NAFTA supply chains: facilities location and logistics

Abstract

Abstract North American Free Trade Agreement (NAFTA), the free‐trade agreement between Canada, Mexico and the United States, has caused North American companies to consider inclusion of Mexico in their supply chain. The lower Mexican wages may offset the additional transportation costs; capital‐intensive operations are preferably still done in the United States or Canada. With a consumer base focused in the United States, can an organisation leverage the benefits of NAFTA to their individual advantage? This paper aims to show how, through a real‐world example, overall supply chain costs (total system costs of inventory, transportation and facilities) can be minimised under those circumstances. We formulate and solve a mixed‐integer programming model to find the optimal supply chain for Tectrol Inc., a manufacturer of power supplies. In the first case, components produced in Canada undergo final assembly in the United States, followed by distribution there. The second case is a ‘NAFTA’ supply chain: the Canadian components are converted to sub‐assemblies in Mexico, processed in finishing plants across the US border, then shipped through distribution centres to the final customer. Model solutions indicate in each instance where to locate finishing plants and distribution centres, and how many of each there should be. Results provide Tectrol (hence other manufacturers) some general guidelines on distribution and supply chain decisions in the NAFTA context.

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