21 minute read
A Turnkey Approach to Manufacturing Location Decisions
Taking a project from site selection through process design and construction to commissioning with a turnkey approach will help a manufacturer ensure its long-term operational success.
By Courtney Dunbar, Site Selection & Economic Development Leader, Burns & McDonnell
When scouting locations for a retailer, an experienced real estate team knows precisely what to look for: sites that have high visibility, easy accessibility, and close proximity to a population base and competing stores. By comparing options that meet this small handful of criteria, the final selection can be relatively simple.
Compare that to locating a new manufacturing facility. As many as 70 or more different variables can influence site selection — from infrastructure, logistical, and incentive considerations to permitting requirements, staffing needs, and community acceptance concerns.
Site selection models for these facilities, therefore, can be notoriously complex. The strengths or weaknesses of each alternative can potentially impact facility design and a host of other variables, making the process of comparing and ranking alternatives even more challenging. Apples-to-apples comparisons of sites are rare.
Some site selectors are better equipped to conduct searches that involve complex infrastructure and permitting requirements than others. A closer look at manufacturing site selection criteria illustrates why.
Factors That Impact Site Selection
The goal of any site search is to identify locations that support a manufacturer’s long-term operational success. The more a site selection team knows about the company’s products, production methods, and infrastructure requirements, the better.
A site selection team must also have a detailed understanding of the owner’s site selection criteria
Engineering, procurement, and construction services were needed for this facility’s new packaging department and process line.
and their relative importance in the decision-making process. These criteria typically fall under these broad categories:
• Logistics: Site selectors need to know the sources of the manufacturing facility’s raw materials, the final destination of its finished products, and the transportation resources available so that there is timely and efficient movement of both.
• Infrastructure: This includes electric, water, and wastewater capabilities; condition, size, and proximity of local roads and highways; and rail and port access. Depending on a community’s size, a new manufacturing center can place significant demands on existing infrastructure. Knowing what, if any, infrastructure upgrades or process changes are needed for a community to accept a manufacturer’s additional load is critical, as is understanding the community’s interest in and commitment to making any needed accommodations.
• Permitting: Some site locators are skilled at identifying sites suitable for manufacturing. The question is, are these sites suitable for the project under consideration, which may require system redundancies, special air permits, or capabilities for handling particular effluents? It is not only a question of how quickly permits can be obtained, but if they are even obtainable.
To answer these questions, site selectors must be familiar with local and state permitting requirements for emissions, effluent, and other environmental considerations — and how they mesh with the manufacturer’s operations.
• Entitlements: Permitting questions should be addressed early in the site selection process for many reasons. Perhaps the most important is their bearing on entitlements — the legal right to develop a property for a certain use or type of building — that government bodies must grant before a project can move forward. Entitlements can be a major factor in determining the use, viability, and value of a property under consideration and should be part of the upfront discussion with local, state, and federal officials who have jurisdiction over a site.
• Public opinion: Manufacturers don’t want to wait until a site is selected to find out the host community’s position on their project. Projects that create demand for housing, infrastructure, schools, or immigrant labor can produce widescale opposition in some communities — while being welcomed with open arms in others. Some types of facilities are more desirable than others. A data center, for example, may receive a warmer civic reception than a slaughterhouse and meatpacking plant. However, it can work in the inverse, depending upon the community’s desires. A solid understanding of project acceptance is critical within the site selection process.
The site selector must be upfront about planned operations when working with local communities. Public opinion can sometimes be swayed when stakeholders understand a project’s full impact on their community, but it is often an uphill battle. Manufacturers generally prefer to eliminate sites in uncooperative communities early and focus on those in places that are more amenable.
• Workforce: Site selectors must understand the manufacturer’s workforce needs and a prospective community’s ability to meet them. Not every location has access to the people and training needed to deliver necessary staffing, nor interest in recruiting new workers who meet a manufacturer’s requirements. This information is valuable because it informs engineers as to whether to go manual or to automate portions of the operation to fill in gaps in skills and training.
Further, as the manufacturing workforce is often comprised of laborers with specific skills and abilities, it is valuable to align an accurate assumption of workforce demands as determined by both company leadership and process design professionals early in the site selection process.
• Local tax environment: Taxes can have major implications on a plant’s economic feasibility and long-term viability. Understanding local tax rates and histories can shed important light on a potential site.
• Incentives: While economic incentives can play an important role in site negotiations, they should not be treated as deal-makers. Most incentives offer short-term benefits — often 10 years or less — that become less valuable when viewed through the lens of a manufacturing plant’s 50-plus year design life. Because their value is short-term, in other words, most incentives do not guarantee a facility’s long-term operational success.
In fact, the incentives offered are often divorced from an owner’s actual needs and may not be applicable after considering the company’s tax liability structure. The best incentives are those that fill the gaps any given site has in fully meeting operational requirements. They should deliver true value to the owner.
Site Selection Team Choice Matters
confirm the accuracy of this informa-
Given the complex interrelationDEPENDING ON tion. However, a turnkey firm — one with the capability to take a project ships between site selection vari- A COMMUNITY’S from site selection through process ables, the team an owner chooses to SIZE, A NEW design and construction to commislead its site selection program matters. There is no shortage of options MANUFACTURING sioning — will go a step further. Not only will a turnkey firm have the abilto choose from, each with its own CENTER CAN ity to work entirely in-house to verify advantages and disadvantages. PLACE SIGNIFICANT that the infrastructure and features Some owners look first to their in-house engineering and strategic DEMANDS ON exist, but it will also confirm capacities and redundancies, rail-serve planning staffs, both of which can EXISTING capabilities, and dozens of other deprovide helpful insights on where and INFRASTRUCTURE. tails. All this data will be loaded into how the manufacturer can grow its business. Many accounting and business consulting firms also tend to offer site selection capabilities. They, too, can be helpful in identifying the geographic regions where a manufacturer should focus its growth, as well as the benefits and liabilities associated with locat“ a site selection model created specifically for this particular site search. A turnkey firm, in other words, can model a site and assess how well it meets the owner’s needs. It can also determine if a site lives up to a developer’s characterization of it. If discrepancies are discovered, the firm can pursue coning within specific states and regions. Once a specific cessions or drop the site from consideration. region is identified, some owners turn to commercial In fact, the intricate site selection models created by real estate firms with expertise in searching real estate turnkey firms work almost as efficiently as the relatively databases and identifying potential sites and incentives simple models used for pharmacy and supermarket programs. site selection. With the help of sophisticated analytics,
Each of these groups has specialty knowledge that a turnkey firm can quickly winnow a list of 30 potential can prove beneficial to a manufacturer. But their collec- manufacturing sites down to three. Importantly, these tive understanding of a facility’s operational needs and models put turnkey firms in an ideal position to know its 70-plus site selection criteria is, more often than not, what selection criteria a given site is missing and what incomplete. Depending on their area of expertise, each incentives are needed to make a property a stronger might weigh the criteria guiding the selection differently candidate. — or make recommendations using partial or inaccurate Let’s say that due diligence efforts find that the roadinformation. ways entering a proposed 300-acre site lack turn lanes
There is arguably one group that understands both and other infrastructure critical to the plant’s operation. the big-picture needs and fine-print details on any new This information can be invaluable when negotiating manufacturing facility, i.e., the team responsible for the incentives. A turnkey firm can often leverage these findplanning, design, and construction of the plant itself. ings to negotiate an incentive that is meaningful to the This group, capable of taking a project from initial site owner: additional infrastructure investment. selection criteria through to project commissioning, un- Likewise, an incentive program that supports an derstands the specific demands a new plant places on electrical capacity increase might be very attractive to local infrastructure. It can also describe a manufacturing an owner when a proposed site cannot accommodate a operation’s logistical demands, permitting challenges, plant’s electrical load. Such an incentive program, howand staffing needs with pinpoint accuracy. ever, can only be proposed if the site selector has the foreknowledge needed to recognize and propose it early Advantages of a Turnkey Approach in the site search.
By expanding the design and construction team’s role The bottom line: Turnkey, full-service engineering, to include site selection in a turnkey approach, an owner design, and construction firms approach site selection also gains an extra layer of due diligence on potential from a unique vantage point. These firms understand sites. both the demands a new manufacturing plant places
When economic development groups promote sites, on a site and the obstacles that can impede its design, they often provide detailed maps that include informa- construction, and efficient operation. That puts turnkey tion on electric, sewer, and water infrastructure; environ- firms in the right position to select sites that are wellmental considerations; and other site features. All site suited to a manufacturer’s operation and supportive of selection firms are expected to perform due diligence to its long-term success. n
The United States will need one billion square feet of industrial space over the next five years to keep up with e-commerce demand — one billion! Throughout the COVID-19 pandemic, much attention has been paid to the future of office, but the industrial market is experiencing a similar tectonic shift.
Prior to the onset of the coronavirus, the increase in online sales was driving growth in the industrial real estate sector. JLL found that nearly 35 percent of all industrial leasing was attributed to e-commerce pre-pandemic. After March 2020, as online sales experienced an explosion in growth, demand for distribution space skyrocketed, accounting for the majority of all industrial leasing in 2020 — Amazon alone represented 55 percent of total U.S. industrial absorption. The result? A flood of investment dollars into the industrial real estate sector — the infrastructure (i.e., warehouses) needed to build out the same-day/next-day e-commerce network is not dissimilar to the railroad industry in the late 19th century.
Latest Trends in the Industrial Real Estate Sector Here to Stay
The industrial real estate sector is experiencing a complete transformation brought about by changes in the retail sector, warehouse design, and supply chains.
By John Dettleff, Senior Managing Director, Brokerage, JLL
Industrial Real Estate Steals Some Moves from the Office Sector
In 2021, leading developers and designers of logistics properties will increase their emphasis on ergonomics and employee wellness. As online sales continue to grow, demand for warehouse workers and fulfillment professionals will also increase. In an already competitive labor market, warehouse amenities can help attract more workers by providing a safer, healthier, and more enjoyable environment for employees. This human-centric approach to warehouse operations will enhance productivity, allowing workers to focus more on order fulfillment and problem-solving, working in sync with warehouse robotics, which will increasingly perform more repetitive and injurious tasks.
Furthermore, e-commerce distribution centers will need to push closer to the urban core and large population centers. These locations are extremely land-constrained and tight on parking. Therefore, distribution centers will need to offer shuttle services for employees to and from public transit. Distribution centers will need a symbiotic relationship with communities in which they are located, so careful attention will be paid to community outreach, career development, and public spaces.
Distribution centers of the future will infuse design elements from the office sector. Air conditioning, for example, is currently available to only 8 percent of warehouse workers! In order to attract employees and maintain positive community relations, warehouses may look a little more like offices, with fitness centers, community spaces, and enhanced wellness infrastructure such as air quality systems and natural lighting.
Scale and Proximity Become Increasingly at Odds
As the world recovers from the COVID-19 pandemic, it is anticipated that the surge of online ordering during the pandemic will be sustained. Consumers became used to shopping online when they were unable to go into stores — utilizing everything from Amazon Prime to grocery delivery to swiping up based on an influencer’s recommendations. With that ease of shopping comes an expectation that those deliveries will arrive the same or next day.
This has forced any retailer with a direct-to-consumer business to immediately invest in their e-commerce distribution network. Within a month after the national lockdown, the industrial market saw many new occupiers in the market. The speed and
size of e-commerce space requirements are staggering.
The common themes throughout all of these new e-commerce distribution center requirements are: Occupiers Inflexible on Flexibility
• • Proximity — locations in urban cores or densely populated areas
• • Scale — very large distribution centers with very large employee and truck parking areas
• • Speed to market — the average e-commerce distribution center needs to be operational within four months of their search
• • Labor — a large (and preferably trained) work force in close proximity to the distribution center
As e-commerce distribution centers push closer to cities, these requirements are increasingly mutually exclusive. Therefore, industrial occupiers and developers will have to innovatively adapt to these changes; and these adaptations are currently occurring in the industrial sector. For example, retail-to-industrial developments are providing great opportunities for proximity. Rural communities at the periphery of urban areas are providing opportunities for land-hungry distribution centers that require scale. A tsunami of investment capital has created a massive pipeline of speculative industrial developments that will offer speed to market. As noted above, industrial occupiers and developers are working together to incorporate laborfriendly and community-friendly design elements to new e-commerce distribution centers.
Real estate is by nature inflexible. Occupiers and investors make huge upfront investments in distribution centers in exchange for 10- to15-year lease terms. Occupiers have to predict peaks and troughs in inventory demand into their decades-long lease commitments. However, recent shocks to the supply chain like the COVID-19 pandemic, the port of Los Angeles backlog, and the Suez blockage increase the need for flexibility into the supply chain.
Supply chain flexibility will not supplant long-term leases. Instead, supply chain flexibility will spur new technology that links shadow industrial space or unused trailer parking and allows principals to transact on an incremental, on-demand basis. While there are some innovators in this space today, there is a huge opportunity yet to be realized by providing flexible supply chain solutions.
Sustainability Starts Now
tion network to an efficient, labor-friendly, and sustainable supply chain. In 2021, forward-thinking industrial E-commerce owners and property managers will need to take measures to reduce the carbon distribution footprint of their properties. Sustainability centers will will be a driving force for change as added pressure from investors, consumers, and need to push regulators encourages companies to more closer to the closely evaluate the environmental impacts of their businesses. urban core and Supply chain carbon neutrality requires large population that a product or company be able to remove the exact same amount of carbon centers. dioxide from the atmosphere that it emits in the process of development, production, and distribution. This is no small task. Even when purchasing carbon offsets or credits, compaInvestor Demand Mirrors Occupier Demand nies will have to focus heavily on emissions reductions
From 2017 to 2019, the institutional investment com- across their entire logistics and distribution network. In munity increased their industrial investment allocations the industrial real estate sector, this will require signifiby 95 percent. This trend actually accelerated after the cant investments in areas such as high-efficiency roofing COVID-19 pandemic, with a 10.6 percent increase in and insulation, LED lighting, rooftop solar panels, wind 2020 and a 10.9 percent increase in the first half of turbines, and other renewable power sources. 2021. In 2021 the theme of sustainability will not only
The flow of capital into the industrial sector has change the design and specification of industrial properlargely provided solutions to the backlog of industrial ties, but it will also be a force of change for all indusdemand, as noted above. However, land and building trial operations. Industrial investors and occupiers are prices have increased significantly. For example, the increasingly aware that now is the time to start sustainaverage single asset deal price increased over 20.6 per- able initiatives if they are looking for results by 2030. cent, from $16 million in the first quarter of 2020 to This a very exciting time in the industrial real estate $19.1 million in the first quarter of 2021. These price sector. The industry is experiencing a complete transincreases will undoubtably increase rents and, perhaps, formation. Acute changes from the retail consumer are consumer prices. However, increased capital flows into spurring massive changes in institutional investing, the industrial sector will make possible the tectonic warehouse design, and supply chains. These changes shifts necessary to transform the e-commerce distribu- will be felt for years to come. n
Mitigate the Risks of Supply Chain Disruption
There are four steps businesses can take now to prepare proactively for policy changes.
By Scott McCandless, Trade Policy Leader; and Mark Hermans, Managing Director; PwC US
If the recent pandemic has taught business leaders anything, it’s that solid readiness planning through diversification and data analysis can reduce the impact when a crisis hits. Nearly half of operations leaders surveyed in the recent PwC US Pulse Survey1 indicated that reducing supply chain disruptions is “very important.” But few companies are ready to make the costly move of reshoring or nearshoring, even though a recent executive order put an emphasis on the potential upsides of moving supply chains to — or closer to — the United States or allied countries. Recent changes to multinational trade agreements also further complicate supply chains — often requiring in-depth proof of origin2 for products and their individual components.
The February 24 Executive Order,3 which looks to review the vulnerabilities in U.S. supplies of critical technologies, metals, and pharmaceuticals, adds further urgency to fixing the disconnects. While it’s unlikely any laws will go into effect in the near term, the eventual resulting policy from the review could have long-term implications for U.S. businesses.
In a March 30 speech about the American Jobs Plan,4 President Biden included additional detail that his proposal would reward companies that invest at home. Yet, only 29 percent of company chief operating officers (COOs) responded they would consider reshoring or nearshoring some operations to address rising costs related to ocean freight/domestic long-haul transportation, and only 28 percent were looking at reshoring or nearshoring some operations to reduce sourcing concentration.
President Biden is calling on Congress to invest $50 billion to create a new office at the Department of Commerce dedicated to monitoring domestic industrial capacity for critical goods and another $50 billion to invest in semiconductor manufacturing and research.
But until there is further clarity on how policy might take shape, moving manufacturing infrastructure is likely not in the cards for most companies just yet. Still, there are critical steps businesses can take in the near-term to prepare proactively for near- and long-term changes in policy.
Have active dialogue with regulators.
Policymakers often don’t know the ins and outs of every business. Sharing your story with regulators and showing them how your supply chain operates can help frame future policy decisions and, significantly, can help deter policy missteps. Identify where jobs exist along your supply chain and how they could be reset to create more U.S. jobs. Also show what support may be needed to overcome the hurdles of reshoring capital investments. Thirty-one percent of operations leaders responded that they are looking to improve their organization’s resiliency through initiatives like expanding suppliers.
Q. Are you pursuing any of the following in your supply chain to improve resiliency? (Responses to – “to a large extent”) Source: PwC US Pulse Survey, March 12. 2021; COO base of 93
Align your business with possible tax implications.
The relocation of people, processes, or technology could have significant tax implications. Pay attention to how income is adjusted between jurisdictions, which may further alter tax attributes, as well as potential tax exits, which could result from moving key profit-driving assets or functions out of the jurisdiction. Internal communication is often one of the biggest challenges within many companies; making sure the trade team is connected with supply, logistics, tax, finance, and planning takes coordinated effort but can reap significant rewards and avoid potential pitfalls, especially as taxing authorities around the world become more aggressive.
Develop and diversify strategic reserve capacity in suppliers.
It’s difficult to build up capacity with little notice, and therefore unforeseen complications like a global pandemic or a container ship running aground in a key shipping lane could easily result in shortages. Diversify the supplier base and eliminate single or concentrated sources of supply. Move toward multi-supplier and multigeography supply strategies.
Identify potential threats.
From cybersecurity to climate change, there are a wide variety of threats that could disrupt a supply chain, but that can cause little impact with the right preparation. Evaluate potential pain points — no matter how farfetched. Many companies still have room for improvement in these areas; only 40 percent of COOs said they were advancing environmental, social, and governance (ESG) strategies and only 34 percent said they would improve analytical capabilities.
President Biden has made it clear that creating American jobs, bringing industry back to the U.S., securing digital infrastructure, and tackling climate change are major initiatives for his administration. Furthermore, board members are increasingly tasking management with uncovering supply chain dependencies. Taking an inventory of how each of these issues impacts your broader supply chain will go far in preparing your organization for the inevitable policy changes coming in this space. n
1 https://www.pwc.com/us/en/library/coo.html 2 https://www.pwc.com/us/en/products/origin-compliance.html 3 https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/ executive-order-on-americas-supply-chains/ 4 https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/ fact-sheet-the-american-jobs-plan/
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