Manufacturing

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Best Approaches Toward Manufacturing and Distribution Facilities Location

28 Feb, 2007

By: Dennis J. Donovan

Introduction


This article illustrates the main differences and also the commonalities associated with the execution of location strategy for manufacturing and distribution facilities. The primary intent is to facilitate an efficient process that will ultimately result in optimal location decision-making for industrial and warehouse operations.

Distribution Center Location

Getting Started

Distribution centers comprise an integral component of virtual, end-to-end supply chains for a variety of industrial enterprises (from retail, to wholesale, to manufacturing). In nearly all instances, the initial location variable is proximity to the customer base. Customers could be either other companies or the ultimate consumer.

Consequently, the first task in a site selection exercise is to delimit the geographic territory that will be served from the proposed warehouse. This requires analysis of the following

1. Geographic clustering of customers


  • Current

  • Future


2. Territories served by existing warehouses

3. Reconfiguration of service territories with an additional warehouse

Relatively straightforward if only one new DC envisioned. But, if more than one is likely in the foreseeable future , determine service territories with probable number of warehouses over a specified time horizon. This exercise is often referred to as a configuration analysis with key inputs noted below:

  • Annual volume, current and future

  • Delivery time/service level requirements

  • Customer locations

  • Supplier locations

  • Delivery time and freight cost quantification

  • Current configuration

  • New configuration

  • Optimal warehouse sizing (thruput, site/building, headcount)

  • A company’s logistics team and perhaps a supply chain consultant would conduct the configuration analysis

  • Several software programs can be purchased to aid the analysis, including

  • Scientific-logistics.com

  • MicroAnalytics Optisite (Bestroutes.com)

  • Networks for Windows (Ronald.ballou@case.edu)

  • Radicallogistics.com

  • SAILS (Strategic Analysis of Integrated Logistics System) by Insight, Inc. (insight-mss.com)

4. Delimiting the least cost freight point within the targeted service territory

  • Inbound

  • Outbound

  • Software to conduct a freight cost analysis, includes


5. Determining an acceptable radius around the least cost freight point within which to conduct the location search for the new warehouse (often a 10%-20% penalty over the optimal spot)

The above described analysis is generally performed by a coordination of a company’s operations and logistics groups. Now the stage is set to launch a location study.

At the outset, an internal team needs to be assembled. Team members should be drawn from the following disciplines:

  • Business operations

  • Logistics

  • Real estate

  • Human resources

  • Information technology

  • Finance

  • Legal


Information Building Blocks

Once the team is put together the new warehouse’s operating requirements need to be delineated. Those embody the following:

1. Maximum distance from an airport, and limited access four-lane highway, and perhaps a seaport

2. Transportation services

  • Motor carriers

  • Air cargo

  • Rail

  • Small package


3. Site

  • Acres

  • Configuration

  • Zoning

  • Compatible nearby land use

  • Access

  • Topography

  • Geophysical


4. Building

  • Size (SF)

  • Clear ceiling height

  • Column spacing

  • Truck docks

  • Rail siding

  • Expansion potential


5. Utilities

  • Electric Power

  • Telecom

  • Water/sewer

  • Dual feed


6. Capital Investment

  • Land/building

  • Machinery/equipment

The team now needs to define and weight locational criteria. These include the following:

1. Logistics

  • Customer proximity

  • Vendor proximity

  • Highway linkage

  • Transportation services


2. Real estate

  • Available sites

  • Available buildings

3. Utilities

  • Electric Power

    • Capacity

    • Reliability

    • Cost

    • Dual feed

 

  • Telecommunications

    • Local exchange carrier

    • Competitive local exchange carriers

    • Long distance carriers

    • Dual feed

    • Broadband

    • Fiber

    • Satellite backup

  • Water/sewer treatment capacity


4. Staffing

  • Hourly

  • Supervisory

  • Sales/general/administrative


5. Taxation

  • Corporate income

  • Franchise

  • Sales/use

  • Gross receipts

  • Property

  • Inventory


6. Possible incentives (should only be considered in qualified areas)

7. Unionization

8. Training resources

9. Business costs

  • Freight

  • Payroll

  • Occupancy

  • Taxes

  • Insurance


10. Quality-of-life

Once baseline information is developed, a two phase process should be followed to select the best long-range location. The initial phase is often called “screening.” Main objective in this phase is to generate a shortlist (often three) of the most attractive locations. These would then be brought forward to a field study phase (Phase Two).

Location Screening

The screening phase embraces a winnowing or elimination procedure wherein locations are systematically rejected until the shortlist surfaces. This screening process starts by rejecting obviously unacceptable areas in the search region. Illustrative early stage elimination factors for distribution centers often include:

  • Distance from a limited access four-lane highway

  • Class I railroad service

  • Minimum population size

  • Distance from seaport

  • Distance from a commercial airport

An iterative process should now be followed wherein increasingly more restrictive criteria are introduced until a longlist (possibly 10) of promising areas emerges. Examples of middle stage screening factors include:

  • Population trends

  • Labor force trends

  • Highway linkage

  • Inventory tax

  • Wholesale trade average salaries

Once the longlist has been generated, the team will reach out to state and/or local economic development agencies to obtain information that provides a better understanding of local operating conditions. It is therefore important to obtain information such as:

  • Site/building availability

  • Construction costs

  • Land costs

  • Electric power costs

  • Utility service

  • Local wage surveys (e.g., warehouse worker, picker/packer, material handler)

  • Competitive employers (distribution and manufacturing)

  • New/expanding blue collar employers

  • Downsizing blue collar employers

  • Motor carriers with local terminals

    • Truckload (TL)

    • Less than truckload (LTL)

  • Rail service

  • Small package service

  • Freeport legislation if inventory tax exists

  • Potential incentives

At this point the semifinalist (or longlist) areas should be ranked/scored. The purpose is to pinpoint three finalists (shortlist). Semifinalist areas should be ranked/scored on individual factors aggregated into broad categories such as:

  • Marker/supplier proximity

  • Transportation resources

  • Labor market

  • Real estate

  • Business cost

  • Quality-of-life

  • Composite


Field Assessment

Once a shortlist (maybe three locations) has been identified, the team needs to conduct a first-hand evaluation in each area (Phase Two). This field-based due diligence assessment should entail the following.

1. Orientation to the area by the lead economic development agency

2. Tours of potentially suitable sites

3. Interviews with comparable employers

4. Interviews with other entities, such as

  • Transportation

  • Utility representatives

  • Government officials

Field study results should be analyzed to compare finalist locations and determine which one is most ideally suited for the proposed distribution center. Essentials for the comparative assessment include:

  • Market/supplier areas

  • Transportation resources

  • Labor market

  • Sites/buildings

  • Business cost

  • Incentives

  • Business regulation

  • Training

  • Quality-of-life

  • Leadership attitude

For distributors serving a highly localized market (e.g., single metro area) delivery times and costs can vary from one site to another. Hence, many of these firms will perform a route optimization analysis to determine which potential site is best from a customer delivery/time cost standpoint. Several software programs can be valuable tools for such an analysis. These include:

Once the above defined study is completed the preferred location and best alternative would be chosen. Now it is time to undertake final real estate and incentives negotiations in each area. Unless these negotiations yield meaningful differences, the top (preferred) location should be selected for the new distribution center.

Additional Thoughts

It should also be stressed that distribution centers, unlike most factories, require large floor plates and high ceilings. Structures often occupied by distributors are sometimes referred to as “big boxes.” They can easily be one million SF with 35 ft. ceilings and sit on a 125+ acre site. A significant number of distribution centers, especially in the perishable goods sector, require buildings arranged for cross-docking. The term reflects a building design allowing goods to be received at one truck door and shipped out another door, almost immediately, without putting the merchandise in storage. Cross-docking can be done through doors either at tailgate or drive-in height.

Before leaving our discussion on warehousing it is instructive to mention another discernable trend that we see accelerating over the next few years. That is the tactical decision of many warehousers to site new facilities in small towns. Usually, these communities will be within hailing distance (maybe 2 hours) of a large metro area featuring a dense concentration of warehouse operations. While many companies must be situated in a large metro (e.g., customer access) others have more leeway. That is they can withstand extra transportation costs and delivery times to enter far less expensive smaller areas. These areas yield substantial labor cost savings and secondarily lower real estate cost and taxes. Incentives are also usually greater. And the warehouse will likely be considered an “employer-of-choice”, enhancing recruitment/retention of qualified workers. Examples of DCs that have been established in smaller towns include the following:

  • Dollar Tree Marietta, (OK)

  • Ikea, Danville (VA)

  • Target, Liberty County (GA)

  • Wal-Mart, North Platte (NE)

  • Harbor Freight Tools, Dillon (SC)

Manufacturing Location Selection

Mobility Constraints

Some manufacturing entities will be geographically limited in location options due to customer imposed demands for proximity. For such businesses, their location strategy is largely shaped by JIT (just-in-time) demands placed on them by customers. Hence, the geographic search territory can be as narrow as the same community or as wide as next day delivery by truck (often 450 miles). Such “local” industries often include auto parts, aerospace contractors, bakeries, beverages, building materials, intermediate chemicals, and packaging.

Manufacturers encountering geographic constraints should nevertheless follow the two phase process denoted above to choose a location whose attributes will maximize success of the new enterprise. Again, the two phases are screening (getting to a shortlist of the most attractive locations) and field-based due diligence to select the best long-range location.

Many other industrial operations have much greater geographic mobility. Frequently these companies can consider multiple regions or even an entire country. Typically, these firms produce light weight and high value products. Examples include electronics, instruments, industrial equipment, medical equipment, pharmaceuticals, and health/beauty products. Like their geographically limited brethren, these highly mobile companies also need to follow a structured, two phase analytical process (screening and field study) to arrive at an optimal location decision.

Reaching the Shortlist

Once the manufacturing site selection team has defined year one/future operating requirements (e.g., staffing, site/building, utilities, transportation, etc.) and concurred on weighting of various locational criteria, the screening exercise (Phase One) can begin. Among the most important factors that manufacturers often utilize to eventually create a shortlist (typically three) of viable locations are:

1. Distance from a limited access four-lane highway

2. Distance from a commercial airport

3. For about 10%-15% of manufacturers, rail service availability

4. Natural disaster risk (e.g., earthquakes)

5. Geographical balance in the supply chain (e.g., distance among various plants in the company’s real estate portfolio)

6. Manufacturing industry concentration (too much above the national average of 13% could signal stiff labor market competition)

7. Distance from key suppliers which could include a seaport for imported goods

8. Average manufacturing industry wages

9. Employment in pertinent occupations (e.g., machine operators)

10. Electric power costs

11. Electric power transmission congestion

12. Natural gas availability

13. Water supply

14. Air quality attainment

15. Industrial building construction costs

16. Demographic trends

These and other factors utilized in the screening process will result in a longlist (maybe 10) of promising areas. There are a number of good data sources that can be tapped for this desktop research. Examples are furnished in Table 1.

At this point (after desktop research) contacting state/local economic development agencies to gain a better understanding of potential business operating conditions comprises the next task. Emblematic of variables that should be addressed to distinguish and rank the longlist are:

  • Major employers (mainly for labor market compatibility)

    • All sectors

    • Manufacturing

    • Distribution

  • New/expanding employers (a harbinger of near-term labor market competition)

  • Downsizing industrial companies (temporary, supplemental labor pool)

  • Post secondary training programs

  • Unionization

    • Organized companies

    • Organizing activity

    • Right-to-Work legislation

  • Transportation services

  • Available buildings

  • Available fully serviced sites

  • Site/building costs

  • Utility infrastructure

    • Electric power

      • Supply

      • Reliability

      • Cost

    • Natural gas

      • Availability

      • Cost

    • Water/sewer treatment

      • Capacity

      • Cost

  • Telecom capabilities

  • Environmental regulation, including hazardous waste

  • Distance to hazardous waste sites

  • Potential users of scrap

  • Number of vendors within a reasonable distance

  • Tax practices/rates

  • Potential incentives

  • Quality-of-life characteristics

Predicated on these and other appropriate considerations, longlisted areas need to be ranked/scored. The top rated locations (perhaps three) will then make-up the shortlist (finalist areas) to be comprehensively assessed in Phase Two.

Final Evaluation

As for distribution centers, manufacturing site selection teams need to visit each area for Phase Two evaluation. In this phase, the following is essential:

  • Get acquainted with the area by attending an orientation session held by the lead economic development group

  • Tour, inspect, and shortlist sites/buildings submitted by the economic development group

  • Interview comparable firms to learn of their recent operational experiences and opinions on future conditions

  • Interview other entities that can shed light on the business operation environment, e.g.,

    • State Chamber of Commerce (regulation/business climate)

    • Local government officials

    • Tax assessors

    • Transportation representatives

    • Property owners/developers

    • Education/training representatives

    • State labor office

    • Personnel agency

    • Environmental regulators

    • Local business associations

    • Potential suppliers (e.g., machine shop)

    • Request the lead economic development organization to submit a preliminary incentives package including the following:

      • Succinct program description

      • Eligibility requirements

      • Restrictions

      • Clawback/recapture provisions

      • Estimated savings

Collect and analyze field study results. Where needed, ask the lead economic development entity for more specific information (e.g., electric power reliability in circuits of substations servicing targeted sites). Then rank/score each area, concentrating on factors that are of greatest importance to the business. The comparative ranking should include:

1. Labor market

2. Transportation

3. Sites/buildings

4. Utilities

5. Environmental

6. Permit approval time

7. Taxation

8. Quality-of-life

9. State issues (e.g., tort/legal liability)

10. Multi-year business cost projections (with and without incentives)

  • Payroll

  • Occupancy

  • Transportation

  • Utilities

  • Taxes

  • Incentives (offset)

Once the top rated and best alternative locations have been agreed to (by the site selection team and executive management) the next tasks are to conduct final real estate and incentives negotiation in both locations as well as final due diligence in other arenas (e.g., tax, legal, environmental). Generally speaking, unless an unexpected dealmaker or breaker surfaces, the number one ranked location should become the ultimate winner.

 

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