The role of operational flexibility in the expansion of international production networks

Abstract

Volatile factor cost developments urge manufacturing firms to increase production efficiency by building up facilities in multiple countries. Differing from previous work that examines the quality of individual locations for investment, the study evaluates the net present value, the growth option value, and the operational flexibility value of the existing production network to predict the establishment of a new site. The results on a sample of 352 German manufacturing firms suggest that the direction, uncertainty, and diversity of labor cost movements in the extant locations influence the propensity to set up a new production subsidiary. Analyzing the international production network after the expansion shows that the new location increases the value of the network regarding these dimensions. Copyright © 2012 John Wiley & Sons, Ltd.

Portfolio configuration and foreign entry decisions: A juxtaposition of real options and risk diversification theories

“…In the context of multinational operations and switching options, correlations in labor costs among the countries in which the firm operates have been proposed as a major source of redundancy (e.g., Belderbos & Zou, 2009; Dasu & Li, 1997; de Meza & van der Ploeg, 1987). For manufacturing firms, labor cost development is a particularly critical consideration in international manufacturing and a major driver of FDI (Kogut & Kulatilaka, 1994), consistent with the notions that minimizing production cost is one of the primary objectives of geographically distributed plant configurations (e.g., Belderbos et al, 2014; Dasu & Li, 1997; Fisch & Zschoche, 2012), and that (changes in) relative levels of labor costs in the host countries drive multinational firms' investment allocation decisions across countries (Belderbos, Fukao, Ito, & Letterie, 2013).…”

Multinational investment and the value of growth options: Alignment of incremental strategy to environmental uncertainty

“…Fifth, prior research suggests that greenfield ventures and acquisitions may confer different option values (e.g., Brouthers & Dikova, 2010;Smit & Kil, 2017), so we include the variable Acquisition Ratio, measured as the percentage of entries through acquisition in a firm's foreign affiliates. Finally, we control for the value of switching options available from the firm's network of multinational operations (Chang, Kogut, & Yang, 2016;Fisch & Zschoche, 2012;Kogut & Kulatilaka, 1994a;Tong & Reuer, 2007b) by including the variable Switching Flexibility, calculated as one minus the correlation in labor cost across all host countries (e.g., Belderbos, Tong, & Wu, 2014).…”

Production network flexibility: case study of Norwegian diary production network

“…Fisch and Zschoche [39,59] studied operational flexibility as a decision factor to be considered by international production networks for expansion. They argued that market-related motives for investment should no longer be dominant factors for maintaining or launching production sites in international production networks.…”

“…Capacity Ability to adjust product-specific capacity in each production facility in the network [35] Inventory Ability to change inventory position or size in production facilities of the production network [36,37] Distribution Ability to alter the distribution point (from one warehouse to another) in order to reduce delivery lead time [38] Operational Ability to dynamically change capacity allocation to production network facilities amongst different product families over time [39,40] External Product Ability to introduce new products or changes in existing product [29] Mix Ability to alter the product mix within the existing product rage that the system delivers [29] Volume Ability to change the system's aggregated output [26,27] Delivery Ability to alter the delivery agreement (shortening lead times or even changing product destinations). If there are insequence delivery arrangements, such as in the automotive component industry, delivery flexibility also includes the ability to make changes to the agreed delivery sequence Volume [37,46] Replenishment policies [37] Mathematical models Flow and cost optimizations [36] Distribution Network queue length estimator (nQLE) [15] Delivery N pheromone policy (nPHE) [15] Production network flexibility: case study of Norwegian diary production network 155…”