Investments Abroad: Using the Right Evaluation Techniques

Abstract

When evaluating investments in new production facilities abroad, companies need to select an approach that best matches their information needs and objectives. The various models available have very different scopes of analysis, complexity, and performance. Selecting the right technique is key to capturing the full potential of network reconfiguration and limiting the complexity of redesign to the level the organization can handle.

Our discussion first focuses on three base models with varying levels of detail. For small and mid-sized enterprises (SMEs), a simple process of sequentially excluding options may be most suitable - the knockout model. Portfolio analysis is a particularly useful tool for diversified groups developing a global site strategy. Corporations with highly integrated manufacturing structures, on the other hand, may find the strategic location concept more appropriate.

A wide range of methods can be used to evaluate the location options identified, combining investment analysis techniques, various indicators and perspectives, and IT implementation. Companies can tailor the approach they take towards evaluating global production sites to their specific requirements. However, our analysis showed that three elements are crucial. First, the approach has to be action-oriented. While it needs to function as a tool for determining the target structure, it should also lead to specific steps towards implementation. Second, it must cover significant parts of the value chain. Suppliers and customers should typically be included in the analysis, particularly if materials costs and other upstream value-added stages account for a vast share of total manufacturing costs. Third, with any technique applied the ratio of costs to benefits has to be right. Realistically mapping economic and operational conditions can take a great deal of effort and time. The level of detail targeted should be strictly geared to the additional insights and accuracy a more granular analysis can provide — a focus that is all too often neglected.