Site Selection Tips for Industrial Consolidations
by Josh Bays, on Feb 17, 2023 8:37:51 AM
Interest in North America from the industrial sector continues to surge in early 2023 judging by the collective pipelines of site selection professionals and economic developers. And this continued unprecedented growth is in the face of economic headwinds such as escalating costs, higher interest rates, and a tightening workforce that would typically slow activity.
The multifaceted catalyst for this activity is well documented, but, subjectively, it feels as if site selection projects have an underlying preference toward diversifying supply chains in North America. When companies undertake strategic location diversification initiatives, it creates opportunities to optimize their overall geographic footprint.
Further, as many industrial companies have grown through acquisition, many production footprints are not necessarily the most efficient. Therefore, the word “diversification” is oftentimes accompanied by the word “consolidation.”
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. We anticipate that many manufacturers will use these broad supply chain diversification initiatives to tackle these inefficiencies in their business.
Site selection strategies for industrial consolidations
The benefits of effective consolidation strategies include reducing operating costs, improving sourcing, recalibrating to current workforce needs, optimizing logistics networks, and eliminating redundancies. Derived from our experience, the following are the top five site selection tips for any manufacturing company contemplating consolidation.
1. It’s always easier to seed a consolidation project with an incremental growth project
Relocating production capacity from one location to another is incredibly complicated and nuanced. And while the efficiencies of consolidating an inefficient network will typically have a quicker payback than a pure relocation, it’s almost always easier to seed a consolidation plan with an incremental growth project. For example, a simple relocation project requires building up inventory, or running duplicate operations in the interim, and relocating very complex and expensive pieces of equipment. It also opens up a company to significant workforce turnover risk. As a result, it is oftentimes much easier to first establish a new operation to meet some new growth objective (e.g. for a new customer, or to get closer to feedstock) before consolidating. This also allows for an easier path to invest in new equipment, automate processes and optimize flows, while keeping an eye on the future.
2. Allow sufficient time to develop and implement a consolidation plan
The adage that the 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 to a location outside of its existing footprint. Site Selection Group recommends starting the research and planning phase as early as possible.
3. Assemble the right team from the start
An effective consolidation strategy requires 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.
4. Do not forget to account for less-than-obvious cost items
Although we prefer to be engaged to help in the planning strategy, Site Selection Group is often retained by companies after they have made the fundamental decision to consolidate to a new location. It’s at this point that they 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 come to light during implementation. Candidly, it is surprising how many companies forget to account for hidden costs. These include items such as redundant production, building up inventory, moving costs, dips in productivity, transaction costs, and re-payment of economic incentives.
5. Give yourself flexibility because consolidating operations is a long-term value proposition
When consolidating operations, it is critical that the new location support any number of unexpected changes that your company might face in the future. For example, it’s important to ensure that the community has the workforce characteristics and pipeline compatible with future lines of business that could be relocated. Since land 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. In addition, structure economic incentive packages in a way that maximizes the opportunity for incremental growth even though long-term growth plans may be difficult to project.