Expand At Your Own Risk

Expand At Your Own Risk

Plan carefully or you may discover your new plant is on the wrong side of the track.

Packaging manufacturer Bell Inc. almost had its plant-expansion efforts derailed, literally. The Sioux Falls, S.D., company with $65 million in sales needed more space in 2005 when it landed a large contract with General Electric to supply all the packaging for GE's four-pack light cartons. Bell executives settled on what they thought was the perfect site -- an existing building only a half-mile away from its first plant. But almost immediately the company encountered problems. For starters, a facility manager quit soon after the planning process began, and an old rail line running along the side of the building didn't meet new railroad requirements, says Marianne Von Seggern, Bell's vice president of strategic development.

Bell eventually worked through the kinks and is now in the second phase of its expansion project. The experience taught the company some valuable lessons about site-selection planning and construction. The issues Bell faced are relevant even in the current economic climate as manufacturers seek ways to reduce expenses by consolidating and moving operations to lower-cost regions. And that doesn't necessarily mean relocating to China.

For instance, Japanese machine-tool manufacturer Mori Seiki Co. Ltd. will open its first U.S. plant to reduce export costs associated with the declining value of the dollar and bring production closer to its U.S. customers, the company said in January. "In recent years our company has grown globally and our customers are spread around the world, so it makes sense, if our foreign exposures allow us, to move our plants from one location to another," says Natsuo Okada, president of Mori Seiki Americas.

Top: The dingy facility had created some unforeseen issues for packaging manufacturer Bell Inc. when the company embarked on an expansion project in 2005.

Below is the renovated plant in Sioux Falls, S.D., where the company is in the midst of the expansion's second phase, which Bell expects to proceed much more smoothly after learning lessons from the initial project.

Other recent expansion efforts have been concentrated in the growing renewable-energy industry where manufacturers are taking advantage of government tax incentives. DuPont will invest $175 million to increase production capacity at its Circleville, Ohio, plant to build solar-panel films, the company said on Jan. 19. Ohio is offering up to $6.1 million in financial and other incentives. Industrial enzymes producer Novozymes A/S is in the process of building a new facility in Blair, Neb., to supply the biofuels industry. The Denmark-based US$1.5 billion manufacturer said in January that it received a $28.4 million American Recovery and Reinvestment Act grant to build the facility.

The tax credits are added bonuses for most companies receiving them, or at least that's how they should be perceived, say expansion consultants. "Tax incentives are something to be aware of, but they're generally not the deciding factor for where you want to locate your facility," says Dana Olson, CEO of site-selection firm Ecodev LLC.

It's more important that manufacturers focus on planning issues, such as project management, labor availability, property costs and potential hidden expenses, including environmental cleanup, say expansion experts.

Do Your Homework

Bell's expansion project probably would have gone smoother had the company started with more than one project manager and kept electronic files of planning documents, says Von Seggern. When the facility manager who was involved in the initial planning stages quit just prior to construction, the company discovered he didn't catalogue and file much of the information, drawings and proposals related to the early expansion efforts. Von Seggern says she's now responsible for ensuring all the information shared during the project's second phase is entered electronically.

When the new facility manager took over, the workload was too much for one person, Von Seggern says. "Our facility manager had never done anything of this size, and one of the lessons learned was that you have to have at least two people internally who can be devoted full time to managing the project," she says. "For that period of time, for about a year, he ended up working 12 hours a day, six or seven days a week; he was always on call, and his phone rang constantly."

In hindsight hiring someone who specializes in construction project management might have helped the company identify some of the hidden obstacles, such as the rail line, Von Seggern says. After Bell purchased the building, which it had occupied years earlier, Von Seggern discovered the rail spur that needed to be reactivated was angled too sharply for the railroad's new requirements. The line was necessary because all of Bell's paperboard shipments are transported by rail car. But there wasn't enough room to construct a new line on the property to make the wider angle, so the company had to purchase a portion of the neighbor's lot, adding about $400,000 to its plant-expansion budget.

The plumbing was another infrastructure issue that resulted in additional expenses. Bell didn't have a plumbing map of the building, so the facility planners didn't know where all the water lines were located, Von Seggern says. "I think when we did the real estate transaction we didn't think through the details required in completely renovating the facility," she says. Bell encountered problems reaching the previous building owner to obtain the necessary historical information and had to hire someone to put that map together. Von Seggern suggests manufacturers that are considering buying an existing building think about all the potential "what-ifs."

Companies also might consider seeking a state or community that has "project-ready" sites that have already undergone inspections, says Hartley Powell, national leader for accounting firm KPMG LLP's Global Location and Expansion Services practice. "What we've seen over the years is states and communities have gone to a certified-site program where the state assists the communities by coming in and setting up some kind of review process for their site," Powell says. These communities are trying to take as much risk as they can out of a site to attract an employer.

The Location Factor

"We really wanted to maintain a global footprint and not get too much concentration of manufacturing in one part of the world....It's a long supply chain from China to the midwest United States."
-- Adam Monroe, president of Novozymes North America

Novozymes enlisted the help of consultants to examine critical factors such as site location, tax history and environmental issues when it began planning in 2008 for its new enzyme facility in Nebraska, says Adam Monroe, president of Novozymes North America. The company selected the corn-belt state because of its proximity to its customers who use the enzymes to produce bioethanol. The labor in the region isn't the lowest-cost available, but the educated manufacturing workforce and the supply-chain flexibility that the location provided were deciding factors. "We really wanted to maintain a global footprint and not get too much concentration of manufacturing in one part of the world versus another, and it's a long supply chain from China to the Midwest United States," Monroe says. By being close to its customers, Novozymes is consistently one of the first companies to release new and upgraded molecules to the biofuels industry, which keeps its products at peak value, Monroe says.

The core plant will begin production in 2012. Novozymes already has a blending facility operating at the 30-acre site located within a biorefinery campus. The business park also played a key role in the company's site-selection process. All the companies in the campus have similar utilities and raw-materials needs that allow Novozymes to share costs such as steam, which is provided by one large boiler.

With construction costs estimated to be between $160 million and $200 million, the federal green tax credit the company received should help. Novozymes' tax credit is dependent on the production of advanced biofuels and would benefit the company in the shape of reduced tax payments. The credits won't be available until production begins at the facility. The company also received some state tax incentives, Monroe says.

That shouldn't come as a surprise to Ecodev's Olson, who says Nebraska along with Texas are two of the most business-friendly states because of the consistent way they deal with companies and their energy and tax policies. Some of the least business-friendly states include Minnesota and California, says Olson, citing stringent workers' compensation laws and property and labor costs as reasons.

Look Beyond the Obvious

Location selection is one of the most important parts of the expansion-planning process, Olson says. But many manufacturers choose a site for the wrong reasons. Chasing cheap labor or basing a decision on only the property itself are two of the most-common mistakes manufacturers make in the expansion process, Olson notes. Instead, manufacturers should focus on the labor pool's skill level, logistics costs and infrastructure expenses, he says.

"Basically, what we're saying is do the math before you expand, and then the question becomes, Why are you expanding? To satisfy a customer? Because you're a public company? Growth?'" says Olson. "Then break down the pro forma of what meets that objective, and then take it out to market."

Olson recommends that manufacturers look outside major metropolitan areas because infrastructure costs tend to be cheaper in smaller communities. Then determine whether the workforce in the region can meet your skill requirements. Workforce availability was an issue for Bell, so the company offered referral bonuses to current employees, Von Seggern says. The company also implemented a mentoring program that matched seasoned workers with new employees and paid bonuses to the mentors. Novozymes plans to partner with community colleges in Nebraska to recruit skilled labor and leverage the business campus where neighboring companies employ workers with similar specialties that Novozymes utilizes, says Monroe.

"At the end of the day the combination of a good community partner, educated manufacturing workforce and the best combination of cost, as it relates to the supply chain along with distribution costs to the marketplace, ultimately put us in Blair, Nebraska," Monroe says.

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