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Who Moved My Profit? Location Selection for the Food and Beverage Industry

30 Sep, 2005

By: Kristian D. Bjorson

Look beyond the company name, nutrition facts and headquarters address on your product’s label. Are you being faced with shifting markets, consolidating product lines, global sourcing and narrowing capacity across multiple transportation modes? These issues are forcing food and beverage suppliers, manufacturers and distributors to digest the savings opportunities associated with location selection. The consolidation and movement of facilities along the food and beverage supply chain provides a unique opportunity to positively impact the customer experience, product availability, brand sustainability and operating profitability. Use location selection as a strategic weapon to deliver profit enhancement.

Today’s supply chain strategies being developed by the leading food and beverage companies are leveraging location selection as a significant play to improve the bottom line and deliver shareholder value. Jump on these real-life tips and practical ideas which help to organize and manage a location selection process to achieve optimal results in the shortest possible time frame.

Lick the Logistics Issue, First!

The complexity of accelerated product trends, supplier integration-internationalization and spiked volume has forced food and beverage companies to utilize not only their brand recognition and product quality, but their logistics, as a competitive advantage. The best way to accomplish this is by conducting regular check-ups on the viability of the network.

  • What is the supply chain strategy to handle the demand?

  • Is the current distribution network properly located to support the supply chain strategy?

  • Which locations have the flexibility, capacity and ability to meet the demand?

  • If a new location is required, where should it be located, for what products and how big?

  • To maximize the ROI, are there opportunities to consolidate any of the other locations?

Answer these questions by meticulously surveying the present situation and anticipated needs to understand the changes in cycle times, product mix, supply sources, as well as increases in operating costs to meet the changing dynamics of demand. Provide an objective analysis of current distribution operations, identify challenges, suggest options for change, and establish the current benchmark for future comparison. This routine of benchmarking performance and developing metrics is not only a “survival of the fittest” tactic, but it also enables a process to efficiently assess the impact of changes and continuously determine how the operations and financials match up globally against top competitors and “best of class” performers.

From an entire supply chain perspective, develop a clear understanding of how the location selection process may help maintain and grow both top and bottom lines. With transportation costs accounting for more than half of the distribution spend, the greatest sensitivity study of the modern supply chain has revolved around the proximity to people and ports. Seek access to interview the top customers and lead suppliers for feedback regarding the service and cost components critical to any effective distribution network. Collect data for the overall supply chain costs from a representative period in order to utilize and leverage network optimization and simulation software to understand the interdependence between all cost and service factors. As each new demand-change happens within the supply chain, analyze the customer service level and capacity of the existing network to understand the financial trade-offs associated with transportation, inventory, labor, real estate and tax. This analysis may justify consolidating locations or simply adding another location through a network-wide reduction in transportation costs to offset the increases in inventory, fixed and variable costs.

A Balanced Location Selection Diet: Stable Workforce, Ample Utility Infrastructure and Existing Buildings

From the targeted area(s) outlined in the logistics optimization study, conduct working meetings to determine a balanced location selection strategy, inclusive of goals and objectives driven by the search for a stable workforce, ample utility infrastructure and existing building opportunities. Develop a realistic timetable and a communications program for all team members to set the foundation for shareholder and stakeholder support of critical project drivers and savings opportunities. Determine three to five “threshold” criteria, such as food and beverage worker concentration, unionization, water supply-capacity or utility rates, essential to the success of the project that each county must meet. Utilize these criteria in a “high-level screen” to obtain consensus and eliminate those counties that do not meet the threshold criteria. For maximum impact, the high-level screen should produce a minimum of six counties in three states for consideration.

At this point, due to the accelerating pace of change in the food and beverage industry, many companies are shortening the location selection process by beginning with the end in mind – identifying existing buildings with an adequate workforce and utility infrastructure. Although this focus may yield a less than optimal location, it meets the “speed to market” demands and “cost reduction” initiatives of many projects. Whether searching on the county-state or building level, develop an objective decision model, which accounts for both quantitative and qualitative advantages and tradeoffs of each alternative. Research and analyze specific criteria related to labor force, infrastructure-community support and operating costs. Look beyond the “off-the-shelf” labor information to quickly focus on relevant correlations — such as the relationship between a diverse workforce and unionization, high school graduate population and food and beverage worker density, or the relationship between a handicapped workforce and public transportation. Regarding the appropriate infrastructure-community support, account for changes in supply and capacity issues for water, electricity, waste water treatment and transportation infrastructure as well as understanding the presence of competitor facilities, intermodal hubs and relevant community acceptance attributes. The operating cost profile will be driven by the following major categories: transportation, labor, real estate, utilities (water and electricity rates) and tax structures. Tailor all of these data points to your needs to develop a quantitative and qualitative analysis that weights, ranks, and plots the data in a report format that is easy to read. A decision matrix of advantages and tradeoffs will provide additional life to the results as well as help build an educated decision-making consensus on relevant information to arrive at a short list of four counties in two states.

Prevent fatal and costly mistakes by taking city visits to gain firsthand experience of the primary economic and community criteria. Set up interviews with other food and beverage operations to verify comparative labor data on hiring, turnover, wage scales and incentives as well as an overall comfort levelfor the operating climate. Define all potential real estate scenarios to understand each county’s issues, weaknesses, and strengths, as well as windows of opportunity created by current real estate market conditions and expected changes. Develop a real estate spreadsheet to evaluate each county by the availability, cost and transportation accessibility (highway, rail and airport) of potential buildings and sites. Prepare a business profile to help you solicit tax abatements and incentives from various economic development councils. Review recent tax abatement and incentive allocations of comparable projects, in terms of capital investment and labor, to understand the overall incentive value for your project prior to meeting with each location’s economic development groups. At the conclusion of the city tour, you will be in a position to make a confident recommendation of the primary state / city / site and back-up, supported by a substantive summary of objective and subjective information.

Pass the Profits, Please!

Don’t just talk about the primary location decision; make it happen by converting recommendations into results. A detailed location selection process puts your team in a position to make a winning business decision. Simply locking and loading a long-term real estate deal is not the answer.

Aggressively take the lead to improve facility layout and productivity through better use of space and work scheduling. Constantly challenge yourself to find answers to critical questions regarding facility planning, design, and operations. Develop a detailed facility strategy that maximizes the ROI in labor, material-handling equipment and information systems. Quantify the benefit of each cost in terms of time, money and effort. Perform value engineering to ensure economic, safety, and flexibility issues are constantly being met. Working from the inside out will enable you to capture the greatest fixed (real estate) and variable (labor) operating savings.

Maintain competitive leverage in the real estate and municipal incentive process by evaluating multiple location alternatives across a recommended minimum of four counties in two states. Set the stage for a professional process by utilizing written request for proposals as the means for communicating and documenting the various real estate and municipal incentive options. In working with the appropriate government officials at a state, county, city and local level, utilize all of the information outlined and captured above to effectively negotiate any tax abatements and incentives by illustrating the trade-offs in transportation, labor, real estate and taxes between the other location alternatives. Use a third party negotiating position to work every angle of the deal until the ink is dry. Always execute the tax abatement and incentive agreement prior to the real estate contract. Prevent any profit erosion by controlling the balance of the implementation process with internal and external resources actively managing the facility design / construction, material handling and information systems procurement.

Leverage the location selection framework outlined above with the appropriate compliment of internal and external resources to yield world-class results.

 

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