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This document provides a framework for companies to efficiently establish foreign manufacturing units in India using operations research approaches. It outlines a process for selecting an optimal location that involves evaluating both internal factors of different states, like resources and costs, and external factors of the overall business environment. Linear programming techniques, including formulating it as a transportation problem, are applied to determine the best state(s) to set up manufacturing based on the collected data. The paper aims to help companies navigate changing import regulations by diversifying production locations.

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0% found this document useful (0 votes)
42 views18 pages

Operation Research Paper END

This document provides a framework for companies to efficiently establish foreign manufacturing units in India using operations research approaches. It outlines a process for selecting an optimal location that involves evaluating both internal factors of different states, like resources and costs, and external factors of the overall business environment. Linear programming techniques, including formulating it as a transportation problem, are applied to determine the best state(s) to set up manufacturing based on the collected data. The paper aims to help companies navigate changing import regulations by diversifying production locations.

Uploaded by

Bhuvan Mahesh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 18

Efficient Establishment of Foreign Manufacturing Units in India: Utilizing

Operation Research Approaches Amidst Changing Import Regulations

By
Bhuvan Mahesh Ashray Kamath Aditya Maurya
Atharva Kasat Diya Jindal Bharath Ram

Keywords
• Manufacturing unit
• Restrictive import policy
• Cheaper price
• Linear programming problem
• Comprehensive framework
• Optimal location

Abstract
With increasing regulatory policies from countries, companies have to find an efficient way to
set up their manufacturing units in other countries as well. Currently majority of the companies
set up their manufacturing units in China as they are able to manufacture products at a cheaper
price, however this will not work for the long term, as if the companies intend to sell their
products in countries with restrictive import policies, they will have to diverisify and set up their
manufacturing units in that/those countries as well.
To select the right location for setting up a manufacturing unit, a company must look into what
we classified as Internal and External factors which we will be going in-depth further into the
research paper.
This research paper sets out to provide a framework to those companies that are looking to set up
their own manufacturing units in a country using operation research tools such as Linear
programming which includes visualizing the “Internal” factors as a transportation problem.
One probable limitation of this research paper is assuming that the current demand for the
products in the economy will remain equal to the forecasted demand or demand in the coming
years after setting up the manufacturing units, demand will be used in the linear programming
problems later in this research paper.

Introduction and Overview


Efficient establishment of foreign manufacturing units in India: Utilizing operations research
approaches amidst changing import regulations.
The Indian government enacted the laptop import ban in India on August 3, 2023 under the HSN
8741 category to boost local production cited from [TIMESOFINDIA.COM. (2023, August 4).
Ban on laptop imports: Can you buy from abroad, duties to be paid and other things to know. The
Times of India.]
This ban calls for importers to obtain a license before importing laptops, tablets and other
electronic items. The Directorate General of Foreign Trade (DGFT) has deferred the
implementation of these import restrictions until October 31, 2023 cited in [Kamath, P. (2023).
India laptop import ban: Reasons, impact, and alternatives explained. coopwb.in.]
Starting November 1, 2023, the clearance of import consignments of the stipulated seven items
under the HSN 8741 category will require a valid ‘License for Restricted Imports’. The HSN
8741 code is meant for devices dealing with data processing. Some people might look at this as
an opportunity to improve domestic manufacturing in India, and others fear that it might lead to
increase in prices.
Companies like Dell have announced that they will invest $300 million in setting up its
manufacturing operations in India.
Global tech giants like Dell, Acer, Samsung, Panasonic, Apple, Lenovo, and HP may face
hurdles as they navigate the new import regulations, potentially necessitating price adjustments
or profit margin reductions to remain competitive. Through this research paper, we plan on
helping corporate companies establish their manufacturing units in India. The methodologies
we’ll be using in this research paper will be Linear Programming Problem and transportation
method.
Companies use these methodologies in setting up manufacturing units for various reasons, some
of them being Cost savings, tariff and trade regulations, resource allocation, supply chain
optimization.
However, our Research paper is not just limited to foreign companies setting up manufacturing
units only in India, India here is taken just as a case study due to the new recent import policy. It
can also apply to other countries which are going to impose the import ban on various products
thus forcing the foreign companies to set up manufacturing units in that/those particular
country/ies.
It is also not restricted to just Laptop/Gadget/Tech based companies, since many countries have
their own import policies on various products, this also applies to all types of companies trying
to establish their manufacturing units in a country.

Literature Review
The paper Sadleir, C. D. (1970). Use of the Transportation Method of Linear Programming in
Production Planning: A Case Study. Operational Research Quarterly (1970-1977) has tried to
find similar solutions like our research paper however they are more focused on an optimal
quantity of production for a manufacturer rather than setting up the unit in a location. The paper
primarily focuses on supply constraints and conditions on product mix and used transportation
problem method of Linear Programming Problem to find the optimal production capacity. We
deal with focusing on the optimal location to set up manufacturing or production units.

While examining (Mueller, E., & Morgan, J. N. 1962; Baumol, W. J., & Wolfe, P. 1958; Elson,
D. G. 1972; Fulton, M., & Hoch, L. C. 1959) it becomes evident that the collective area of study
remains strongly inclined towards an exceedingly narrow defined context. Most studies are
limited to specific geographic area, neglecting broader comparisons or international perspectives.
The focus has mainly been on small scale industries with limited competition, leaving a gap on
how these factors apply to larger enterprise. Algorithms have primarily been in context of
warehouse management or a specific sector, but their applicability to manufacturing units
remains underexplored. Existing research often overlooks the impact of external factors, such as
broader business environment of the host country, which can significantly influence economic
outcomes.

We came across several papers (Meng, X., & Li, X. 2020; Knox, J. 1951; Dumas, Y., Desrosiers,
J., Gelinas, E., & Solomon, M. M. 1995) focusing on location sites related to a specific industry.
These research papers provided valuable insights and served as a catalyst for our own work.
However, they also highlighted a notable gap of how the algorithms and factors used in the
research of one industry cannot be used for the optimization of location for another industry that
inspired us to embark on our research paper. Below images are the bibliometric analysis using
VOSviewer.
Bibliometric Analysis – Link between OR and Manufacturing sector

Image source – The author: Retreived from VOSviewer importing data from Dimensions.ai
Density Analysis - Link between OR and Manufacturing sector

Source – The Author: Retreived from VOSviewer importing data from Dimensions.ai
In figure 1, we have network analysis of the VOSviewer mapping, as evidensed by figure 1,
there are multiple research co-citations on the topic transportaions in the logistics or supply chain
management and also on application of Operations research on pharmaceutical industries.
In the figure 2, we have the Density analysis of the VOSviewer mapping.
Density analysis as suggested by the name shows the Density or the cluster power of each cluster
based on the depth of colour.
As we can see, in transportation in logistics and supply chain, the density is the highest as it is
showing more depth in colour as compared to others.
Therefore, this indicates that there is scope for operations research in transportation, however we
have taken a different approach to this topic in our paper.
Our research gap is that-
• We focus more into analyzing, planning and forecasting rather than just creating a linear
programming problem based on current/past status of the manufacturing units in a
country, this will be explained more in-depth in the coming sections of the paper.
• We provide a comprehensive framework for the Top-level managers of any company to
take decisions as to which is the most optimal location to set up their manufacturing
units.

Research Methodology
Essentially the methods we have used in the research paper as discussed above is linear
programming (LPP), we have also converted the data into transportation problem which is a
subset of LPP.
Now since our objective is to provide a framework for the companies to set up their
manufacturing units in a country like India with increasing restrictive import regulations.
Here is the step-by-step process the companies will have to follow in order to select the most
appropriate location for setting up their manufacturing units:
I. Select the Country in which you want to set up your manufacturing unit.
II. Consider and evaluate the external factors of each state in that country.
III. After evaluating the external factors, shortlist atleast 4 to 5 states. (for this research paper
we short list 4 states after evaluating external factors)
IV. Once shortlisting is done, one must now collect the data of the internal factors of those 4
states.
V. Use those internal factors to construct LPP problems.
VI. Solve the LPP problem and thus determine the most optimum state/states for setting up
the manufacturing unit.
Our primary analysis begins from step 4 onwards. However, we will explain briefly about
what we classify as internal and external factors (i.e all steps prior to step 4).

Analysis and Findings


We will be following the steps specified in the methodology,

I. Select the Country in which you want to set up your manufacturing unit.

The first step sets up the premise for the entire paper, the top management of the
company must select which country to set up their manufacturing unit.
They can do so by analyzing the import regulations of each country.
For this research paper we consider India as a case study, as specified earlier in the
research paper there are some import regulations set up in India where there is a banin
import of laptops/gadgets, this has forced the foreign companies which have majority of
their manufacturing units set up in countries like china now set up their units in India to
be able to cater to the Indian market.
II. Consider and evaluate the external factors of each state in that country.

The external factors that we consider essential to set up manufacturing units in India or
any country are more generic in nature. However, the result of these generic factors may
differ from country to country.

The external factors could be-


a. Economic Factors: Economic factors encompass the financial conditions affecting
businesses. These include inflation rates, exchange rates, economic growth or recession,
interest rates, unemployment levels, consumer spending habits, and overall economic
stability. Businesses must monitor these factors to make informed financial decisions and
assess market conditions for their products and services.
b. Political and Legal Factors: Political and legal factors refer to the influence of
government policies, laws, and regulations on businesses. This includes government
stability, tax policies, trade restrictions, labor laws, intellectual property regulations, and
industry-specific regulations. Changes in political leadership or policies can have
significant impacts on business operations, market entry, and compliance requirements.
c. Environmental Factors: Environmental factors are related to the natural world and
sustainability concerns. These encompass climate change, environmental regulations,
natural disasters, resource availability, sustainability initiatives, and the impact of
environmental practices on reputation and customer preferences. Companies increasingly
focus on eco-friendly practices and managing their environmental footprint.
d. Social and Cultural Factors: Social and cultural factors encompass societal trends and
preferences that influence business decisions. These include demographic trends, cultural
norms, social attitudes, lifestyle changes, and shifts in consumer behavior. Understanding
these factors helps businesses tailor their products and marketing strategies to meet
changing customer needs.
e. Technological Factors: Technological factors relate to advances in technology and their
impact on industries. This includes the pace of technological innovation, research and
development capabilities, automation, artificial intelligence, and cybersecurity threats.
Staying technologically competitive is essential in the digital age.
f. Competitive Factors: Competitive factors involve the actions and strategies of rivals in
the marketplace. This includes market share, competition intensity, innovations by
competitors, entry of new competitors, competitive pricing, and product differentiation.
Businesses must constantly assess their competitive landscape to maintain a strong
market position.
The above are the external factors that must be considered by the top management of the
foreign company.
III. After evaluating the external factors, shortlist atleast 4 to 5 states. (for this research paper
we short list 4 states after evaluating external factors)

The top management must evaluate each state in the country based on the above listed
external factors, preferably create a pro and cons list of each country based on these
factors, allocate weights to each pro and cons, and shortlist atleast 4 to 5 states best
suitable for setting up the manufacturing unit.
For this case study, we assume that the foreign company shortlists 2 states best suitable
for setting up their manufacturing units.
The states being Delhi and Mumbai.

IV. Once shortlisting is done, one must now collect the data of the internal factors of those 4
states.

THIS EXAMPLE IS TAKEN FOR SIMPLIFICATION, REAL EXAMPLE WOULD BE


DIFFICULT TO UNDERSTAND WITH HUGE NUMBERS.
Manufacturing Units: The company plans to set up manufacturing units in
• Delhi
• Mumbai
• Bangalore.

Suppliers: These are the locations or suppliers from which the company sources its raw
materials. In this case, let's consider four suppliers:
• A
• B
• C
• D.

Supply: The supply capacity of each supplier, representing the availability of raw materials.
We'll assume

• Supply_A = 200 units


• Supply_B = 300 units
• Supply_C = 150 units
• Supply_D = 250 units

Manufacturing Unit Demand: The expected demand for raw materials at each manufacturing
unit:

• Demand_Delhi = 120 units


• Demand_Mumbai = 180 units
• Demand_Bangalore = 170 units

Transportation Cost: The cost of shipping one unit of raw material from each supplier to each
manufacturing unit. We'll use random costs for illustration:

• C_A_Delhi = 400 per unit


• C_A_Mumbai = 500 per unit
• C_A_Bangalore = 500 per unit
• C_B_Delhi = 500 per unit
• C_B_Mumbai = 400 per unit
• C_B_Bangalore = 700 per unit
• C_C_Delhi = 600 per unit
• C_C_Mumbai = 800 per unit
• C_C_Bangalore = 500 per unit
• C_D_Delhi = 700 per unit
• C_D_Mumbai = 600 per unit
• C_D_Bangalore = 400 per unit

Source – Dell annual report


This is Dell ltd’s data about the where most of its cost of goods sold is applied.
However, the sales of each state/district must be collected via primary research or more
extensive research, we limited ourselves to hypothetical scenario of supply and demand
for a company like dell.
In this case we consider the COGS as the demand constraint and the raw materials
supplied as supply constraint.
However, deriving data for a vehicular company is much easier as compared to a tech
company, below image is the example.
Source: BHP website
In the above image we have data of vehicular sales across multiple different states, so in this case
we can consider the sales as a constraint, and companies can use this data to forecast their sales if
they consider setting up their manufacturing unit in one of the states.

V. Use those internal factors to construct LPP problems.

Constraints:

1. Supplier Constraints:

• Supplier 1 capacity= x11+x21+x31 >= 275.

• Supplier 2 capacity= x12+x22+x32 >= 300.

• Supplier 3 capacity= x13+x23+x33 >= 225.

• Supplier 4 capacity= x14+x24+x34 >= 200.


2. Demand Constraints:

• Delhi Demand= x11+x12+x13+x14<=280.

• Mumbai Demand= x21+x22+x23+x24<=380.

• Bangalore Demand= x31+x32+x33+x34<=340.

3. Non negativity Constraints:

• Xij>=0 for all i & j

VI. Solve the LPP problem and thus determine the most optimum state/states for setting up
the manufacturing unit.

• The figures in YELLOW represents the number of units transported from the
manufacturer to the respective City.

• Total Transportation Cost would be:

195(400) + 85(600) + 80(500) + 300(400) + 140(500) + 200(400) =

78000+51000+40000+120000+70000+80000 = 4,39,000.

• Out of the 3 cities, one city will have the Head Quarters and the other 2 cities will
have Exclusive Stores.

• To choose the best city for Head Quarters, we found the transportation cost of
each city to find the most optimal location.
• Total transportation cost:

For Delhi: 195(400) + 85(600) = 1,29,000 (demand=280)

For Mumbai: 80(500) + 300(400) = 1,60,000 (demand=380)

For Bangalore: 140(500) + 200(400) = 1,50,000 (demand=340)

• Per unit cost for finding the optimal location to setup headquarters.

Delhi: 129000/280 = 460.71

Mumbai: 160000/380 = 421.05

Bangalore: 150000/340 = 441.18

• In the above example, least cost of transportation per unit is in Mumbai.

Hence, the optimal location to setup Headquaters is Mumbai as it has more


demand and less cost.

Delhi and Bangalore will have Exclusive Stores.

Limitations
1.The premise of this research study is relying on the fact that corporations can no longer only
depend on China for their production facilities and raw materials, and that countries would be
increasing their import controls.
2.We have restricted ourselves to only four states and have taken into account a small number of
factors and limits; nevertheless, the corporations can consider a large number of variables and
more states to develop a transportation problem around them.
3.This study paper is better suited for industrial firms that focus on producing goods or physical
products rather than providing services.
4.The assumption that the economy's present product demand will continue to match projections
or future demand when manufacturing facilities are established is a significant study
restriction. Demand is a crucial component in linear programming, but it's also vital to take
into account how stable it will be over time.
5.We have not conducted primary research therefore we do not have the data for the suppliers
and created a transportation problem based on a hypothetical scenario, however, the companies
can easily get the data and create a problem in a similar way as ours.
Conclusion
This study examines the increasing difficulty businesses encounter while establishing overseas
manufacturing facilities, especially in nations whose import laws are subject to change. Due to
economic benefits, many businesses have historically relied on manufacturing in nations like
China; but, as global trade changes, production locations must become more diverse. The paper
focuses on the Indian setting and offers a framework for using operations research approaches,
such as linear programming and data translation into transportation issues, to choose the best site
for manufacturing units.

The first section of the paper describes the steps taken by the Indian government to increase
domestic production by imposing import restrictions, such as the ban on laptop imports. Global
technology behemoths like Dell, Acer, Samsung, and others are now interested in setting up
manufacturing operations in India as a result of this regulatory move.

The purpose of this study is to help corporate entities make well-informed decisions on where to
locate their manufacturing units by applying Operations Research methodologies. This
architecture can be customised for a wide range of industries and nations with changing import
laws, not only tech firms or India alone.

Examining the body of research, it is clear that earlier investigations frequently had a restricted
scope, concentrating only on particular sectors, geographical areas, or small-scale businesses.
Many have failed to consider the influence of outside variables, and there has been a dearth of
research into the transferability of algorithms from one business to another.

This is filled by the research paper, which provides a flexible framework that integrates external
and internal aspects, uses linear programming, and helps businesses adapt to the dynamics of
changing global trade. The statement highlights the significance of Operations Research in
facilitating effective decision-making while establishing production facilities to adapt to
changing import laws.
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