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Site-selection

Investors should look beyond the short-term incentives and take expert consultation when choosing a manufacturing site to make sure they avoid expensive mistakes, write Mark Williams and Danielle Campolo of Strategic Development Group.

Site selection is vital for optimising a manufacturer’s competitiveness. Today, successful site selection requires attention to many qualitative and quantitative variables. Those involved in selection must consider a potential site’s attributes and how those will affect ongoing costs, profits, product quality, logistics and the supply chain.

Unfortunately, site-selection errors can reduce the operational and financial competitiveness of a manufacturing facility on a permanent basis. Early in the process, firms need to allocate the resources necessary to use qualified internal or external experts for all site-selection and negotiation activities. This crucial step can minimise costly errors.

Based on our experience, here are the 10 most expensive mistakes companies commonly make when they fail to employ an expert consultant. 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.

1. Failing to get key decision-makers to agree on search parameters.

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 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.

2. Choosing a site with inadequate labour and talent.

Manufacturing investments today are increasingly capital intensive and require access to employees with sophisticated skillsets. Verifying an adequate short- and long-term labour force is one of the most significant factors for today’s site-location projects; in the future, the importance of qualified labour will only increase. Selecting a site in an area without an adequate labour force is a major error, often resulting in higher human resources costs that will have a long-term negative impact on quality and production efficiency.

3. Choosing a site based on the most generous incentive offer. 

Site-location incentives are an important consideration, and naturally most companies want to maximise the value of incentives. However, a common error is selecting a site based on the best incentive package, rather than selecting the one best aligned with a company’s ongoing operational needs. If, for example, the selection team chooses a site based on the highest value incentive package, but the site is in an area with poor logistics or an inadequate labour force, ongoing costs to the operation will likely 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.

4. Not understanding the usable value and cost of securing incentives.

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 realised. 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 or 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 their value. 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.

5. Choosing a site that is too small.

Committing to a site that is too small can reduce the success of the initial start-up and limit future expansion. Selecting a site that has the size to accommodate a best-case growth scenario while maintaining an adequate buffer to provide privacy from future commercial or residential encroachment is important.

6. Narrowing to a single proposed site prior to final selection.

For the best site search results, the selection team should narrow the list of candidate sites until two or three sites remain, preferably in competing locations. 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 begin again. Another problem with shortlisting only one site too early is that it likely erodes the company’s ability to generate competitive incentive negotiations between locations. Without competition, economic development entities, utilities and rail providers will have little reason to up 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.

7. Choosing a site without performing due diligence.

The selection team must evaluate numerous physical characteristics of each site, including topography, geotechnical and archaeological 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 by many site location projects. For example, not taking into account geotechnical and topographic issues can lead to significant site preparation cost overruns because of unexpected costs related to general earthwork, soil remediation and the potential need to install geo-piers or other required structures.

8. Choosing a site with either high logistics costs or unsuitable ingress and egress.

Logistics costs are an important consideration for many types of locations and expansions, especially automotive and distribution projects. Selecting the wrong site from a logistics perspective can add a permanent higher per-unit cost to production. For an automotive manufacturer, this additional cost per unit can add millions of dollars in freight costs per year and over the lifetime of the facility. Ingress and egress are also important considerations. Selection teams must consider the capability of current roads to safely, adequately and permanently handle employee, supplier and customer traffic, as well as provide alternate routes if a primary route is temporarily blocked or unusable.

9. Failing to adequately document incentives and other commitments.

Site-location projects are extremely dynamic and 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 vitally important. These should be summarised 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, 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. MOUs should also address non-incentive parameters including technical specifications related to utilities, land transfers or implementation of training and recruiting programmes. 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.

10. Failing to keep the project confidential.

For most manufacturing site-selection projects, preserving confidentiality is vital. 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. Qualified site-selection consultants are generally capable of devising and implementing strategies, including using multiple project codenames and strict non-disclosure agreements, to reduce significantly the risk of any release of private site-search information prematurely.

Site selection for manufacturing locations is an extremely complex process requiring the selection team to evaluate numerous quantitative and qualitative parameters before choosing the optimum location. Failing to consider key site-selection factors generally causes significant project delays, higher costs and lower profits in the short and long term. Similarly, failure to set up a competitive environment for incentive negotiations can be a costly error.

Using a qualified site-selection adviser is fundamental to choosing a successful location and can minimise or eliminate the most common site-selection errors. Site-selection advisers, whether internal or external, must have comprehensive experience, no conflicts of interest that could affect their recommendations and an understanding of the wide range of considerations necessary to provide the most valuable site-location intelligence.

Mark Williams is founder and president of Strategic Development Group (SDG), a site-selection firm based in South Carolina. Danielle Campolo is a senior principal at SDG.

This article is sourced from fDi Magazine
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