Logistics, Warehousing & Distribution

Print
Location Strategic Planning

31 Mar, 2004

By: Dennis J. Donovan

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.

 

Print


 
x

Subscribe to our Newsletters


The only vertical market site selection publication that delivers industry insight and growth strategies right to your inbox. Incentives, real estate, workforce development – site selection news and information centered around markets that matter to you.