Define Your Parameters: Site Selection for the Plastics Industry
31 Oct, 2006By: Suzanne Davis
It’s hard to imagine our world without plastic. From food packaging to laptops to raingear, plastic delivers an affordable, versatile option for items we depend on everyday. Plastics have had such a revolutionary impact on our society that Newsweek named plastic as one of the top 100 news events of the century. Looking to the future, plastics will play a strong part in the emerging biotech, nanotech and life sciences industries.
Given the depth and breadth of plastic use in our society, it isn’t surprising to find that the same global events that are causing pain at the gas pump or threatening to move jobs offshore are also impacting the plastics industry. Rising energy costs negatively impact the industry at both ends. Raw materials costs are up due to higher petrochemical prices, which negatively impact resin costs. Plastics manufacturing facilities are generally energy intensive and margins are reduced as natural gas and electricity prices rise.
The severe 2005 US hurricane season also hit the industry hard, and not just for facilities located in the path of storms like Katrina and Rita. The supply of plastics additives was disrupted by the storms, driving up prices in this important sector. The sudden upswing in demand for building products also impacted the industry.
Offshore demand is also putting pressure on the plastics industry. The explosive growth of Asian markets is driving companies to consider new locations, both domestic and foreign, and new product mixes. Without significant expansion and realignment, it is questionable whether the industry can meet these growing consumer demands.
Faced with rising prices and changing demand, plastics companies need to carefully evaluate their business opportunities to ensure they are well positioned to capture their fair share of the market. Smart manufacturers will reevaluate their manufacturing operations, consider consolidations and new locations, and increase efficiencies to stay competitive. For small to medium sized manufacturers in the U.S., investment in land and buildings can be up to 50% of fixed assets. Operating costs related to facilities usually makes up about 10 percent of annual operating budgets. When these numbers are evaluated, it becomes clear that strategic location decisions can have a real bottom-line impact on a plastics facility.
When considering strategic location decisions, plastics industry executives should also keep in mind the potential positive impact of their facility on a community. The plastics industry has many attributes that make it attractive to communities searching for economic development opportunities. Workers are generally skilled and well-trained, which means that employees are paid an above average wage. The industry makes significant investments in plant and equipment, with technological improvements and new product developments constantly demanding new investments. These on-going investments add to the tax base of the local community. Additionally, these types of significant investments in human and physical capital make a plastics manufacturing operation more difficult to relocate than a data center or customer care operation. Generally, plastics operations are clean and have a minimal impact on the environment. All of these factors combine to make plastics operations very attractive from a community economic development standpoint. This fact should be kept in mind as new locations are considered and financial assistance and incentives are pursued. Incentives, offered at the state and local level, can help offset the upfront costs of a new facility, making a good project even better. Positioning the project to receive incentives should be a consideration as the site search is completed.
How to Complete a Successful Site Search
First, a company should evaluate current facilities and ensure that there is truly a need to consider a new location. In today’s market, every efficiency should be squeezed out of existing facilities before a new real estate option is considered. An internal audit of customer opportunities, utilization of current equipment and labor, available capacities at other manufacturing locations, supplier factors and operating costs should be conducted.
Once it is determined that a new location is optimal, the company should decide what broad geographic regions meet the needs of the project and allow access to both suppliers and customers. The broad regions will be narrowed as the process moves forward, based on the criteria for success defined below.
Before making any inquiries regarding potential sites, a company should make decisions regarding certain variables that will impact the search. Carefully defining the project parameters for key items such as labor, utility use, and transportation needs will make the project go more smoothly. The more accurate this information is on the front end of the project, the higher the likelihood of a good location decision. Making decisions regarding these items upfront will ensure that good information is shared with community representatives and real estate and economic development professionals during the search.
Labor is a key component of any operation and in an industry like plastics, it is especially important. A determination of the number of workers, skill levels, desired educational background and experience level must be made early, because these requirements will impact many other aspects of the location decision.
Number of workers: The number of workers needed to run the operation, by shift, will impact the location decision. If locating in rural area, the company must be sure that there is a sufficient labor force in the area from which to draw. If locating in an urban area, will there be so much competition for labor that desired employment numbers will be difficult to reach and maintain?
Educational background: Are there sufficient workers in the area with the right level of educational attainment? Statistics are readily available from local economic development offices to ascertain the formal education levels of area workers. It is more difficult to determine the practical experience of the workforce and the number of workers that have experience with plastic extrusion equipment, for example. Workers must have a strong basic education that enables them to learn the necessary skills for the plastics industry.
Demographics: Is the area gaining or losing population? Are income levels projected in increase? What is the racial mix of the area population? All of these factors will increase the future availability of labor.
Union vs. non-union: The unionization rate of the labor force is another important consideration. If the company is non-union in existing locations, it may want to carefully consider the implications of locating in a heavily unionized area.
Average wages: The company must decide where they desire to fall on the local pay scale. Do they want to pay at the average level of similar size manufacturing operations or do they want to be an employer of choice and start employees at a wage above the local average? Benefits should also be considered when comparing compensation in different communities. Given the high cost of healthcare, a good medical plan can be worth more than a couple of dollars an hour in wages.
Plastics manufacturing operations are typically energy intensive. Based on the anticipated product mix at the new facility and the equipment to be used, the company should define expected use of electricity, natural gas and water. Expected wastewater to be produced by the plant should also be considered. Telecommunications needs should also be defined.
Certain assumptions can be made about utility costs in broad regions of the U.S. For example, electricity is typically more expensive in the northeast. However, variables such as peak usage and load factor can drastically impact the cost of electricity. Reliability is another factor to consider. If accurate utility usage numbers, load factors and reliability requirements can be provided to local providers, accurate estimates of cost going forward can be produced. In some cases, utilities will provide special rates for new manufacturing facilities as an incentive to attract the load to their service territory. Utilities are major players in economic development in most communities throughout the U.S.
Documentation of utility infrastructure should also be requested. The company should make sure that adequate capacity of all utilities is available in the community and that the necessary pipes or lines are in place to deliver the utility to the plant. If not, the cost of this infrastructure should be part of the incentive package requested by the company of the local community.
Water and wastewater are typically provided by community owned utilities. It can be difficult to obtain good projected cost estimates from these organizations, as they are often understaffed and have less sophisticated resources. Good usage estimates are especially important in these cases. Water needs for both process and fire protection use should be considered.
High speed internet and fiber optic service are infrastructure items that cannot be taken for granted, especially in more rural areas. With the increasing reliance on the internet and electronic data transfer, the availability, cost and reliability of these services should be determined.
Plastics manufacturers often prefer to receive raw materials by rail. Rail-served sites are becoming more scarce in the U.S. and if rail is required, may significantly reduce the number of viable sites. The need for rail, including the anticipated number of cars per day, should be prominently highlighted in the site requirements provided to local economic development and real estate professionals. Early in the process, communication should be established with the rail service provider.
With trucking dominating shipping in the US, a careful evaluation of highway access should be made for every project. The location of suppliers and customers should be mapped and estimated driving times determined. An estimate of traffic impacts and highway congestion should be made. Additionally, a community’s tolerance for increased truck traffic should be gauged and truck routes determined.
Real Estate Options
Existing building or greenfield site? Is the company willing to consider retrofitting an existing industrial building to meet their needs, or do the project parameters demand a build-to-suit facility? An existing building can be a more economical choice, especially if a community has an empty building that they can’t fill. The increase in tax base caused by the building renovations and new equipment, combined with the psychological impact of filling a large empty building, may be incentive to provide an attractive financial deal to the company.
A greenfield site may be more desirable for a specialized facility that has new technology and specific building attributes needed to support equipment. The company should also consider whether to lease or own the facility. Many real estate developers will provide attractive options for build-to-suit projects.
Whether considering an existing building or new construction, the company must define building parameters such as square footage, ceiling heights, thickness of floors, number and placement of truck docks, rail access, utility ingress and egress, building height, parking ratios, office space vs. production space, and image.
Once the basic project requirements are clearly defined, the company should start the process of identifying and evaluating potential communities. The company can do the search using their own personnel, or they can engage a consultant to assist them. Using a professional site selection firm can take the burden of receiving and evaluating information from many communities off the company, allowing them to focus on the project itself.
State governments and regional and local economic development organizations will provide real estate and community options based on the project parameters provided by the company. While it is fairly straightforward to evaluate the real estate, utility and labor data, a company must also consider the tax structure and long-term operating costs associated with a location, the attitude of government toward business and development, the image of the community and the proximity of similar firms, competitors and suppliers. The last factor is especially interesting for plastics firms. Unlike other industries, plastics companies often thrive on the synergy of being located close to similar firms. In some regions, plastics firms have created buying cooperatives for raw materials and joint training facilities. Communities have developed specialized educational programs to address the needs of the plastics industry in the area and to train local citizens to work in this growing, vital industry. One example of this is the new Plastics Technology Center at Ivy Tech State College in Evansville, Indiana.
Once the potential communities have been narrowed to the top 2-3, the company should request incentive commitments. Incentives such as tax credits, property tax abatements, training funds, infrastructure assistance and attractive financing options may be committed to the project by state and local governments. As mentioned above, no amount of incentives can make a bad location profitable. But, a good location can be further enhanced and reach profitability more quickly with a strong incentive package. As incentives are negotiated, the company should understand the reporting requirements of each program. Millions of dollars in incentives are forfeited each year by companies that do not meet the ongoing administrative requirements.
Finding a new location for a plastics manufacturing facility is a labor-intensive process, but it can pay huge dividends in increased productivity and profitability. Detailed planning and clear definitions of the project requirements will help ensure a successful location. With strong growth projected for the plastics industry, firms will continue to seek new locations to serve their customers efficiently.