Multimarket Facility Network Design with Offshoring Applications

Abstract

Moving production to low-wage countries may reduce manufacturing costs, but it increases logistics costs and is subject to foreign trade barriers, among others. This paper studies a manufacturer's multimarket facility network design problem and investigates the offshoring decision from a network capacity investment perspective. We analyze a firm that manufactures two products to serve two geographically separated markets using a common component and two localized final assemblies. The common part can be transported between the two markets that have different economic and demand characteristics. Two strategic network design questions arise naturally: (1) Should the common part be produced centrally or in two local facilities? (2) If a centralization strategy is adopted, in which market should the facility be located? We present a transportation cost threshold that captures costs, revenues, and demand risks, and below which centralization is optimal. The optimal location of commonality crucially depends on the relative magnitude of price and manufacturing cost differentials but also on demand size and uncertainty. Incorporating scale economies further enlarges the centralization's optimality region.