The Importance of Site Selection in Cost Control
When considering a new facility expansion, you can’t underestimate the importance of site selection in controlling costs and maximizing profitability. From customer location, labor cost, and freight, to tax structures, incentive programs, and the cost of real estate, there are a number of important items to consider. Whether leasing, building, or buying, it’s important to evaluate each of these considerations when determining your real estate strategy.
The first consideration when planning a facility expansion is to evaluate your strategic business needs — where are your customers located, what are their needs, and how can you plan your location to meet those needs. The next step is to strategically align this business plan with your real estate strategy to identify the optimal location for your new facility.
Your customers are king. It’s important to really understand their needs and requirements. If they’re used to one-day delivery, and your new location means that they’ll be lucky to get shipments in three, it’s probably best to re-evaluate. The foundation of any solid real estate strategy is one that’s supportive of your overall business strategy.
Aside from customer considerations, labor cost and availability tend to be the most significant factors in site selection, and they vary widely across the United States. While a particular location may offer an excellent pool of inexpensive, unskilled labor—making it a superior location for a warehousing facility—it may not offer the highly skilled, technical workforce required for a research facility.
Moreover, a location with extremely low unemployment rates may pose a challenge when hiring new employees. A general rule of thumb is to identify a labor pool that can provide three quality applicants for each available job.
Another key labor consideration, however, is redundancy. Not all staff will choose to relocate or be offered the opportunity to do so. How long will it take you to wind down operations? How long will it take new staff to get up to speed? How long will you have two sets of staff manning the same positions in two different locations?
The proper mix of cost, quality, and quantity of labor must be a key consideration. This goes back to your customers — they expect a certain level of quality. It’s important that the service is seamless.
Despite recent declines in the cost of fuel, transportation costs remain an important consideration in location strategy. While rail transport offers the most cost-effective solution, truck and air transport provide higher service levels and reduced transit times. It’s important to understand freight requirements before deciding upon a specific site to ensure necessary access to interstates, rail, and airports, as appropriate — a location many miles from the main interstate is not conducive to an operation heavily reliant on truck shipping.
Finally, there are considerations such as tax structures, incentive programs, real estate costs, and “intangible” requirements.
Tax structures vary by state. Rates for franchise, real, and personal property taxes can vary significantly from location to location. Corporate income tax structures vary greatly as well, and some cities have an additional payroll or inventory tax. In addition, some states are more willing than others to offer tax abatement programs. It’s important to undertake detailed due diligence to determine what the tax impact will be on your business.
It’s also important to leverage any applicable state and local incentive programs. Many states have economic development staff who can offer creative programs to help make locating in their state more affordable. Having someone in your corner committed to your success can be very valuable in this regard.
Finally, real estate costs, school systems, quality of life, and other intangibles do play a role in location strategy. It’s important to consider the quality of life for your employees and their families in each location.
Site selection is an important cost-control variable for many organizations. Whether you know where you want to locate or you wish to explore local, regional, or national options, Plante Moran CRESA can help. Whether you’re considering leasing, buying, or building a new facility, our experts will evaluate your current environment and develop a real estate strategy that is closely aligned with your business plans and goals.
The Customer Is King
The first consideration when planning a facility expansion is to evaluate your strategic business needs — where are your customers located, what are their needs, and how can you plan your location to meet those needs. The next step is to strategically align this business plan with your real estate strategy to identify the optimal location for your new facility.
Your customers are king. It’s important to really understand their needs and requirements. If they’re used to one-day delivery, and your new location means that they’ll be lucky to get shipments in three, it’s probably best to re-evaluate. The foundation of any solid real estate strategy is one that’s supportive of your overall business strategy.
Labor Cost & Availability
Aside from customer considerations, labor cost and availability tend to be the most significant factors in site selection, and they vary widely across the United States. While a particular location may offer an excellent pool of inexpensive, unskilled labor—making it a superior location for a warehousing facility—it may not offer the highly skilled, technical workforce required for a research facility.
Moreover, a location with extremely low unemployment rates may pose a challenge when hiring new employees. A general rule of thumb is to identify a labor pool that can provide three quality applicants for each available job.
Another key labor consideration, however, is redundancy. Not all staff will choose to relocate or be offered the opportunity to do so. How long will it take you to wind down operations? How long will it take new staff to get up to speed? How long will you have two sets of staff manning the same positions in two different locations?
The proper mix of cost, quality, and quantity of labor must be a key consideration. This goes back to your customers — they expect a certain level of quality. It’s important that the service is seamless.
Freight
Despite recent declines in the cost of fuel, transportation costs remain an important consideration in location strategy. While rail transport offers the most cost-effective solution, truck and air transport provide higher service levels and reduced transit times. It’s important to understand freight requirements before deciding upon a specific site to ensure necessary access to interstates, rail, and airports, as appropriate — a location many miles from the main interstate is not conducive to an operation heavily reliant on truck shipping.
Other Considerations
Finally, there are considerations such as tax structures, incentive programs, real estate costs, and “intangible” requirements.
Tax structures vary by state. Rates for franchise, real, and personal property taxes can vary significantly from location to location. Corporate income tax structures vary greatly as well, and some cities have an additional payroll or inventory tax. In addition, some states are more willing than others to offer tax abatement programs. It’s important to undertake detailed due diligence to determine what the tax impact will be on your business.
It’s also important to leverage any applicable state and local incentive programs. Many states have economic development staff who can offer creative programs to help make locating in their state more affordable. Having someone in your corner committed to your success can be very valuable in this regard.
Finally, real estate costs, school systems, quality of life, and other intangibles do play a role in location strategy. It’s important to consider the quality of life for your employees and their families in each location.
Plante Moran CRESA Can Help
Site selection is an important cost-control variable for many organizations. Whether you know where you want to locate or you wish to explore local, regional, or national options, Plante Moran CRESA can help. Whether you’re considering leasing, buying, or building a new facility, our experts will evaluate your current environment and develop a real estate strategy that is closely aligned with your business plans and goals.
