Multimarket Facility Network Design with OffShoring Applications

Manufacturing & Service Operations Management 11(1) 90-108, 2009

UNC Kenan-Flagler Research Paper

19 Pages Posted: 26 Feb 2013 Last revised: 30 Nov 2020

Date Written: October 23, 2007

Abstract

Moving production to low-wage countries may reduce manufacturing costs but increases logistics costs and is subject to foreign trade barriers, among others. This paper studies a manufacturer’s multimarket facility network design problem and investigates the offshoring decision from a network capacity investment perspective. We analyze a …rm that manufactures two products to serve two geographically separated markets using a common component and two localized …final assemblies. The common part can be transported between the two markets that have different economic and demand characteristics. Two strategic network design questions arise naturally: (1) Should the common part be produced centrally or in two local facilities? (2) If a centralization strategy is adopted for the common component, which market should the facility be located in? We present a transportation cost threshold that captures costs, revenues, and demand risks, and below which centralization is optimal. The optimal location of commonality crucially depends on the relative magnitude of price and manufacturing cost differentials but also on demand size and uncertainty. Incorporating scale economies further enlarges the centralization’s optimality region.

Keywords: capacity investment, newsvendor network, location, transshipment, commonality

Suggested Citation

Lu, Lauren Xiaoyuan and Van Mieghem, Jan Albert, Multimarket Facility Network Design with OffShoring Applications (October 23, 2007). Manufacturing & Service Operations Management 11(1) 90-108, 2009, UNC Kenan-Flagler Research Paper, Available at SSRN: https://ssrn.com/abstract=2209316

Lauren Xiaoyuan Lu (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Jan Albert Van Mieghem

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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