A Literature Review on Risk Analysis of Production Location Decisions

Abstract: This report is the result of a master thesis with a focus on risk analysis of production location decisions. The project is a part of “PROLOC-manufacturing footprint during the product’s life cycle”. The main aim of this thesis is to point out how current applicable risk analysis techniques evaluate the risks involved in production location decisions and then underline the most important risks involved in production location decisions and elicit strengths and weaknesses of these methods.A systematic review of literature with a focus on journal papers of risk analysis and production fields is conducted by using the content analysis and coding technique. The current risk analysis techniques identified are failure mode and effects analysis (FMEA), life cycle cost (LCC) analysis, and system based techniques like multiobjective analysis, decision tree analysis, and analytic hierarchy process (AHP). In addition two identified frameworks of foreign direct investment (FDI) and international production are the research fields that have contributed extensively in identifying various risks of production location decisions.Having reviewed the literature, it is realized that majority of companies take a short sighted vision in choosing production location and consider just cost based issues like cheaper raw material and low labour cost in some countries and simply ignore uncertainties that can be sources of political, economic, social, competitive, and seismic risks. Low cost countries are usually situated in politically instable areas that can cause long production halts or expropriation. Political risk is mainly identified in FDI literature and is usually triggered by a political turmoil, coup d’état, or revolution. On the other hand cheap labour does not necessarily mean decrease in costs and might bring about quality issues and damage company prestige among customers which results in time and monetary loss. Currency exchange and inflation in costs often causes the initial forecast and cost analysis go wrong. Supply risks are because of disruption of ties with raw material or part suppliers in home country and might result in risk of misuse by new suppliers or partners. Also the seismic risk is introduced as a separate category of risks of production location decisions which can be considered a matter of more investigation and requires further research.The study also presents a review of strengths and weaknesses of existing risk analysis techniques of production location decisions. The lack of consistency, vagueness of information, unfamiliarity with design to cost concept are among the major weaknesses of risk analysis techniques of production location decisions. The study concludes with the fact that just considering the cost oriented factors like cheap labour and raw material by production companies exposed them to various risk and might make the whole investment in vain. Suggestions for further study on techniques and risks of production location decisions are also proposed.