Medical Device Link.

Originally Published MX November/December 2002

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Companies seeking to explore the advantages and disadvantages of siting facilities in various locations typically use a matrix structure that lists possible locations down the side and issues for consideration across the top. Setting up a matrix to analyze location alternatives requires some initial decisions about its format and methodology.

The first task is to determine what kind of rating system is required. For the purposes of some companies, a simple three-tiered system (1-2-3, or poor-okay-good) is sufficient, but some cases require a more complex system. A good alternative is a four-point system (1-2-3-4, or bad-weak-good-outstanding), which forces companies to make the tough calls that distinguish between the weak and the good.

The next decision relates to grouping the issues to be considered. A logical grouping that can later incorporate many subissues would be as follows.

• Process issues (issues for R&D will differ from those for manufacturing).
• Logistics and transportation.
• Human resources.
• Financial issues.
• Marketing.
• Incentives.
• Site development.

Exactly how the issues are grouped can be adjusted as the process unfolds, but a starting system is needed.

It is generally not advisable to simply add the ratings listed in columns and come up with a final score for each location, because different issues carry different levels of importance for each company. Direct labor costs or access to universities, for instance, will likely have more importance than recreational facilities or electricity costs. Although it is possible for a company to develop a weighting system that accounts for differing levels of importance, such systems are generally too complex to be effective. Quantification can help sort out the best alternatives from the rest, but trying to quantify everything in order to reach a score for each location doesn't work.

The Obvious Issues

The most important issues to be included in the matrix are typically also the most obvious issues. Because they involve fundamental business practices, such issues are relevant no matter what city, region, or country a company may be considering for its new location. A sampling of such issues includes the following.

• Direct labor costs.
• Supervisory labor costs.
• Availability of skilled workers.
• Availability of experienced managers.
• Electricity (access, reliability, and cost).
• Raw materials (quality, availability, and cost).
• Construction costs.
• Real estate costs.
• Distribution channels.
• Competition.

The Less-Obvious Issues

Companies that are considering overseas locations—particularly in the Asia-Pacific region—will be required to analyze many new issues, or to assign higher priority to issues that would not be critical for U.S. locations.

The United States, for example, has an abundance of lawyers. But in the world's newest country, East Timor, it is estimated that there are only 50 lawyers in the entire country. In such a setting, where there is minimal infrastructure and few resources that can be devoted to change, it can be difficult for companies to evaluate the ability of the nation's judicial system to handle cases involving either corporate or individual rights.

To take another extreme example, when Motorola built a major production facility in China, it agreed to provide housing for its workers. But it was only after the company had signed the contracts and started the project that it realized what this agreement really meant. The company would have to build the housing as well as finance the purchases of the housing—and do so in a location with no mortgage industry and no tradition of borrowing to own a home.

Many such issues arise in the Asia-Pacific region that would not be important elsewhere in the world. Some of the key region-specific issues that companies should incorporate into their matrix include the following.

• Legal system.
• Personal liability of management.
• Intellectual property protection.
• Political stability.
• Safety of employees.
• Quality of higher education.
• Communication systems and related regulations.
• Transportation for workers.
• National and local employee-termination rules.
• Corruption and transparency.
• Housing.
• Schooling for expatriate families.
• Cultural and recreational alternatives.

Copyright ©2002 MX