Emerson Subpack Facility Location Decision

Executive Summary

This paper discusses about the possible relocation of the subpack production facility of Emerson Electric Company.  It covers the factors that should be considered by the company before relocating the facility including the techniques that should be analyzed to apply appropriate techniques to the project.

Emerson Electric Company designs, manufactures, and sell a wide range of electrical, electromechanical and electronic products and systems.  It operates through five segments: process control, industrial automation, electronics and telecommunications, heating, ventilating and air conditioning and appliance, and tools.  It started in 1890 in St. Louis, Missouri, manufacturing electric motor and fans.  They sold the first electric fans in 1892 in America. From then on, the company expanded its product lines by attaching electric motors to new products such as sewing machines, dental drills, player pianos and power tools.  It became the world’s largest manufacturer of aircraft gun during the World War II, supplying the US Army Air Force.

By 1986, Emerson’s sales had reached almost $5 billion.  Over the previous three years, its international sales, including exports, had risen from $883 million to $1.1 billion.  During this period, Emerson changed its strategy to place greater emphasis on international operations.  As part of strategy, Emerson shifted from exporting domestically produced goods to manufacturing items offshore.  As a result, the number of offshore plants increased from 50 in 1981 to 82 in 1986.  Reflecting this trend, international sales increased to more than 20% of the total.  Total foreign assets increased from $458 million in 1984 to $813 million in 1986, and at the same time sales of products manufactured by foreign subsidiaries rose from $539 million to $861 million.

Emerson eventually emerged and become a globally competitive electrical company today employing about 114,000 people around the world with more than 60 divisions that operate approximately 275 manufacturing locations worldwide and market products in over 150 countries.

As part of its strategy, Emerson considers placing plants and facilities in key locations worldwide.  This strategy enhances its global competitiveness and at the same time cuts exporting expenditures of the company.

Recently, Emerson has been planning to relocate its sub pack production facility.  This is the focus of this study and analysis of the factors that the company should consider, the risks that go with it; the advantages that it will bring in the part of the company and the techniques that will help evaluate the company the location and make a good decision.

Six Factors for Consideration

In relocating a facility, a company must consider factors and criteria that influence facility location.  These factors include proximity to customers, business climate, total costs, availability and quality of infrastructure, quality of labor, suppliers, other available facilities, free trade zones, political risk, government barriers, trading blocs, environmental regulations, the host community and finally, competitive advantage .

Emerson’s plan to relocate its sub pack facility must consider the six most important factors that will have great influence on the plan.  The first factor to consider is the total costs. If the total costs of production in the current location of the sub pack facility are greater than the total costs that will be spent when the facility will be relocated, then the company should consider relocating its facility.

Another factor is the quality and cost of labor.  When the facility will be relocated, the company will then hire employees and laborer to work in the facility.  The company will hire those who live within the vicinity of the location. In some countries, wage and labor costs are lower compared to the wage cost in the United States.  Wage savings will be a definite advantage in the part of the company.  However, in some countries, there is also an existing lack of educated labor.  The company may implement training or hired trained and skills people depending on the budget allocated on the project.  The union activity and public transportation issues belong to this factor.

Another factor that can affect the operations of the company once relocated is the local environment.  These can include the geographical characteristics of the community; cost of living, housing, taxes; community services, attitude of the people; and recreational, educational and medical facilities.  The input is another factor.  These include the availability and proximity of raw materials, the complementary industries, the cost of inputs and alternative sources.

Utilities such as the availability and dependability of power, fuel or gas and water and water treatment capacity are also factors to consider for all these will affect the operations of the company.  Site alternatives, which include industrial zoning locations, competition for sites, land and construction costs, regulation and tax structure and environmental characteristics, are important factors to consider when choosing a facility location.

Analysis Techniques to Determine Best Site

The facility that Emerson is planning to relocate is part of its manufacturing operations.  There are trends in the location of manufacturing operations such as centralization, which includes industrial complex; decentralization which includes smaller dispersed service facility, mini plants, or flexible manufacturing systems; single level facilities; industrial parks; and movement away from urban centers.  It will be advisable for Emerson to choose a single level facility for its sub pack facility.

Single level facility uses different techniques in choosing a location.  One technique is the economic analysis.  In economic analysis, a detailed cost analysis of operating in different locations is presented and studied.

The factor rating system is another technique in evaluating a facility location.  This technique considers the factors that are important to retail location; mostly these factors are difficult to quantify.  It will be very difficult to compare one site from another unless the analysis can be quantified.  To develop a factor rating one should first determine the relevant factors such as location of market, utilities, parking facilities or revenue potential.  Then assign a weight factor that indicates its relative importance to other factors.  Decide on a common scale for all factors and score each location alternative.  Multiply the factor weight by the score for each factor and sum the results for each location.

Finally, choose the location with the highest composite factor.  Factor rating technique is greatly dependent on the judgment of the decision-makers in the company.  The center-of-gravity model is another technique, which gives great importance to transport costs.  It involves selection of geometrically optimal site based on the volume and transport cost.

Recommendation

Using the factor rating technique to evaluate and choose the best location for Emerson’s subpack facility, I have determined that it will be best for Emerson Electric Co. to begin outsourcing to Mexico through a “maquiladora.”  While several areas within the rating system proved to be positive for the existing Taiwanese partner as well as the US option, the Mexican facility proved to have much more upside.  The determining factors came from reduced transportation costs and significantly reduced labor costs with a positive impact from the exchange rate.  Another contributing factor of importance to the Emerson leadership team was improved sourcing flexibility; which the US option did not offer and could actually injure future sourcing opportunities.

As shown in Attached 1, this technique gives importance to factors that will have influence on the operations of the facility.  Much of the quantitative data needed to be meshed with qualitative data gathered through Ken’s knowledge, research and experience.  Although Ken’s largest fear regarding the Mexican option was quality, he expressed a similar concern with switching to any new vendor therefore; Emerson can use their sourcing experiences to implement the proper procedures to ensure quality during the transition period.  In addition, they will be transferring better tooling equipment than what is currently available through Taiwan.