Logistics, Warehousing & Distribution

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Real Estate

28 Feb, 2006

By: Dennis J. Donovan
Tradeoffs In Manufacturing/Distribution Facilities Location

Introduction

Finding the optimal locations for a new manufacturing or warehouse facility often involves a series of tradeoffs. Among these tradeoffs are acceding to customer desires to locate alongside the operation to be served by the company’s new production unit. For a distribution center, the driver is often to locate as close as possible to major customer concentrations.

But a site next to the targeted customer might not be the ideal location to satisfy the new facility’s primary operational criteria. These could include labor supply/quality, unionization risk, business costs, electric power reliability, etc.

Conceptual Approach

For a manufacturer, it is therefore imperative to hold dialogue with the customer in question to balance your company’s most critical requirements vs. the need for virtually instant delivery of product. In preparing for these discussions it is important to consider six dynamics.

1. You will have invested a significant amount of capital in the new facility, so you must be sure that you get an adequate return should market dynamics change?

2. What would happen if the prime customer decided to terminate its supplier contract with your company?

3. What is your cycle time and to what extent does being next to your customer as opposed to a day distant affect product delivery from the time an order is placed?

4. Would your location be well suited to allow you to cultivate new customers who may be located outside the area?

5. Ideally, what would be the character of a new location assuming you did not have a restriction of being a neighbor to your prime customer?

6. Do you have secondary customers beyond the prime and how does the new location allow you to effectively serve these entities?

For a distribution operation, the following should be addressed before entering the location selection phase.

1. What region will the new DC serve?

2. Where is the densest concentration of customers now & in the future?

3. What is the maximum delivery time (e.g., next morning) to major customers?

4. Where is the least cost freight location in the region?

5. How important is transportation cost vs. labor cost?

6. What would it take to offset incremental transportation costs by reducing other costs (e.g., labor) at various distances from the optimal freight point (at 50 miles, 100, 250, etc.)?

Back to the manufacturing illustration, once the six aforementioned dynamics have been resolved internally, it is time to hold discussion with your primary supplier. The object is to define the geographic extent of a search territory for your new facility. This must weigh the customer’s just-in-time demands with other considerations that are vital to your company. Agreement can then be reached on how far away your new plant can be from the prime customer’s facility.

In these discussions, it is important for you to stress that many considerations other than delivery time affect your ability to produce a high quality product at the lowest possible cost. Such considerations include workforce availability and quality, wage levels, electric power costs, availability and cost of sites/buildings, etc.

Once you and your customer have reached concurrence on maximum delivery time and the geographic search region, the location selection process can commence. A component of the study could involve benchmarking your customer’s location so that tradeoffs with alternative areas can be objectively quantified.

Location Process

The location study would involve a three phase procedure. Highlights of each phase are outlined below.

Phase One: Definition

  • New facility operating requirements (year one & future)

    • Headcount

    • Site

    • Building

    • Utilities

    • Transportation

    • Environmental

    • Capital investment

  • Geographic search region

    • Customer locations

    • Vendor locations

    • Geography to be considered

  • Importance of various criteria

    • Customer proximity

    • Vendor proximity

    • Labor market

    • Payroll costs

    • Highway access

    • Transportation services

    • Available buildings

    • Prepared site availability

    • Occupancy costs

    • Utility

      • Availability

      • Reliability

      • Cost

    • Natural disaster risk

    • Site security

    • Environmental

    • Quality-of-life

    • Taxes

    • Incentives

  • Rules of disclosure/confidentiality

Phase Two: Screening/Shortlist

  • Winnowing or elimination process

  • Confined to search region

  • Basic criteria introduced first such as four-lane highway access

  • More restrictive criteria sequentially applied such as

    • Population size/trends

    • Labor force characteristics

    • Distance to an airport

    • Average manufacturing or distribution wages

    • Natural disaster risk

  • Longlist (maybe 10 areas) emerges

  • Further review conducted

  • Both desktop research and outreach to economic development groups

  • Illustrative factors include

    • Major and similar employers

    • New/expanding companies

    • Downsizing firms

    • Unionized companies and recent election activity

    • Local wage surveys

    • Availability and asking price

      • Buildings

      • Sites

    • Electric power cost/capacity

    • Natural gas availability/cost

    • Air/water quality attainment

    • Motor carrier and rail service

    • Tax practices/rates

    • Possible incentives

  • Compare/rank longlist areas (including the customer benchmark location) on many factors grouped into categories like

    • Business costs

    • Labor market

    • Sites/buildings

    • Utilities

    • Transportation

    • Environmental

    • Quality-of-life

    • Composite scores

  • Select a shortlist (maybe three) for Phase Three evaluation

Phase Three: Location Selection

  • Field based due diligence evaluation

  • Consists of

    • Interviewing comparable businesses to learn of their recent and emerging operating experiences

    • Interviewing other pertinent entities (e.g., transportation officials, government representatives, business groups, etc.) to gain insights on business conditions

    • Examining sites/buildings to identify the most promising

    • Physical tours

    • Geotechnical maps/reports

    • Zoning restrictions

    • Building permits

    • Satellite images/aerial maps

    • Phase One environmental analysis of candidate sites/buildings

  • Request a preliminary incentive offer from state/local economic development organizations

  • Compare each area on critical factors

    • Short-term

    • Long range

  • Choose the best location, balancing various factors such as

    • Customer proximity

    • Operating costs

    • Labor market viability

    • Site/building attractiveness

    • Incentives

    • Time required to become operational

  • Select the

    • Top location

    • Best alternative

    • Two or three most suitable properties (sites and/or buildings) in each area


  • Commence final incentives/real estate negotiations in both areas

  • Perform final due diligence (e.g., tax, legal, real estate)

  • Choose the best location/site

  • Plan for the construction phase

  • Announce the decision

This systematic process is necessary to ensure that your next location will maximize the company’s ability to realize business objectives associated with establishing the new facility. You will need a multi-discipline project team to conduct the analysis. Be sure you obtain customer feedback before making the final decision. You should plan on the study requiring 3-6 months, depending on its complexity.

For the distribution illustration, the same three phase decision-making process would be followed. Again it would be important to benchmark two or three alternate areas with the location that is best suited from a logistics standpoint. Then compare all of these locations to determine if it is worth choosing one of the alternative areas. Key ingredients to making the final choice would involve a comparative review of the candidate areas on the following:

1. Delivery times to customers

2. Transportation costs

  • Outbound

  • Inbound (could be slight variation as in alternate locations as carriers might have to deadhead back which could affect cost)

3. Labor costs

4. Ability to recruit/retain labor

5. Labor turnover and costs

6. Unionization threat

7. Site and building costs

8. Electric power costs

9. Local taxes

10. Incentives

Once these tradeoffs are quantified you will then be in a position to choose a location which best supports attainment of your most critical business objectives for the new distribution center.

Conclusions

In closing, there are no definitive answers for solving this dilemma so that it is beneficial to both the customer and supplier. Tradeoffs must be determined so that an objective, rational decision can be made that balances both the customer’s and company’s prime interests.

For some industries, location near (maybe 1 hour away) is virtually mandatory. These industries basically involve situations where the new facility is serving a localized market. Examples include bottling, bakeries, industrial service/repair, and building products.

Other industries have more flexibility in locational choice. It is here where the tradeoff challenge would be paramount. Such industries include motor vehicle parts, aircraft components, specialty chemicals, packaging material, plastics, etc.

We should point out that many companies have successfully negotiated with suppliers to locate a reasonable distance away from their facilities in order to achieve low cost and other operational objectives. Examples include Quebecor printing plants (e.g., Corinth, MS 90 minutes from the Memphis hub concentration), Fleetguard Nelson (Waynesboro, GA with major customer concentrations in areas like Atlanta), and Mitsui Chemicals (Kentucky with major customer concentrations in Chicago).

Likewise, many distributors have opted for lower cost locations up to 3 hours away from major customer agglomerations. Examples include Wal-Mart in North Platte, NE; Lowe’s in Plainfield, CT; and Target in Liberty, GA.

On the other hand, some companies have gone to the extreme and collocated (same building) with their main customer. This is beginning to take shape in the auto sector.

The ultimate resolution depends upon balancing the company’s and customer’s preeminent needs. Balancing equates to tradeoffs which in the end must be a win-win situation for all stakeholders.

 

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