Efficient location of industrial activity cells in a global supply chain $ Marija Bogataj a,c,n , Robert W. Grubbstr ¨ om b,c , Ludvik Bogataj a a University of Ljubljana, Slovenia b Link¨ oping Institute of Technology, Sweden c Mediterranean Institute for Advanced Studies, Sempeter pri Gorici, Slovenia article info Available online 7 October 2010 Keywords: Industrial plant location Supply chain design MRP theory Net present value (NPV) Logistics abstract Inefficient locations for production, distribution and reverse logistics plants will result in excess costs no matter how well material requirements planning (MRP), inventory control, distribution and information sharing decisions are optimized. In this paper we study ways in which aspect of activity cell location decisions can be analyzed within an extended MRP model. This model has previously been extended by including distribution and reverse logistics components in a compact form, presented in Grubbstr ¨ om et al. (2007). Our aim is to demonstrate the basic differences between an approach to location problems with MRP ‘‘under the same roof’’ as the global supply chain, in which transportation time delays and direct transportation costs have substantial influence. We discuss possibilities of how to present location aspects in the supply chain model obtained from combining input–output analysis and Laplace transforms in four sub-systems, namely manufacturing, distribution, consumption and reverse logistics, and show how the transportation costs and lead time influenced by the location of all these activities affect the resulting net present value (NPV). Our aim is to build a model supporting decisions concerning the structure of a supply chain as an alternative to a mixed integer programming formulation. The model developed is based on the use of continuous functions describing spatial distributions of cost and customer demand. Continuous functions are embedded in the MRP extension previously introduced in Grubbstr ¨ om et al. (2007). Location decisions influence (i) production costs, because timing influences the cost of activities involved in creating a product, cf. (Grubbstr ¨ om and Bogataj, submitted for publication), and (ii) logistics costs, which refer to the procurement and physical transmission of materials through the supply chain. In this current paper we wish to combine both of these aspects into a comprehensive model, where we show the interaction between the ‘‘space of flows’’ and the ‘‘space of places’’ as Giovanni Arrighi distinguishes one from the other in his book The Long Twentieth Century. & 2010 Elsevier B.V. All rights reserved. 1. Introduction The location decision is one the most critical decisions needed to realize an efficient supply chain. From everyday practice, it follows that there are two basic strategies for locating manufac- turing or remanufacturing activities: (i) concentrating them in the optimal location and serving the world market from there, or (ii) decentralizing them in various regions (continents) that are close to major markets or have much cheaper human resources and often also lower taxes. The appropriate strategic choice is influenced especially by regional (political), technological and product characteristics. Decentralized activity cells in a supply chain will be favoured when (i) the final product value-to-weight ratio is relatively high, (ii) exchange rates are volatile and customs duty and adminis- trative barriers play a significant role, as explained in Bogataj and Bogataj (in press) and (iii) the differences in political economies can improve efficiency. If location externalities are not very important and the minimum efficient scale is too high, and if the trade barriers do not push production through the border of a certain economic space, activity cells will stay centralized. This result is also obvious from our applied studies, especially from the statistical analysis of investments in Central European regions (Bogataj et al., 2010). Whereas decisions on transportation Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/ijpe Int. J. Production Economics 0925-5273/$ - see front matter & 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ijpe.2010.09.035 $ The first two authors owe a deep debt of gratitude to Professor Ludvik Bogataj who had suggested us to present the differences in contributions to NPV induced by location decision of industrial plants through (a) timing of supply chain flows influencing production costs and benefits and (b) direct transportation costs. Unfortunately he was not able to stay with us to finish this article. n Corresponding author at. University of Ljubljana and MEDIFAS, S ˘ empeter pri Gorici, Vrtojba, Mednarodni prehod 6, 1000 Ljubljana, Slovenia. E-mail addresses: marija.bogataj@ef.uni-lj.si, marija.bogataj@guest.arnes.si (M. Bogataj). Int. J. Production Economics 133 (2011) 243–250