Decision-making for industrial facility site selection can be challenging. The outcome is, without a doubt, critical to the success of future operations. In most cases, it will have a major impact on the success or failure of your enterprise. There are five critical success factors that most commonly dominate the site selection process for the businesses we work with. The following summary is offered with the local or regional manufacturing or distribution business in mind. Each situation will vary, and most businesses have different criteria, depending on their unique strategies, products, and mission. The important takeaway is to determine your top factors in evaluating potential sites and use them to guide your decision-making process using the site selection matrix provided as a free tool on our website at www.warehouse-veteran.com.
Site Selection Factor #1: Supplier/Market Connection
While quick highway access in and out of your facility is important to your location, proximity to your current or future suppliers and customers is critical. If your business experiences a cost impact related to inbound or outbound shipments, consider investing in simulation modeling and network optimization exercises to deliver meaningful information for consideration in your site selection process. Think about the current (and projected) shipping locations of your suppliers, as well as the delivery locations for your key customers. Where is most of your output shipped? Is the site positioned in the best location to minimize overall transportation costs? Of course, if you import or export raw materials or finished product, you must also consider locations with close access to intermodal facilities.
Critical Site Selection Factor #2: Availability of Skilled Labor
In dealing with many different businesses across various industries, I have found that growing companies are usually more worried about adequately fulfilling demand than generating it. At the time of writing this book, economic expansion and a growing resurgence of manufacturing in the U.S. are driving an increased demand for skilled labor in most primary and some secondary markets across the country. Access to an available, skilled labor force is a critical success factor for most businesses that utilize industrial space. If you fall in this category, it is important to understand current and projected labor pool availability for the geographic markets and submarkets you are considering. Additionally, make sure to understand the implications of operating in a right-to-work state, as more and more companies will not consider working in a state that is not based on right-to-work law. States and municipalities competing for jobs are responding to this need more than ever.
Most regions competing for new and expanding businesses are engaged in comprehensive labor force training programs. These programs are normally funded at the state level and provide training at no charge for many expansions and new operations, primarily through the state technical college systems. Some programs also contract with private industrial trainers to provide supplementary efforts. For more information, contact your state or local economic development agencies. A skilled commercial real estate advisor should be your ally and a helpful resource in providing local labor data, as well as contacts to local sources of skilled labor and training programs.
Site Selection Factor #3:Land/Construction Cost
Land costs are an important consideration depending on your intended market or submarket. Industrial land surrounding more active primary and secondary metropolitan areas commands higher prices than rural or tertiary markets, where land is less of a cost factor. While land prices will rise and fall depending on supply and demand factors, costs for new construction and improvements to existing facilities are driven by other factors. These include the availability and cost of raw materials, availability of local labor pools, cost of capital for financing, site-specific requirements, and local contractor availability. We advise our clients to connect with one or two reputable general contractors in advance of developing a new site or purchasing an existing site that will require improvements. This relationship can serve as a foundation for future cost estimates and construction advice. In return, the contractor should expect an opportunity to work on, or at least bid on, your future project. It is important to have a good grip on cost impacts between different locations due to site-specific requirements. For example, if you are considering a low elevation site that may require imported fill for the building pad and parking lots, a critical part of the decision-making process will include understanding how much import fill is required to balance the site, and how much that import material will affect the cost of the project. I have worked on large site projects that have required over 400,000 cubic yards of fill dirt. Considering that the cost exceeded $10 per cubic yard to deliver, spread, and compact, it was a major cost component of the overall project.
Site Selection Factor #4: State & Local Incentives
Economic development incentives at the state and local level are meant to encourage development in a specific geographic location. Targeted programs crafted to attract or retain businesses, usually with financial assistance or tax relief can offer the business owner the possibility of a quick payoff. If you are thinking about moving your business to a new space, opening a new facility, or adding a new division with significant new hires, start the incentive application process before your plans are finalized. As a general rule, economic incentives are only provided as a catalyst to influence your decision to locate into a specific region. Therefore, in order to qualify, it is critical to apply for these potential benefits before you make any decisions. Expanding a plant or hiring new workers might earn you tax credits for the new hires, or qualify you for training money, or provide tax relief for material and equipment purchases.
It is important to keep a low profile throughout the process. In some cases, you may want to seek out and apply for benefits anonymously, if possible, before publicly announcing plans to move to a new location or build a new facility, with the goal of avoiding industry rumors with competitors and layoff concerns internally among employees. Another concern is that you can potentially void any incentives if the state or municipality finds out it has been selected as your new location prior to finalization of the incentive package.
Most small and medium sized businesses lack the resources to research, apply for, and pursue available tax credits and incentives, particularly if they are focused on their current operations while simultaneously moving to or opening a new facility, hiring new employees, and other business-related tasks. To address these competing requirements, assign a project leader to be responsible for credits and incentives long before investing in facility space or new jobs. If your business doesn’t have the resources internally, there are many consultants who specialize in advising businesses on maximization of available incentives. Keep in mind that incentive packages usually include local employment commitments that your business must deliver over a multiple year time frame. Make sure that you allocate resources to tracking and reporting any required benchmarks in order to avoid violations or penalties as a result of the incentive agreement.
Site Selection Factor #5: Tax
When considering tax implications of site selection, take a close look at the broad array of taxes that will impact both your business and its employees, including personal income taxes, sales and use taxes, tangible taxes, property taxes, local business taxes, and state corporate tax rates. Recently, many states have enacted packages that include substantial cuts in, or restructuring of, these types of taxes. Some localities are more business-friendly than others, and it is important you understand the tax effects associated with locating at your potential new site. It is also important to consider that relocation incentives are helpful at the time of relocation, but the tax rate will be there for the long term. A number of states and municipalities are now moving to revise their tax structures with a focus on attracting business and jobs for the long haul without incentives. Other states are moving toward a single sales tax or an apportionment for income tax. Eventually, the states that haven’t adapted their tax structures to remain competitive will lose out in the competition for relocating business and jobs.
To ensure success in your site selection, be sure to check off each of these five selection factors along the way. A great tool to help this process is our site selection decision making matrix. To compare and contrast best alternatives, develop a decision matrix that ranks your top five to ten site selection criteria with a weight—between one and five is a good range. Next, rate your top site choices side by side, assigning a score to each—usually between one and ten. Finally, multiply the score by the weight for each site selection factor under each comparable site to come up with a numeric value. While this is not a perfect system, it provides an objective reference to aid you and your team in the decision-making process. Below is our site selection matrix tool for your reference.
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