Is picking the right manufacturing location purely an objective exercise or is it subjective as well? The answer is yes….. to both. The objective side clearly affects your P&L, while the subjective side affects the risk to your P&L.
In choosing the right manufacturing location it is important to do the analysis with 4 key objectives in mind. They are as follows:
- Total cost of ownership
- Availability of resources
- Operating environment
Total Cost of Ownership:
The number one objective is to have a facility with the lowest “total cost of ownership”. In order to do that, close attention needs to be paid to acquisition costs and operating costs. There are many elements of these primary costs that need to be considered which include but aren’t limited to the following:
|Acquisition Cost||Operating Cost|
|• Financing: Bonds, Equity, Loans, etc.||• Electricity and other utilities|
|• Land||• Labor|
|• Building Cost||• Taxes|
|• Infrastructure||• Transportation: Inbound and Outbound|
|• Build out||• Wage Inflation|
|• Real Estate Fees||• Tariffs and Duties|
|• Permits||• Currency|
|• Legal||• Workmen’s Compensation|
|• Regulatory Costs|
The above costs differ significantly from location to location. This is particularly true when considering manufacturing in foreign countries such as Mexico or China. In the United States, these costs vary significantly from state to state and locale to locale as well.
Many states and municipalities are hungry for manufacturing businesses because of their economic multiplier effect. It is important that companies investigate the incentives which we have seen to include free land, purchase bonds, tax credits, free training, tax abatements, etc. etc.
Responsiveness is a big deal in today’s economic environment. More and more companies are using responsiveness as a competitive advantage and using it to gauge vendor suitability. Each industry segment has a unique set of challenges they need to deal with.
High fashion which may only have a 6-12 month life cycle cannot afford to have product manufactured in China and shipped via container, so they must contend with air shipments, produce to demand or produce as close to the point of consumption as possible.
When considering the right location for a manufacturing facility, it is important to consider how close the facility is to its primary vendors and its primary customers.
When days count, increasing the lead time for raw materials or the lead time for finished goods is often the wrong thing to do. Both scenarios can be overcome but they come with a significant impact to operating costs.
Availability of Resources:
There are many resources that are required to operate a manufacturing facility. Most people will think about Human Resources first and that is a great start. Human resources are about the availability of people and their skill levels.
Implementing a complex machining operation in an area where there are no skilled tradesmen or trade schools wouldn’t make any sense even though all of the other considerations might be favorable. The other resources that must be considered are natural resources. The availability of water ( a big deal in California, Nevada and Arizona) and other raw materials will have a large impact on cost.
Lastly, support resources are also very important. Today’s organizations run very lean and they need to be able to find qualified local experts to help them navigate through various business issues, especially local ones. It is important to consider the future risk of these as well.
If you think that responsiveness and resources are subjective, then this next one will be more so. We have heard many companies complain that California is the worst place to do manufacturing with unfriendly environmental policies, outrageous tax rates, out of control workmen’s compensation, etc.
A lot of people believe that moving to Texas is the answer. Before making that decision, see the three items above. The reality is that the operating environment has a huge subjective impact on making the right decision. Here are some factors to consider:
Each of these items requires significant consideration for companies looking to expand their operations into another country, but these also impact the decision on where to locate operations inside the US.
An example would be the difference between the labor laws in California vs. Mississippi. All of these items have an indirect impact on operating costs that cannot be forecasted in a P&L.
Recently, we were working with a client to understand the total cost of acquiring product from China. They paid an organization in China 4-7% of the product value to inspect each lot of material prior to shipping.
They viewed that as an overhead cost, but the reality is that it is a supply chain cost that is impacted by the location decision. Another example includes the unwillingness of engineers and others to constantly be on late night calls with suppliers and vendors 12 time zones away. We have seen this result in less than optimal performance and disenchantment in the workforce. How much does that cost?
Senior leadership and Boards of Directors have the responsibility to create strategic direction which has three main tenets: growth, profitability and sustainability. At the end of the day, the most important result is what happens to the P&L both now and in the future. It is critical that companies do the appropriate due diligence when picking a manufacturing location. The best result will occur when all of the above factors are optimized and the right priorities are chosen.
If a company doesn’t have the appropriate skill set, then they need to engage expert resources to help them through the decision model. Making the right decision has immediate and long term implications on the profitability and sustainability of the business. Other articles of interest include: Mexico – The New China
About the author: Jim Gitney is the CEO of Group50®Consulting and specializes in the development and implementation of manufacturing and supply chain strategies, including global site selection and supply chain restructuring.
Jim and the Group50 Continuous Improvement Consultants team are all former executives with well-known manufacturing and distribution companies who understand what it takes to put together and manage the implementation of a successful strategic plan.
Group50 has designed a series of strategic assessments, workshops and strategic execution tools that eliminate the existence of Anti-Strategy. You can reach us at (909) 949-9083 or send a note to firstname.lastname@example.org.
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