Continental Tire: Pursuing a Winning Plant Decision
Length:
08:40
Subject:
New Manufacturing Plant Decision
Textbook Reference:
Chapter 13: Supply Chain Logistic Networks, page 554
Summary
This video case shows how Continental tire, the world’s largest automotive company and fourth
largest tire manufacturer, reached a decision to locate their new manufacturing plant in Sumter,
South Carolina. While locations such as Mexico and Costa Rica had lower labor costs, Continental
Tire realized that the location of a new plant should not be solely driven by labor costs. Instead, it
should be based on the total landed cost, which covers costs from the entire stream of raw materials
to the shipping costs of finished goods. Analysis showed that having a location for the new plant
close to its customers would be more beneficial.
Key Concepts related to the chapter
The case and video describe the decision-making process for plant locations within a network of
manufacturing and distribution facilities. Several key concepts are provided in the case, such as
considering additional dominant factors other than labor costs, running break even analysis with
an optimization program, and creating a systematic process for strategic decision making.
The variables that Continental Tire considered include proximity to the customers, work force skill
levels needed, energy accessibility, government and private partnerships, and incentives. In
addition, logistics costs were measured in the form of landing cost, which includes freight,
handling, and in-and-out bound logistics costs. Some interesting points given in the case show that
Continental Tire put little weight on the incentives from the State governments because they tend
to be short term benefits. Instead, putting emphasis on intangible factors such as quality of life is
more reflective of the firm’s long-term orientation.
Because Continental Tire was relying heavily on out-sourcing (not much vertical integration), it
changed the cost metric from production cost to total landed costs. Instead of a 5-year model to
assess the impact of the decision, they used a 20-year model, which would provide a longer-term
assessment of their decision. Students can therefore discuss in detail how the decision-making
process used by Scott differs from traditional approaches that tend to define cost structures
narrowly, and do not take such a long-term planning horizon into consideration.
Essay or Discussion Questions Based on Video
1. Consider the dominant factors for manufacturing as described in the text. Briefly describe
how each one may have influenced Continental’s decision to locate its new plant in
Sumter, South Carolina, instead of Mexico or Costa Rica.
• The dominant factors in manufacturing location decision described in the text consist
of a favorable labor climate, proximity to markets, impact on the environment, quality
of life, proximity to suppliers and resources, proximity to the parent company’s
facilities, utilities, taxes and real estate costs, and other related factors.
2. South Carolina is also home to manufacturing plants for major tire competitors Michelin
and Bridgestone. How might these two plants factor into the company’s location
decision?
• Academic research reveals several benefits that can arise from competitive co-location
of a manufacturing plant. For example, when firms in an industry cluster together, it
3. Explain why locating a plant solely on the basis of low labor costs may be the wrong
approach.
• First, it is important for the students to understand that a favorable labor climate factor
does not limit itself to labor costs only. Even when labor costs are low, other important
