Manufacturing

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Site Selection for the Metals Industry

31 Mar, 2003

By: John F. Sisson

Each year, a hundred or more new metal manufacturing plants are located in the U.S. In addition, two to three times as many companies make the decision to expand existing plants instead of siting a new plant. Each plant siting represents an opportunity to improve the competitive position of the company and take advantage of the opportunities available in the U.S. Each plant expansion, if properly planned and orchestrated, can also improve the company’s position by taking advantage of many state and local programs. However, to take full advantage of the opportunities available, company management must avoid the following pitfalls in siting a new plant or expanding an existing plant.

Four Pitfalls in Siting and Expanding Plants

I. Requesting community, site or building information before you have built your project team, created a project description, or established the determining factors for the project

Problem: Going into the market and looking for sites before you have built your team and completely understand the business drivers for a siting project will result in data overload. Asking for general information about sites and communities without a clearly defined project description and critical criteria will result in the gathering of massive amounts of information, most of it irrelevant. In the information age today, a general request of information on industrial land and buildings in several states could result in hundreds of e-mails and a room full of collateral materials.

Solution: Build your team and project definition before you look for a site. First, understand the business drivers for the siting decision. Are you siting to reduce cost, improve efficiency, expand markets or meet new market demand? Understanding the project drivers will usually limit the search area because of inbound or outbound transportation costs, labor cost, industry clusters, or other critical location criteria.

Follow these building blocks before you go to market and request site and community information.

Building Block 1: Build the project team for the siting project: You will need critical input from Operations, Human Resources, Information Technology, Finance, Engineering, Environmental, Legal, and most importantly, the decision maker for this project representing management. If the corporate decision maker is not on your team and involved, you may miss a critical siting assumption for the project. Finally, appoint a single person who is in charge of making this project happen so that all aspects of the project can be coordinated successfully. A very good candidate for the single point of contact is the proposed plant manager for the new location. After all, he is the one who will be making the move, and getting his personal requirements for a location should be considered from the start of the project.

Building Block 2: Build a base case for the project. The project definition for your requirement should include the locational objective for the project, your present and future requirements for building, land, utilities, labor communications, the project timing and all critical project specifications (see critical criteria in next paragraph) as well as your decision criteria (see project aspects in building block 3B)

Building Block 3: Decide how to determine the best location before you look for sites. Set up a two-phase decision model, similar to the following, and get your team to agree on how to decide before you start looking for a location.

A. Phase One of the decision model establishes the critical criteria that will be used to quickly reduce the number of qualified sites. The critical criteria should include establishment of the search area for the location usually determined in part by minimizing the freight cost to the location of customers and suppliers. Additional critical factors may include facility specifications (size, height, land area), utility and communications requirements, transportation infrastructure, labor market size and wage limits, availability of specialized labor skills, size of community, location relative to competitors, labor relations issues, desirability of industry clusters, availability of specific support services and preferred company positioning in the market. The critical criteria are “must have” location and site elements for the project. If they are not met, the site or location will be eliminated from the search.

First, the critical criteria should be used in a computer based screening using websites and national demographic data to eliminate areas within the search zone. Then, the critical criteria should be clearly enumerated on a request for proposal (RFP) that indicates that any site not meeting these criteria will not be considered. This will reduce data input from areas and eliminate sites and buildings that don’t meet the critical criteria. As data is received in response to the RFP, the critical criteria can be used to screen and sort the eliminated, non-qualified locations.

B. Phase Two of the decision criteria is a rank ordering of the most important project aspects that will be used to make a final decision. Below is an example, ranked from most important to least important, of the determining factors for metal manufacturing plant location:

10. Competitive recurring costs offset by any recurring incentives

9. Quality, trainable work force, availability of local recruitment and training resources, experience and support, and labor management relationships

8. Competitive investment costs offset by any recurring incentives

7. Favorable site characteristics and surrounding land uses

6. Quality transportation access

5. Comparative time-line to project start-up including permit time

4. Ability to attract and retain professional and technical employees

3. Community de7. Favorable site characteristics and surrounding land usesmographics

The purpose of this rank ordering is to group and prioritize the tremendous amount of data that you will receive into an organized system for analysis. This way the information received can be gathered and organized by project aspect and summarized for a comparative ranking of the communities analyzed.

II. Selecting a narrow search area for the project location

Problem: Deciding that the new plant location or plant expansion has to be in (blank) state, or worse, in only (blank) city without an overriding reason. A search area that is too small will result in the loss of competitive positioning for the project, which will eliminate the availability of many local and state incentives. Also, you may have to choose a less than optimal industrial park or building for the project because of the limited number of choices available.

Solution: Decide to include a wide (practical) search area. You should always consider at least three states in a domestic site location search. For a plant expansion, consider at least three alternative locations as well. This will build your competitive position and improve your chances to maximize the return for the project.

Picking a larger search zone will not add to the time-line for the project if you have completed the building blocks described above. You can quickly move through the following and on to stages involving site visits:

1. Establish the geographic search zone

2. Screen the search area for locations that meet the critical criteria or project restrictions. This will establish a list of initial candidate locations.

3. Screen the initial candidate location using published data, websites, project team familiarity, RFP responses and telephone survey information. Compare and contrast locations and develop a finalist list of locations

4. Visit finalist locations and make final site selection

III. Not allowing enough time for the siting decision

Problem: Having to make a decision in a crisis mode because you need to be in production in two or three months. This will almost always result in a sub-optimal location, sub-optimal building and reduced incentives.

Solution: While planning ahead is important and the obvious solution to this problem, a well organized siting project following the building blocks outlined above can be completed in less than three months. Allowing this time will give the states and communities enough time to build the best possible responses to your project and to present their best case to win your location decision.

IV. Not planning for the outside help you will need with the project

Problem: In completing a siting project, you will need and use assistance from multiple external companies to assist you in the due diligence and selection of a site. Not planning for this help and anticipating the functions you will need will result in a slow-down of the project each time you need to hire an outside resource you had not planned for or anticipated.

Solution: When you build your project team in the building block phase of the project, make sure you inquire of each company discipline as to outside resources need for the project. You need to plan for these resources well in advance so that the project can keep flowing smoothly to conclusion. Outside resources required may include: Engineering, Architecture, Human Resources, Move Management, Real Estate, Legal, Environmental, Project Management, Site Selection, Project Finance, Transportation, etc. It really all depends on the sophistication of the company resources, the complexity of the project assignment, and the availability of company resources for assignment to the relocation project.

Four Opportunities in Siting and Expanding Plants

1. Improved company cost structure in a new location, increasing bottom-line profits

Picking a new location is a series of compromises. The final decision is based on a combination of factors as were discussed in the project definition building block. However, project cost is always an important project decision factor. In the final analysis, for many projects, financial considerations are the tie-breaker in the decision between two very similar communities or sites.

The costs that vary from region to region are classified into recurring and one-time costs. Recurring costs include: transportation (inbound and outbound), labor, utilities, and taxes, offset by incentives (see opportunity 2), and sometimes, material costs. One-time investment costs include real estate, construction, building, infrastructure, permits and utility extensions and some incentives. These costs need to be measured carefully from region to region for a full understanding of their impact on your project. But, the minimization of these costs will improve your company’s bottom line results.

2. Incentives offered by states, counties, utilities and local governments

During periods of a slower economy, the competition between states and communities for the remaining industrial projects generally intensifies. So it has been for the last two years during the slow down by the manufacturing sector in the U.S. Many states and communities are considering new incentives to attract specific industry targets to their areas, based on their demographic, logistical, environmental, and political needs.

Project incentives can only be maximized in an area-wide competitive project, which allows enough time for the communities counties, states, and utilities to put forth their best possible package of incentives to win the project. Everything is negotiable in a project including cash grants, financing (subsidized), loan guarantees, infrastructure improvements & guarantees, land and site development, training, employee recruitment, tax breaks, credits and abatements, accelerated permitting, in-kind contributions, employee move assistance, utilities, and job creation tax credits/grants (to name a few). Several rounds of negotiations are required. It takes the communities time to understand their position, to put together their best competitive package and to present the results to the client.

Finally, as a company, you must always analyze incentives in the light of your company structure and tax situation. For larger companies, many of the incentive state tax credit programs may be relatively useless to a company with minimal taxes (or tax loss carries forward in a particular state). Also, incentives must be analyzed in light of the taxing structure within a state. Many state incentives are merely an offset to a tax system that is disadvantageous to a company compared to a neighboring state. An example is a state with an inventory tax of 2%, offering inventory tax abatements to a company. When compared to state B, with no inventory tax, what value is this incentive? It really just levels the playing field.

3. Labor availability, employee relations and specialized skills

Labor costs, relations and skill availability vary from state to state and even by regions. Pockets of high unemployment still exist within most states. Many companies have relocated to find better labor availability, labor relations and specialized labor skills. The tight labor markets of the late 1990’s in the U.S. have relented somewhat in the last two years. But, the forecast is for them to return in the future, and even be tighter. The U.S. Department of Labor forecasts a shortfall of 28 million employees by 2030. Also, a company’s labor position in a market can change over time with the addition of new competitors. Companies may also be required to change labor position because of competitive pressures in the market for a company’s products and services. Both of these situations may require facility relocation.

Many companies in high cost locations have relocated to lower cost areas in the southeast and south-central U.S., and the mountain states in the west. Technology has allowed the separation of functions from headquarters and centralized operations into back office operation centers, separate customer contact centers and shared service centers. These are all examples of a major displacement of labor to lower company costs. These centers have been widely dispersed across the U.S., to both large and small cities.

4. Real estate opportunities for lower rents and building prices

The U.S. real estate market is soft and ripe with opportunities to achieve savings. Rents are low; a 15% drop in effective rents in the last two years, and vacancy is high, now at 10%.

Conclusion

Companies facing a plant expansion or facility siting decision have an opportunity to improve the company’s competitive position. Proper planning (building blocks), understanding outside assistance required, making the project area competitive, and allowing enough time to complete the project will go a long way toward optimizing the opportunity and avoid a sub-optimal decision. Today, there are increased opportunities in community and state incentives, labor markets, and real estate. A well organized siting or expansion project will capitalize on the opportunities present in today’s market.

 

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