Successful site selection requires attention to both qualitative and quantitative variables. Companies must take into consideration how the potential site’s attributes will affect ongoing costs, profits, product quality, logistics, and the supply chain.
Based on our experience, here are the 10 costliest errors that companies commonly make. These errors can severely and permanently compromise the competitiveness of an expansion or relocation and can cost tens or even hundreds of millions of dollars depending on the size of the project.
One of the most important tasks in any site selection process is to make sure all corporate decision makers are aware of and agree to key search parameters. This alignment must occur before their search begins to avoid wasting time, money, and other resources evaluating marginal or otherwise unsatisfactory locations.
Too often, selection teams begin a search before collecting all of the input regarding key site location parameters, only to have a new parameter identified later, after considerable time and resources have already been spent identifying sites. The selection team must obtain complete input and confirm mutual agreement among decision makers on all acceptable parameters, including logistics, human resources, engineering, and environmental and legal issues, before the actual search begins.
Manufacturing investments today are increasingly capital intensive and require access to employees with sophisticated skill sets. Verifying an adequate short- and long-term labor force is one of the most significant factors for today’s site location projects; in the future, the importance of qualified labor will continue to increase.
Selecting a site in an area without an adequate labor force is a critical error, often resulting in higher human resources costs that will have a long-term negative impact on quality and production efficiency.
Site location incentives are an important consideration, and most companies, of course, want to maximize the value of incentives. However, a common error is selecting a site based on the best incentive package, rather than selecting the site best aligned with a company’s ongoing operational needs.
If, for example, a site is chosen based on the highest-value incentive package, but the site is in an area with poor logistics or an inadequate labor force, ongoing costs to the operation likely will be significantly greater than the value of the incentive package. Selecting a site without a balanced perspective regarding both incentives and operational costs can have a permanent and negative impact on the facility’s competitiveness.
Most states and communities are extremely aggressive in assembling incentive packages that present very attractive savings. But without careful analysis, the estimated value of incentives often appear higher than what can actually be realized. To avoid key incentive analysis errors, selection teams must ask:
• What are the net short- and long-term costs after all incentives are applied? For example, property tax abatements can be worth a lot of money, but one location may offer a larger abatement because its property taxes are significantly higher than a competing location.
• Can the incentives offered be used? The selection team must determine the “usable value” of all incentives offered. Income tax credits can be extremely valuable, but not if a company has little to no income tax liability.
What is required to actually secure the incentives? In some cases, the effort to secure certain incentives may not be worth the value of the incentives. Most incentives have applications and supporting documentation that must be submitted at particular times throughout the search process and upon project implementation. Follow-up is very important to ensure deadlines are met and incentives are secured.
Committing to a site that is too small can reduce the success of the initial startup and limit future expansion. Selecting a site that has the acreage to accommodate a best-case growth scenario while still maintaining an adequate buffer to provide privacy from future commercial or residential encroachment is important.
For the best site search results, the selection team should narrow the list of candidate sites until two to three sites remain, preferably in two competing states. All of these sites should be entirely acceptable as a final location. Narrowing to one site too soon creates the risk that if a fatal flaw is found in that site, the search must start over.
Another significant issue with shortlisting only one site too early is that it likely erodes the company’s ability to generate competitive incentive negotiations between states. Without competition, economic development entities, utilities, and rail providers will have little reason to enhance their incentive offers. Depending on the size of the project, a lack of competition can result in a financial loss of tens or hundreds of millions of dollars.
The selection team must evaluate numerous physical characteristics of each site, including topography, geotechnical and archeological conditions, environmental history, and potential location of freshwater wetlands. The team must also determine whether the property is in a flood plain, and whether or not any title or easement issues exist.
Failure to fully understand how each of these factors affects a site’s feasibility and ultimate development cost is a very serious error made on many site location projects.
For example, failure to fully understand geotechnical and topographic issues can lead to significant site preparation cost overruns because of unexpected costs related to general earth work, soil remediation, and the potential need to install geo-piers or other required structures.
Site location projects typically involve numerous commitments from multiple entities regarding site and utility development and incentives. Generating written documentation of commitments during site analysis and incentive negotiations is critically important. These should be summarized in a detailed Memorandum of Understanding (MOU) and ultimately in binding agreements.
For performance-based incentives such as property tax abatements or Tax Increment Financing (TIF), MOUs should contain quantitative examples of how incentives will operate, as well as any “clawbacks” that will be enforced if project performance goals are not met.
MOU’s should also address non-incentive parameters including technical specifications related to utilities, land transfers, or implementation of training and recruiting programs. Failure to secure detailed MOUs and follow-up agreements often results in a loss of incentive value, project delays, inadequate utility services, increased costs, and an erosion of goodwill with the community.
For most manufacturing site selection projects, preserving confidentiality is imperative. Inadvertent release of information to business competitors or employees can be costly on many levels. In the early stages of a project, not revealing the identity of a company conducting a site search or the product they wish to manufacture is typically very important.
Companies should consider devising and implementing strategies, including using multiple project code names and strict non- disclosure agreements, to reduce significantly any release of private site search information prematurely.
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