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.
About the Author
