Companies today compete in a single global market. Barriers to entry which previously separated markets no longer exist due to trade liberalization and information communication technology developments of 21st century. Import tariff rates have fallen dramatically over the past two decades along with cost of communication and transportation.
A single global market not only increased the competition among the players but also opened up opportunities for them to explore new strategies. With these new variables in the equation, companies came up with the solution knows as global supply chains or many researchers referred to it as “production fragmentation” or “vertical specialization” or “processing trade”.
The number of companies that adopt global supply as an organizational strategy have grown exponentially over the past decade. Some of the main reasons for global supply chains discussed in Ibrahim Dogan (2012) in his research paper about facility location model using Bayesian Model are mentioned below.
- Expanding current market
- Spreading foreign exchange rate risk
- Attracting talented work force
- Working with capable suppliers
- To learn from foreign customers, suppliers, competitors and foreign research centers.
- Saving cost from reduced taxes, labor, transportation, incentives and capital subsidies.
The fragmentation of operation of companies is not limited to a particular operation process. It can be seen in marketing, production, finance, customer relationship etc..,. However the magnitude of fragmentation in production is higher especially in the processes like sourcing and manufacturing. One such classic example is, a disk drive produced in Thailand produce only 11 components in Thailand while remaining 43 components are sources from 10 different countries.
One of the strategic decision a company needs to make when adopting a global supply chain is where to locate its facilities. This is strategically very significant, for one reason, the decision is long term and for onother reason, all other supply chain objectives shall be optimized within the constrains set by facility location decisions.