43.

64
38.59
37.14
36.05
35.08
33.76
33.31
33.20
33.09
32.88
32.75
29.62
27.40
22.95
22.86
22.21
21.87
21.11
21.01
16.44
13.18

(adapted from Institut der Deutschen Wirtschaft, 2010)

Data in EUR per hour, 2009

Norway
Belgium
Switzerland
West. Germany
Denmark
Finland
France
Austria
Luxemburg
Sweden
Netherlands
Ireland
Italy
USA
Japan
UK
Spain
East Germany
Canada
Greece
Slovenia

11.49
10.27
10.03
8.86
7.89
7.80
7.30
6.94
6.04
5.45
5.25
4.33
3.61
3.39
2.67
2.44
2.25
1.81
1.74
1.65
1.33

9.1

2012 R. Grnig/D. Morschett

South Korea
Malta
Portugal
Czech Rep.
Croatia
Slovakia
Estonia
Hungary
Poland
Lithuania
Latvia
Turkey
Russia
Romania
Belarus
Bulgaria
China
Ukraine
Modavia
Georgia
Phillippines

Labor costs in manufacturing industries in different

countries

9. Evaluating new production and sourcing locations

(Electrolux, 2005)

= Logistics

= Direct labour & overhead

Production Country

= Materials & components

Production Country

China

Eastern
Europe

9.2

2012 R. Grnig/D. Morschett

Western
Europe

USA

China

Washing machines for

EU market

Chest-freezers for
US market

Mexico

Total costs of Electrolux for products sourced in different

regions

9. Evaluating new production and sourcing locations

Total cost of procurement

Purchasing cost or production costs abroad

Logistics
Inland freight in the production country
International freight
Inland freight in the home country
Transfer charges
Additional safety stock
Customs duties and fees
Duties
Customs fees
Harbour fees
Taxes
VAT and/or import tax
./. Tax incentives in the production country
Other costs
Cost of quality monitoring
Cost of damage
Supplier development and certification
Cost due to exchange rate volatility

(adapted from Deloitte, 2007)

Components of procurement cost

9. Evaluating new production and sourcing locations

2012 R. Grnig/D. Morschett

9.3

(adapted from Fraunhofer Institut, 2009)

% = Percentage of relocating companies

2%

8%

9.4

2012 R. Grnig/D. Morschett

Access to new knowledge/technology/clusters

Lack of skilled employees

Taxes/levies/subsidies

Transport/logistics costs

15%
12%

Proximity to other relocated production

Market-seeking

28%
16%

Proximity to key customers

Labor costs

29%

77%

Motives for relocating production abroad

9. Evaluating new production and sourcing locations

Availability/fluctuation of skilled employees

19%

(adapted from Fraunhofer Institut, 2009)

9.5

2012 R. Grnig/D. Morschett

Proximity to R&D

Loss of know-how/copies/piracy

Coordination effort

Transport/logistics costs

32%

20%

Labor cost

% = Percentage of reversing companies

2%

5%

Quality

Flexibility/service levels for delivery

68%

33%

43%

Reasons for foreign divestments

9. Evaluating new production and sourcing locations

3. Selecting the most attractive countries

2. Eliminating the less attractive countries

1. Producing an initial list of potential country locations

9.6

2012 R. Grnig/D. Morschett

Process for evaluating new production and sourcing

locations

9. Evaluating new production and sourcing locations

9.7

161.5

7,542

GDP (billions USD)

GDP per capita (USD)

87

67

Innovation

Global Competitiveness Index

(adapted from World Economic Forum, 2010

43

93

Business sophistication

58

Technological readiness

Market size

76

81

76

Goods market efficiency

Financial market development

54

Higher education and training

Labor market efficiency

78

63

92

Infrastructure

Health and primary education

81

Institutions

Macroeconomic environment

Rank
(out of 139)

Criterion

4.2

2.9

3.5

4.4

3.8

4.0

4.3

4.1

4.5

5.8

4.5

3.4

3.7

Score
(1-7)

Global Competitiveness Index and its components 2010-2011

21.3

Population (millions)

Key indicators

5%

10%

15%

20%

2012 R. Grnig/D. Morschett

0%

The most problematic factors for doing business (% of responses)

Access to financing
Inadequate supply of infrastructure
Inefficient government bureaucracy
Tax rates
Tax requisitions
Policy instability
Corruption
Restrictive labor regulations
Inadequately educated workforce
Inflation
Poor work ethic in national labor force
Foreign currency regulations
Crime and theft
Government instability/coups
Poor public health

Evaluation of Romania in the World Competitiveness Report

9. Evaluating new production and sourcing locations

50

Spain

UK

USA

Germany

60

65

70

75

80
Economic Freedom Index 2011

55

S. Korea
Portugal
Czech. R.
Slovakia
Estonia
Poland
Russia
Turkey
China
Romania
Bulgaria
Philippines

Italy

France

85

90

Switzerland

(based on Institut der Deutschen Wirtschaft, 2010; Heritage Foundation, 2011)

10

15

20

25

30

35

40

9.8

2012 R. Grnig/D. Morschett

Labor costs and economic freedom in selected countries

9. Evaluating new production and sourcing locations

Labor Cost in manufacturing

in EUR per hour 2009

Border

Export firm

Buying agent

Production
joint venture

Wholly-owned production subsidiary

Company

Contract
manufacturer

Company

Taking up own production

abroad

Company

Sourcing from a foreign

contract manufacturer

Independent
manufacturer

Company

Independent
manufacturer

Independent
manufacturer

Procurement office

Company

Company

Sourcing from an independent

foreign manufacturer

Independent
manufacturer

Independent
manufacturer

Manufacturer's sales
subsidiary

Company

Company

Independent
manufacturer

Import firm

Company

Sourcing from a trade

company

= Independent suppliers

= Alliance/partnership

= Company

10.1

2012 R. Grnig/D. Morschett

Different alternatives for sourcing from abroad

10. Evaluating foreign operation modes

2. Select the most suitable operation modes based on a detailed

evaluation

1. Eliminate the less suitable operation modes based on external

and internal conditions

10.2

2012 R. Grnig/D. Morschett

Process for evaluating foreign operation modes

10. Evaluating foreign operation modes

low

medium

high

Country
risk

low

Sourcing from
independent
manufacturers
(or trading
firms)

Sourcing from
independent
manufacturers
(or trading
firms)

Sourcing from
independent
manufacturers
(or trading
firms)

high
Specificity of
necessary assets

Production
subsidiary

Contract
manufacturing
or production
subsidiary

medium

Production
subsidiary or
production
joint venture

Production
joint venture

Contract
manufacturing

Contract
manufacturing

10.3

2012 R. Grnig/D. Morschett

Fit between country attributes, production asset attributes

and operation modes

10. Evaluating foreign operation modes

Cost per product unit

Effectiveness of knowledge-transfer to
the foreign production site

Scores: 4 = very positive 3 = positive 2 = negative 1 = very negative

Importance of the criterion: 3 = high 2 = medium 1 = low

Overall evaluation

Supply security

Financial resources required

Flexibility to switch the sourcing

location
Risk of knowledge dissemination to
another company

Control over the production process

and quality

Criteria

29

Importance of Options
the criterion
Independent
manufacturer

48

Wholly-owned
production

10.4

2012 R. Grnig/D. Morschett

40

Contract
manufacturer

Scoring model for selecting the operation mode

10. Evaluating foreign operation modes

1b. Evaluating potential

operation modes

Developingthe
feasibility
studies
entering
the attractive
country markets
6.3.Developing
production
and for
sourcing
relocation
programs

feasibility
studies for
entering
the attractive country markets
5.3.IfDeveloping
needed: Signing
agreements
with
the partners

= usual
sequence
of steps
= most
important
possible
loops

11.1

2012 R. Grnig/D. Morschett

4. Developing the internationalization

strategy

Developingfeasibility
feasibilitystudies
studiesfor
forproduction
entering the
country markets
3.3.Developing
or attractive
sourcing relocation

2. Determining suitable location - operation mode combinations

1a. Evaluating potential

sourcing countries

0. Preparing the strategy planning project

Process for developing an internationalization strategy for

production or sourcing

11. Developing an internationalization strategy for production and sourcing

11.2

P2

P1

R1

a - f = suppliers/partners

U2

Sourcing from
a joint
venture

2012 R. Grnig/D. Morschett

Sourcing from
an
independent
manufacturer

Sourcing
from a
domestic
import firm

Operation modes

U1

V1

C2

C1

Location
within
country

= selected operation mode at that location

Romania

Ukraine

Vietnam

China

Country

Product Most attractive

locations

Location - operation mode combinations as result of Step 2

11. Developing an internationalization strategy for production and sourcing

1. Product and production step characteristics

2. Country characteristics
3. Characteristics of the specific location
within the country
4. Operation mode
5. Supplier, contract manufacturer, partner
and/or acquisition object
6. Supply chain
6.1 Transport and warehouses,
including costs
6.2 Delivery times
6.3 Supply security
6.4 Other decision-relevant aspects
of the supply chain
7. Legal aspects
7.1 Protection of intellectual property rights
7.2 Other aspects of contracts
with foreign partners

11.3

2012 R. Grnig/D. Morschett

8. Resources required
8.1 Human resources
8.2 Assets
8.3 Working capital
9. Quantitative objectives and forecasts with
regard to labor costs,
production volumes, etc.
10. Measures
10.1 Steps and time needed to build up
activities
10.2 Steps and time needed to terminate
current activities that will be relocated,
e.g. supplier contracts in home country
11. Responsibilities
12. Budget
12.1 Initial investments
12.2 Annual expenses
13. Economic evaluation

Table of contents of a feasibility study for a relocation

option

11. Developing an internationalization strategy for production and sourcing

All figures in thousands of Swiss francs

-3,500

NPV

593.2

11.4

2012 R. Grnig/D. Morschett

700

-600

Cost of closing down the

production in the home
country
Difference

-300

-2,900

Production joint venture in

China with a partner in
location C2

Cash flows
year 1-15
-1,000

Initial
investment

Maintaining production in
the home country

Elements of the NPV

The Net Present Value of a relocation option

11. Developing an internationalization strategy for production and sourcing

7. Investment budgets and free cash flow targets

6. Responsibilities

5. Timetable

4. Quantitative objectives

3. Operation modes and partners

2. Countries and locations

1. Products and production steps

11.5

2012 R. Grnig/D. Morschett

Table of contents of an internationalization strategy for

sourcing and production

11. Developing an internationalization strategy for production and sourcing

http://www.springer.com/978-3-642-24724-8