducing carbon emissions. In addition, if your facilities consume a lot of electricity, you can reduce your emissions by locating near low-emission power plants.

As the list highlights, geography matters. What makes this challenging is that the geography often pushes the solution in different directions at the same time. For example, it would be desirable to have a facility close to all the demand. However, demand is typically where people live. And it is usually very expensive, if not impossible, to locate a plant or warehouse in the middle of a major metropolitan area. So the desire to be close to customers pushes locations close to cities. The desire for cheap land and labor (and welcoming neighbors) pushes the best locations further from the city center. In global supply chains these decisions become even more extreme. In some cases it may make sense to service demand from a location on an entirely different continent.

In addition to geography, the next two sections will discuss the importance of warehouses and multiple plants to your supply chain as well.

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