Copyright Halcyon Business
Publications, Inc. Oct/Nov 2006
[Headnote] |
It's clear from the responses to Area Development's
2005 Corporate Survey that PROXIMITY TO MAJOR MARKETS is increasingly
driving the location decision. |
The 2005 Annual Corporate Survey marks the 20th year
Area Development magazine has published the results - reporting the corporate
executive viewpoint - concerning factors important in making location decisions.
In the latest survey, several ranking changes have occurred - including the one
for proximity to major markets, which has jumped from 14th in 2004 to 9th in
importance in 2005. This also represents a 14 percent increase in weighted
significance. The response is very clear: Closeness to market is now of major
importance to corporations as they consider where to locate their
facilities.
AS TIME CHANGES SO DO BUSINESS MODELS.
Looking back over the 20-year time period that the
survey has been conducted, it is apparent that the factors in motion have been
the same; however, the rankings of certain factors have become stronger (or
weaker) as time moves forward.
In order to understand changes that may be occurring,
let's keep in mind that proximity to major markets will have a different
connotation depending on the function or facility type being located, as
follows:
* Manufacturing facilities may interpret proximity to
market as a close physical presence to the consumer, or close to another
manufacturer producing finished goods for their just-in-time inventory
delivery.
* Warehouse/distribution facilities may view
proximity to market as meaning closeness to a certain shipping port for
exporting/importing goods on a more direct basis.
* Office facilities could interpret proximity to
market as the same time zone for delivering service-oriented activities.
Each organization selecting a new location develops
their own criteria to aid the process for specific location projects. It is fair
to say that organizations with more than one location project under way will,
more than likely, have differing criteria for each project. Also, projects with
similar requirements but completed in a different era will have different
criteria than a current project. Although the same factors will appear on the
criteria list, the weighting (or ranking) will change based on the current
business model. For example, as quality and affordable labor becomes tight,
companies are usually willing to consider locating farther from a preselected
target location rather than experience operating cost increases that may not be
recoverable in price increases to their customers.
CUSTOMERS REALLY DRIVE LOCATION STRATEGY.
Although a company's location criteria and business
model change over time, it is really the customers who establish broad location
strategy. Furthermore, the business model established by most companies will be
based on customer preferences - which also change over time. For example, the
old-school model used for manufacturing included the need to inventory raw
materials and sub-assemblies at the manufacturing site. Manufacturers did not
rely on the supplier's ability to re-stock inventories on a short-term basis.
This supply-chain model allowed suppliers to operate their plants on a remote
location basis and to utilize various modes of transportation to satisfy their
manufacturing customers' on-hand inventory requirements.
Simply stated, the customer sets the expectation
related to product cost, quality, and delivery time - and it becomes the task of
the supplier company to meet those expectations. For example, several major
retailers may demand that suppliers ship directly to store locations rather than
to the retailers' distribution centers. In setting this delivery expectation,
the customer (the retailer) is establishing how its suppliers will arrange their
physical locations to meet the delivery schedule, including how many
distribution facilities and where they need to be located.
THE WORLD OF LOGISTICS HAS STRONGLY INFLUENCED
CORPORATE THINKING.
Again, the customers are the ones who really drive
location strategy and, over time, customer supply-chain factors and advancements
have demanded that suppliers modify their business models - as well as locations
- in order to satisfy things like just-in-time delivery requirements.
Logistics sciences have refined the manufacturing and
distribution industry in a manner that drastically improves delivery times,
inventory levels, and profitability. In many cases, this evolvement has taken
logistics planning from an art to a science. The improvements realized have
caused the typical business enterprise to examine other location-related
decisions, including all facility types such as manufacturing plants,
warehousing, office functions, and special-use properties.
The world of logistics and distribution has had a
strong influence in corporate thinking, which, in rum, has influenced the manner
in which organizations plan and make choices, including how and where to locate
facilities.
HOW DO WE EXPLAIN OFF-SHORING?
Therefore, if proximity to major markets - or
closeness to customers - is an important factor in choosing a location, why are
many companies off-shoring jobs to locations that are half way around the world
from their customers? The answer is in the business model dictated by the
customer.
Some 70 percent of the respondents to Area
Development's 2005 Corporate Survey were from the manufacturing sector, and 15
percent of the respondents were from the distribution sector. Collectively, 85
percent of the respondents are clearly driven by supply-chain evaluation and
influence. The respondent companies have learned to fit into their customers'
location expectations and - in the case of both manufacturing and distribution -
physical closeness is essential.
On the other hand, in most cases involving
off-shoring of employment, it is the service sector making these decisions.
These location choices are still driven by customer mandate of product cost,
quality, and delivery time. Off-shoring allows for a less cosdy product and an
unaffected delivery time (via electronic transfer), although, in some cases,
quality is still under review. In these instances, physical proximity is not
expected by the customer.
As the annual survey continues to report the trends
and changes in corporate dunking, keep an eye on this dimension. Also, keep in
mind that American industry, generally speaking, has now reached a level of
maturity, and finding "new markets" is rather difficult - geographically
speaking.
[Author Affiliation] |
BY LES J. CRANMER, SENIOR MANAGING DIRECTOR, AND ART
M. WEGFAHRT, CORPORATE MANAGING DIRECTOR, STUDLEY,
INC. |
[Author Affiliation] |
Les Cranmer and Art Wegfahrt are location and real
estate consultants in the Corporate Services Practice at Studley, Inc.
Together, they have over 60 years experience in advising corporations on
strategy, location selection, and
implementation. |