Manufacturing

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Planning Ahead

10 Mar, 2016

By: Christopher Steele

In the world of real estate and corporate facilities, often the very real cost of developing future capacity strikes fear into the hearts of financial planners. Couple this with the wisdom of a German general by the name of Helmuth von Moltke who once stated that "no battle plan survives contact with the enemy," one might be forgiven for not investing in new facilities too far ahead. Certainly, the amount of uncertainty in the modern business world has increased. However, how do we still plan for, or at least keep our options open for, the future?

Recently, a corporate real estate executive was bemoaning the fact that he was having difficulty getting his CEO and CFO to fully endorse and execute plans for corporate facility expansion. Such real estate expansion plans were completely tied to hiring plans, which were tied to the strategic business plan for the company. This strategic business plan called for an approximate three percent increase per annum mainly due to organic growth.

All this is well and good, until you consider that on average, headcount growth for this organization has been better than 15 percent annually for the past 10 years (including two reasonably sized acquisitions which were then merged into existing space).

Similarly, our firm recently performed a site selection project for a manufacturing firm that needed to establish not one, but two facilities on the West Coast. The company had consolidated considerably during the recession. This was a wise decision at the time, but did not have a strategic plan for how to replace that capacity once demand rebounded, less than five years after the closing. Moreover, the company was so successful in its strategic marketing that demand was outstripping what it was capable of producing in the remaining facilities. It is uncertain how much the company lost in unrealized sales.

It is completely understandable that those given the financial responsibility for an enterprise are prone to conservatism with large capital outlays and, as a result, are skeptical about claims for additional headcount and capacity. Likewise, individual business units feel their own pressure for keeping costs down and may skip on or delay real estate needs. It is better to aim low and then to outperform.

A certain degree of realism, however, needs to be integrated into the real estate capital planning process, otherwise von Moltke's observation cannot help but ring true. After all, how can a battle plan survive first contact if the battle plan was designed to combat a different enemy?

A real estate plan based on overly constrained facilities plans puts the company and the institution at strategic risk for not being able to accommodate workforce, not being able to support innovation and can hold the company back from being able to capitalize on new markets. Real estate is a long lead-time item, and a degree of forward flexibility must always be a part of the portfolio.

As a best practice, companies should plan for a varied set of possible scenarios – from the low to the high. When done properly, this allows the company to modularize the real estate plans and make capital investments in chunks. These chunks allow for good strategic management of real estate investment.  In addition, such a strategy explicitly builds resilience into the plan — as modules are no longer required, they may be dealt with without much disruption to the greater enterprise.

Financial officers are right in taking real estate costs seriously. However, it is also essential to remember real estate is much more than a box in which to keep people and materials. Even in these days of the virtual organization, the interactions of working interactively, for efficient physical layouts and for an integrated value chain are vital to the success of the overall business strategy. Being able to lay out those operations in a way that is resilient and can adapt to change and can move quickly must certainly be worth the investment.

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