Where Should You Locate Your Next Factory?

As the old saying goes, the three things that matter most in real estate are: location, location, location.

It’s pithy, but its usefulness is limited when you’re shopping for the site for a new plant. Location is certainly a major consideration in such cases—if you’re trying to decide between two sites, you’d be crazy to choose the one that’s a hundred miles farther from your customers and/or suppliers, all else being equal—but that caveat matters.

The availability of skilled labor, access to your delivery and supply chains and, of course, financial considerations, must all be weighed against one another to determine the best site for your factory, whether it’s your first or thirty first. This article looks at three of the most important factors to consider when selecting the site for a new manufacturing operation.

1) Access to Your Customers and Supply Chain

Okay, so location may not be the only factor that matters, but it is a big one, particularly when it comes to your new factory’s proximity to your customers and supply chain. Check out this infographic on US manufacturing focus by state. Broadly speaking, the ideal location is one in which your factory would be roughly equidistant between your suppliers and your customers in order to minimize shipping and distribution times, but that assumes you’re placing equal value on lead time and delivery time.

(Image courtesy of Bid on Equipment.)

The situation is rarely so simple. For example, if you’re operating in a high-volume industry—such as food and beverage or automotive—you may prioritize proximity to your suppliers in order to ensure a steady stream of parts or raw materials, counting on the continuous output of your factory to compensate for potentially longer delivery times. On the other hand, if your customers require faster deliveries, you might consider locating your factory closer to them and increasing the size of your inventory as insurance against potential delays and longer lead times.

Even with these additional considerations, we’re still operating with a relatively simple model in which we assume, for example, that all customers and all suppliers are equally important to your business. It may be good diplomacy (not to mention good salesmanship) to say that all of your customers are treated equally, but the hard truth is that some customers are more equal than others. If one of your customers happens to be twice as far as the others from a potential site, but also accounts for 60 percent of your revenue, it may be prudent to accept the extra delivery costs to ensure that customer’s order can be filled as quickly as possible.

The same is true for your suppliers. If more than half your parts are made from steel, it may be worth locating your factory closer to your steel supplier to ensure that you always have enough raw material on-hand to keep production running. On the other hand, if your product depends on a complex component with a long lead time, minimizing the distance between your factory and the supplier for that component could go a long way toward reducing it.

Determining the best location for a new factory based on the locations of your customers and suppliers is an example of the travelling salesman problem, which is to say it’s an extremely complex optimization issue, one which becomes even more difficult when you consider the other relevant constraints, such as material factors, limited resources and time windows. Of course, in some ways the next factor to consider makes even the travelling salesman problem seem easy by comparison.

2) Labor Supply

In case you haven’t heard, the manufacturing skills gap is a serious concern in North America that’s keeping many economists, factory owners and policy makers up at night. According to Deloitte and the Manufacturing Institute, more than 2 million manufacturing jobs will go unfilled across the US over the next decade. The main problem—as the name implies—is a lack of skilled labor, which is a consequence of two separate trends:

The coming wave of baby boomer retirements (2.7 million according to Deloitte)
An insufficient proportion of the new workforce with technical education and training

There’s not much we can do about the first trend—short of inventing some new longevity treatment or pushing the retirement age to 75—which is why the focus has been on the latter. If you’ve been wondering why there’s so much emphasis on STEM in education these days, it’s because we need more kids to enter STEM fields in order to fill the knowledge gaps left by retiring baby boomers. Of course, unless you’re not planning on having your new factory up and running for another ten years, you probably don’t have time to wait for all that STEM brainwashing to kick in with Generation Z.

In the near term, the best you can do is look at the demographics for the regions where you’re considering opening a new factory and try to get a sense of the available labor pool. For example, if you’re looking in a region where the unemployment rate is lower than the national average—such as Vermont—then you’ll most likely need to look further afield when recruiting. In this case, the issue isn’t so much the lack of skilled labor, but the lack of labor in general. It’s not an insurmountable challenge, but it is an important issue to bear in mind.

Another labor-related issue to look for in a potential site is its nearness to three- and four-year colleges and trade schools. These can offer a steady supply of skilled labor through apprenticeships, internships, coops and direct hires. Moreover, your factory’s geographical proximity to these schools may give you an edge over your competitors in pursuing the top talent. The possibility of forming research-based collaborations with these educational institutions is an added bonus.

It may also help to look at the region you’re considering from your employees’ perspectives. Ask yourself how difficult it will be to convince potential hires to move there. More specifically, you can ask:

What’s the cost of living?
What’s the potential for job and income growth?
What’s the quality of life like in terms of access to schools, entertainment, etc.?
What’s the average commuting distance?

As important as it is to get a new factory up and running quickly, it’s crucial to think about how it’s going to run in the long term as well. Selecting a site in one of the many up-and-coming cities in North America could mean getting ahead of the shifting labor market while avoiding the higher property costs and tax rates of more established urban centers.

3) Financial Incentives

This is easily the most important factor when determining where to build a new factory. If your ideal location relative to all these other factors isn’t affordable, then it’s basically a non-starter. Obviously, you’ll be working within a budget that constrains where you can build based on property values, but it’s worth investigating whether there are county, state or federal incentives for setting up in an area that might otherwise be out of your price range. Even with a low unemployment rate, few places in America would turn down the chance to bring modern manufacturing—and the benefits that come with it—to the community.

On the other hand, it’s just as important to consider whether the low-cost option could become a financial burden. If the cheapest real estate is also the farthest from your supply and delivery chains, additional shipping costs and lead times could cripple a new factory as it gets up and running. If it’s located in an undesirable area from your employee’s point of view, you may have to offer financial incentives of your own to attract people with the skills and talents that you need.

Fortunately, there are still many parts of the country that are less expensive but still offer a decent quality of life for companies and employees alike. New Hampshire, for example, lacks both sales and income taxes. In Vermont, where manufacturers struggle to recruit talent from the low population, the non-profit Vermont Healthcare & Information Technology Education Center (Vermont HITEC) runs an eight-week course that starts with basic math and works its way up to G-code and M-code programming and machine operation.

If you’re looking for hard numbers, KPMG’s Competitive Alternatives 2016 report ranks Atlanta and Miami as having the most competitive business costs for manufacturing, indexed against a baseline of the average of the four largest US cities. The report notes that, “Recent reductions in transportation costs and suburban office lease costs both help Miami, along with enhancements in Florida state tax incentives.” This demonstrates the complex relationships that exist between all five factors—although Miami might not seem like an ideal location from a geographic point of view, reduced transportation costs have made it a more attractive option.

Best Location for a New Plant

Clichés from realtors aside, there is no single factor that will determine the best site for your next factory. Finding the site for a new plant is like looking for a new home: you need to consider where you’ll be in relation to what’s important, what the quality of life is like in the surrounding area, and what you can reasonably afford up front, and in the long term. Weighing these factors against one another isn’t easy, but with due time and consideration, the best option will present itself.

Then all that’s left is construction…and equipment installation…and hiring, getting the lines up and running, establishing shipping and delivery schedules, growing your customer base…