Here’s how to approach site selection of a U.S. facility, as businesses move to shore up supply chains.
By Michelle Comerford
The business disruptions caused by the Coronavirus disease (COVID-19) have certainly left many companies rethinking their supply chain and manufacturing strategies. Given the implications of COVID-19, a familiar solution has resurfaced—the idea of "reshoring," or bringing manufacturing back to the United States.
These efforts are expected to accelerate in the near term, particularly for products destined for the U.S. market. This is especially true as U.S. officials seek to reduce dependence on Chinese supplies, given the virus’ impact on that nation, current trade policies and a potential fracturing of export capacity. An effective U.S. site not only minimizes risk, but would also mean reaching customers faster, improved quality control and the introduction of new products to the market.
So, how should a company approach its search for the right U.S. location?
To be clear, reshoring is a complex proposition. Traditionally, the business case has been centered around a comparison of manufacturing costs per unit, and with low labor rates found in Asia, it has been difficult to justify U.S. production for some. More recently, disruption caused by the virus, along with other factors (e.g., the ability to automate production operations, increasing tariffs on imports and concerns over intellectual property protection), have signaled a change.
This complexity has made tools such as the Total Cost of Ownership (TCO) calculator from the Reshoring Initiative a vital part of the discussion. This tool helps companies compare pure manufacturing costs, along with additional factors, resulting in a true total cost of doing business in the U.S. vs. China (and other countries). It helps prevent 20-30% miscalculations of this equation.
In many cases, the results are quite favorable to the United States, particularly for companies that serve the American market. These operations may see a reduction in costs for transportation, utilities and other operational risk factors. They may also see an increase in sales attributed to products with a “Made in the USA” label.
Planning the site selection process
Once the decision is made to reshore, how can a company find the right location?
Selecting the right location for your U.S. operation is a multifaceted process. It is critical to have step-by-step knowledge of the stakeholders, regulators and other information used in the decision-making process. This helps ensure that nothing is missed that may otherwise cost time and money.
Every project is unique, and as such, requires a deliberate, rigorous evaluation that incorporates operating environments and total costs. You must ensure that a location meets the company’s current and future needs.
Define the operation’s scope
Before beginning to evaluate location options, it is important to first “define” the proposed operation and its many associated requirements. This allows you to properly evaluate location opportunities against these needs. For a manufacturing plant, the production process and equipment should be planned with a process engineer. Be aware that the U.S. version of the plant will likely be more automated than its foreign counterpart.
Define the plant “inputs,” including suppliers, transportation, labor, real estate, utilities and other location factors such as community preferences, accessibility, etc. For example, when considering local materials and suppliers to augment a new operation, there are various resources available to help identify potential U.S. partners. Other industry trade groups also publish online supplier directories searchable by city and state.
Then, calculate the project investment and identify the desired timeline to begin operations.
Tap into site selection resources
There are many resources available to assist with site selection, most notably economic development agencies and site selection consultants.
Economic development agencies operate at the state, local and regional levels and have a responsibility to attract and retain business investment and jobs to their respective communities. They can be excellent initial resources of preliminary information at no cost and are the point of entry for economic development incentives, such as grants, property tax abatement, corporate income tax reductions and training assistance.
Reshoring projects will typically find a particularly warm welcome, as they resonate with the general public’s sense of patriotism. However, be aware that each economic development entity is representing their respective area only and will not necessarily be an objective source of information.
A professional site selection consultant assists companies in formulating a site selection process and executing a strategy through data collection, analysis and field work. Most site selection consultants work closely with economic development agencies and utilize data services and other tools to evaluate available locations and incentives through an established methodology. A site selection consultant engaged by a company will work on behalf of that company’s interest to help guide the search methodology. They work in an objective fashion across jurisdictional boundaries, weighing various operational factors in the process. This results in an effective final location decision.
The key is to engage these professionals early in the process. They can provide the most value when brought in during the conceptual phase of the project, facilitating a streamlined decision-making process and guiding the company through it, ultimately saving significant time and money.
Project financing and incentives
Prior to the COVID-19 crisis, there were financing and incentives programs available from most states and local communities, however many of these programs may be affected in the near term by government budget shortfalls resulting from economic shutdowns.
However, even prior to the crisis, these programs were generally not designed to fund 100% of a project, so each company will need to be prepared with project financing sources, whether through internal means or outside investors. Having a firm understanding of any funding gaps will be important to incentive discussions with the finalist locations in the search process.
Other types of incentives programs, including grants, tax credits and abatements may also be available depending on the states and local communities under consideration (and their post-COVID-19 situation). These are typically awarded based on the amount of capital investment, number of jobs created and wage levels for the new jobs.
Planning and execution
Overall, an efficient site selection process is truly more of a site “elimination” process. Location screening and scoring criteria, beginning with high-level considerations and then evolving into site-specific considerations, will guide you through a progressively shorter and shorter list of potential locations.
If your process is not deliberate, you will become mired in an overabundance of information and conflicting priorities; if not rigorous, your decision may not withstand the test of time and markets. If, however, you achieve both, you will find the optimal location and reap the financial and operational benefits.
The final step is to acquire the property and begin detailed engineering and construction of the facility. Keep in mind that many construction timelines may also be 12-18 months or more, depending on the type of operation and the location.
Faced with an unprecedented disruption event like COVID-19, the current climate demands swift action. With a renewed call for U.S. production, the opportunity for new innovative manufacturing processes and rapidly increasing consumer demand, the time is right to consider reshoring operations to the United States. Tapping into resources and engaging the assistance of outside professionals will ensure a well-guided and efficient decision-making process and implementation plan.