According to the most recent data from the Bureau of Economic Analysis, the manufacturing sector in 2019 has so far output approximately 16% of the nation’s GDP which represents a sizable portion of the U.S. economy. The nation’s industrial production index, which measures real output for manufacturing, mining and utilities, has had an increasing annual rate of change since the beginning of 2015 and is holding steady at the highest point post-Great Recession. Although there are some macro signs that suggest industrial activity in the U.S. is plateauing, Site Selection Group’s industrial project activity leading into 2020 is as strong as ever.
Despite strong site selection project activity, it would be foolish to overlook several festering factors that have the potential to turn the economy in a short period of time. As I author this blog, we are on the heels of tense military exchanges between Iran and the United States, an impeachment hearing headed for the Senate, and racing toward the most contentious presidential election of my life time. And that’s just the top three headlines today.
Will 2020 be the inflection point?
As companies continue to ride the strong economy, it is never too early for manufacturers to start planning their footprint in advance of a downturn. There are many companies that have inefficiencies in their production footprints as a result of the expansionary growth, especially those active in mergers and acquisitions.
Site Selection Group, a full-service location advisory, economic incentives, and real estate services firm, helps our clients align their location strategies with economic cycles. A downturn affords manufacturers the time to pause and evaluate and then rid themselves of the inefficiencies in their business.
Site selection strategies for consolidations
The benefits of effective consolidation strategies include reducing operating costs, improving sourcing, optimizing logistics networks and eliminating redundancies. Derived from our experience, the following are the top five tips for any manufacturing company contemplating consolidation.
1. Allow sufficient time to develop and implement a manufacturing consolidation plan.
The adage that most valuable achievements take longer than expected certainly applies to developing and implementing a consolidation plan. Understanding the effect that consolidating manufacturing operations will have on productivity, supply chain, workforce and financial performance is a complicated process that involves the evaluation of countless scenarios. It typically requires eight to 12 months just for planning before a company is ready to implement its consolidation plan, and that timeline could be longer if a company is consolidating outside of its existing footprint. Site Selection Group recommends starting the research and planning phase as early as possible, even if we still find ourselves in a growing economy.
2. Assemble the right team from the start.
An effective consolidation strategy requires the input and hard work from a variety of corporate disciplines. Internal confidentiality notwithstanding, it is Site Selection Group’s experience that the key players should be assembled as a project team from the beginning. This includes key members from executive leadership, operations, finance, tax, real estate, human resources, supply chain/logistics and engineering.
3. Do not forget to account for less-than-obvious cost items.
Although we prefer to be engaged to help through the planning strategy, Site Selection Group is often retained by companies after they have internally planned their consolidation strategy to a new location, but need help finding that optimal location and securing economic incentives and real estate. In instances like this, we sometimes see mistakes made during the planning phase that come to light during implementation. Candidly, it is surprising how many companies forget to account for hidden costs. These include items such as moving costs, dips in productivity, transaction costs and re-payment of economic incentives.
4. Give yourself flexibility as consolidation of production operations is a long-term value proposition.
When consolidating operations, it is critical that the new location can support any number of unexpected changes that your company might face in the future. For example, ensure that the community has the workforce characteristics and pipeline that is compatible with future lines of business that could be relocated. Since dirt is relatively inexpensive compared to machinery, equipment and human capital, Site Selection Group recommends investing now by acquiring more land than initially needed to support future expansion. Further, make sure to structure economic incentive packages in a way that maximizes the opportunity for incremental growth that might not be initially solidified.
5. Be wary of short-term benefits that could tempt you into a bad location decision.
As noted above, consolidating production operations is a long-term value proposition and should be evaluated as such. All too often, we’ve seen clients tempted to make bad location decisions by being overly influenced by short-term incentives that burn off over time and good real estate options in less attractive markets. Conversely, it is common for companies to discount locations that have an immediate hurdle but offer the best long-term value proposition.