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Supply chain and facility location decisions

Supply chain management deals with managing the flow of raw materials, funds and information in the supply chain. The supply chain is composed of the suppliers, the producers, warehousing department or the assemblers, the distributors and finally the consumers. Facility location refers to where these components of supply chain are to be situated to ensure than the supply chain is efficient. Facility location decisions are the most crucial and difficult decisions to make since they are not frequently changed and poor facility location may lead to losses for a business.

Other factors like transportation routes and inventory decisions are easier to change and can be changed on short notices. Such changes may be necessitated by changes in the supply of raw materials, transportation costs or labor cost, taxes and duties among other factors (Johnson & Pyke, 1999). Unlike the above decisions which are relatively flexible, facility location decisions are inflexible in the short run. For example, an automobile assembly may not be easy to change due to changes in demands of a consumer.

Careful analysis and assessment of an area is thus vital before making a facility location decision. Duties refer to any money that is paid when products or even equipment

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move internationally or even across the states or cities in a country. Countries with higher tariffs or duties makes companies not the serve local markets or forces companies to set up plants locally so as to save on the international duties (Glaser-Segura, 2005). Globalization has led to the complication of facility location decisions.

Some of the macroeconomic factors which affect facility location decisions include the exchange rates, duties and taxes and tariffs. All these factors may encourage or discourage the setting up of a supply chain enterprise in an area. Areas which are characterized by fluctuations in exchange rates and other duties are often undesirable for setting up facilities of supply chain. As noted earlier, facility locations are hard to change and hence requires an area with moderately predictable exchange rates.

Fluctuating exchange rates may lead to high losses especially where the production costs exceeds the profits realized by a company. On the other hand, fixed exchange rates form best sites for setting up of supply chain facilities (Rai University, n. d). Duties and currency exchange rates are vital in determining the profitability and long term survival of a supply chain facility in a certain area. High duties imposed by governments tend to reduce the profitability of an enterprise. Currency exchange rates also determine whether a company operates profitably or not.

A supply chain facility cannot be located in areas where the exchange rates of products are higher than the destination of final goods. This would mean that the cost of raw materials and labor would be higher than the cost of the final goods. Supply chain facilities are often set up in areas where the currency exchange rate is lower than the final destination of the final goods to ensure profitability (Melo, Nickel & Saldanha da Gama, 2007). With an aim of encouraging entrepreneurs to set up supply chain facilities in certain areas, the government may reduce the duties charged on such facilities.

The government of a certain country may give such incentives to foreign investors to encourage development of certain areas of a country. This may also influence the location of a supply chain facility. On the contrary, heavy trading duties may be imposed by a government on certain areas thus influencing the supply chain facility location decisions. Supply chain facilities are usually found in areas where duties imposed by the government are relatively low (Vidal and Goetschalckx, 1997).

Bibliography: Glaser-Segura, D. A. (2005): Facility Location Decisions. Retrieved on 18th of February 2009 from,

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