Strategy Framework
This article examines the latest thinking relative to the design of corporate location strategy. One overarching force shaping location strategy is the globalization of business. Companies in nearly all industries are both increasingly penetrating foreign markets and encountering global competitors. As such, a flexible location strategy that can morph in response to global market conditions is becoming essential.
Large multi-national corporations are leading the way. In a growing number of these firms (e.g., Aetna, Bank of America, Intel, and Solectron), real estate has become fully aligned with business strategy. The keystones to this emerging paradigm regarding the role of corporate real estate, and by definition location of operations, are as follows:
1. Enterprise-wide view of the real estate portfolio
Continuous monitoring of physical deployment to ensure alignment with evolving business strategy
Capability for rapidly responding to emerging market opportunities, economic contractions, business disruption risk, product/service diversification, cost competitiveness, etc.
Determining if proposed bricks and mortar investment for a business unit is (a) the best use of capital and (b) targeted toward the right geography given the entire enterprise’s growth plans
All facilities in the portfolio linked as a network of places that are subject to change based on competitive marketplace conditions
2. Strategic versus Ad hoc approach toward real estate investment/disinvestment
Pro-active vs. reactive
Big picture vs. one-off
3. Global databases that capture real-time information, empowering top management to swiftly adjust the portfolio as needed
Information typically embodies
Real estate measurements
Human resources profile
Locational characteristics
Primary operation performance measures
Information can be reported at various levels including facility, city, country, region and business unit
4. Performance metrics that go beyond traditional real estate factors to demonstrate the influence of physical assets on corporate performance, e.g.,
Company earnings
Market entry/share (added revenue/profit)
Workflow efficiency
Cycle time
Employee recruitment/retention
5. Standing committees or advisory councils
Responsible for
Charting real estate/location strategy
Approving major capital investments
Approving location of new facilities
Global centralization of strategic decisions is becoming the norm
But implementation of decisions is frequently done by regional corporate real estate teams
Advisory council composition often embraces
Senior operations executive (lead)
Corporate infrastructive management
Real Estate
Human Resources
Information Technology
Logistics/supply chain
Finance
Legal
Global risk officer
Primary customers
JV and other business partners
Key suppliers
6. Real estate/physical location is becoming a prime component of vertical, end-to-end supply chains
Increasing demands are thus being placed on real estate toreduce cost, maximize efficiency, and achieve significant flexibility
Corporate real estate departments, especially in manufacturing and warehousing, are more and more reporting throughthe global business services or supply chain hierarchy
However, the chief financial officer will continue to exert substantial influence over capital investment decisions
7. The corporate real estate executive is slowly being invited to sit at the business strategy table
The CRE must be equipped to expand the knowledge base of senior business executives in terms of how the enterprise’s physical assets affect attainment of strategic objectives
The successful CRE in the future will be an expert in traditional real estate subject matter but must also demonstrate a working knowledge in areas such as
World geography
Business risk/continuity
Supply chain dynamics
Sophisticated finance
Human resources
Additionally, the CRE must have strong interpersonal skills to manage/coordinate disparate strategic teams
While the above defined strategic model is most applicable to large corporations, smaller companies must also become more strategic in charting location strategy. This is especially true in adopting a holistic view of real estate and physical location. Before committing to a new facility even a smaller company should ask if such an action best supports key business objectives. For instance, maybe there is a more propitious alternative to incurring the cost of establishing a new facility. Perhaps this could involve outsourcing or a joint venture arrangement. Also a look at how the new facility fits into a strategy of accelerating global market penetration should be taken before allocating scarce capital to a new operation. Maybe the initially targeted geography should be modified given future worldwide growth plans.
Whether a strategic framework is in place or not, a systematic process should be followed when the company has approved a decision to locate a new facility. This requires astute planning prior toengaging in any location analysis. The planning segment of the facilities location process is defined below.
Location Planning Process
This phase involves translating the reasoning behind a potential new facility into specific objectives, requirements, and criteria. Here are some of the issues to consider.
1. Who should comprise the location/site selection team? Typically:
Senior operations executive (leader)
Corporate real estate executive (coordinator)
Other main players
Finance
Legal
Logistics
Environmental
Human resources
Information technology
Perhaps a major customer, supplier, or business partner
Frequently an outside service provider for expertise (e.g., location consultant)
2. Why is the new operation needed?
Penetrate existing markets
Serve new markets
Closer proximity to customers and/or vendors
Lower the cost of goods sold
Reduce business disruption threat
Ensure flexibility for future growth
Obsolete facility
No room for expansion
Revamp production process/introduce new technologies
3. How competitive is the company within the industry?
Cost structure
Profitability
Production cycle
Customer service
Efficiency
Technology
4. Should a new/improved production process be employed in the new facility?
Just-in-time
Cell manufacturing
Statistical process control
Layout/design to accommodate a new technology and streamline process
5. Should any part of the process be outsourced, e.g., logistics?
6. What is the optimal size? The answer to this question (for both the short-term and long-haul) would involve a review of dynamics such as:
Total market share
Company’s proportion of market share
Constraints on obtaining greater share
Company’s financial resources and capital availability
Utilization of technology
Type of production process
Capacity of machinery per production line
Size of production runs
Cycle time
Change over time
Ability to operate 2nd and 3rd shifts
Rated capacity of machinery and equipment
Space, people, utilities required per production line
Total cost per production line
Number of production lines required to meet various volume levels
Maximum realistic volume that the new plant could serve given marketplace realities
Facility size of successful competitors
Financial modeling of several size options
Annual volume
Machinery and equipment investment
Production yield
Direct/indirect labor
Utilities
Transportation
Throughput/inventory turns
Inventory carry cost
Land/building
Capacity utilization
Total one-time cost
Total recurring costs
Return on investment
Key assumptions(e.g., additional capacity would yield “X” percent market penetration and sales volume)
7. Do any existing or emerging competitors have an operating cost advantage due to their plant or office locations?
8. What will be the new facility’s operating requirements?
Requirement Year One Year Three Year Five
Annual volume (units, lbs., $)
Headcount
Direct labor*
Indirect labor*
Sales/general/admin.*
Building
Size
Dimensions
Land (usable acres)
Utilities
Transportation
Number of shipments by mode
Frequency by mode
Air passenger service
Average inventory (day/month)
Machinery and equipment
Production
Nonproduction
Pollution control
*Note: For office operations, headcount generally is reported by exempt (salaried) and non-exempt (hourly)
9. What are the most critical assumptions framing the location search?
Maximum size for study purposes
Geographic markets served
Target start date
Ramp-up period
Future skill mix of employees
Number of transferees
Lease vs. own
Necessity of an available building
Location near a specific customer or vendor
Location in the same community as a competitor
Comfort level with being a large employer in a particular community
Maximum distance from a limited access four-lane highway
Geographic search region
10. Upon careful reflection of critical success factors, how important are specific location criteria?
11. What are the milestone tasks/completion dates for meeting the target occupancy date?
By phase
Key junctures for signoff by executive management
12. What are the rules of disclosure/confidentiality and communication policies regarding the project?
Internal
External
The project coordinator, often the corporate real estate professional, should recap the study’s building blocks in a brief presentation style report. The document should also include an overview of major tasks and decision dates for future work on the project. Approval of study building blocks, by appropriate senior level executives, is critical before advancing to the analytical (or tactical) phases.
Subsequently, the location analysis can be activated. As shown in the attached graphic, three other phases are involved before the project comes to a conclusion. By creating a well thought out plan, the likelihood greatly increases that the ultimate outcome will be a new location, which maximizes success potential of the proposed business entity.
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