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32 The Location Selection Process 5.1 Overview A comprehensive site selection process for freight facilities systematically translates the strategic goals of the company into a business plan for a new operation, and continues the process of identifying appropriate candidate areas, evaluating those areas, determining the financial impacts of the move, and implementing any resulting decisions. Many corporate officials have a stake in the process, and each shapes the process and the relative importance of key factors at different stages in the decision. While some small or regional companies will make location decisions based upon the idiosyncratic market and supply chain knowledge of specific individuals, many others construct a more robust site selection process that will result in the application of analytic discipline to the stated business need. Such a process explicitly identifies the key success factors for the new facility, meets the operational requirements, verifies financial payback and, ultimately, supports the executive decision-making process. This chapter explores the most common approaches to site selection while noting differences and alterations that sometimes occur for differing facility or company types. Some entities enter and exit the process at different points, and some approach the process with more or less information. Each company brings its own culture and method based on its own situation. Freight carriers and their clients (retailers, manufacturers, and others) also view the process somewhat differently, and we will describe these variances as well. Likewise, location selection for large super-regional facilities such as ports and inland ports are subject to more idiosyncratic processes. The current section and the following section regarding key dynamics were developed through in-depth interviews with corporate executives in freight-intensive businesses (such as manufacturing and retailers) as well as with freight carriers, location consultants, and real estate professionals. A full list of interviewees may be found in Appendix B. The location process typically begins with an examination of the overall business needs for the distribution network as a whole, or for the new facility in isolation, and then follows a process similar to that shown below to narrow the range of alternatives.
33 Figure 5-1: Examination Process While these steps are shown above as a sequence, stages often overlap and may flow in somewhat different order. For example, some organizations combine the network modeling and location screening stages. Others develop a cost model early in the project to determine overall feasibility and then refine this based upon knowledge gained throughout the process. 5.2 Planning and Strategy The location selection process for any facility begins with the identification of a need. This need may arise from the desire to serve a new market, to merge facilities acquired from another company, or to respond to a change in market conditions. Regardless of the presenting issue, the location team needs to understand the strategic context for this new facility or set of facilities. In the case of most freight facilities, the presenting cause for a site selection process will be to: ï§ Expand: ï§ A need to service a new market due to expansion. Contract: ï§ The company or carrier may wish to rationalize a distribution network into a smaller number of facilities, or to merge two networks into one. Change: However â more than other industries â freight facilities are inextricably linked into distribution networks and cannot be wholly viewed in isolation. A change at one node in the network may have implications up and down the entire supply chain. As a result, companies will usually take some time at the beginning of the project to revisit the goals and business context for the distribution network as a whole. This will include asking and answering a variety of business questions, which may include the following: The companyâs market or method of servicing the customer has changed in some way making the current facility or distribution network either inefficient or obsolete. ï§ How far into the future can we plan? ï§ How much of the supply chain do we wish to control ourselves, and how much of it do we wish to contract to a 3PL, vendor, or set of vendors? ï§ How might our business change over the coming years in terms of customer base, product mix, and service delivery? ï§ How are our customersâ needs changing? Does this present us with new opportunities?
34 ï§ Is our goal to optimize cost or reduce time to market? How best can the company balance its customer service goals? ï§ How capital and labor intensive are our preferred operating strategies? ï§ What is our overall workforce strategy? How do we want our staff to interact with and manage the supply chain? ï§ How do our total material and operating costs compare to those of our competitors? ï§ What are our overall sources (and costs) of capital to invest in this facility or network? ï§ What other outside events (e.g. fuel costs, global sourcing of goods, network congestion) might impact our decision making? ï§ How will we evaluate and adjust our decisions as time goes by? How often will this be accomplished? The answers to these questions will provide the general planning framework for the organization, forms the basis for planning the facility or network, and illuminates the changes needed to the distribution system. The team tasked with answering these and subsequent location questions can be small or quite large, depending on the size, sophistication and complexity of the organization. Members of the team may include: ï§ Business Unit management and staff â including representatives from the affected business unit(s) ï§ Operations â including supply chain, logistics, and transportation managers ï§ Finance â the chief financial officer, controller or members of their staff ï§ Real estate and facilities â the corporate real estate or facilities department or industrial development representatives ï§ Administrative functions â particularly legal, tax, and human resources professionals ï§ Outside service providers â which may include consultants, brokers, engineers, and architects Any form of advance planning involves a calculated risk. Unforeseen business events, market changes, and other outside factors introduce the risk of significant error into any planning, and the margin of variance increases the further out the plan is built. Nonetheless, any network or facility plan usually adheres to the rules of thumb for planning horizons from early stage planning to project implementation and operations: Table 5-1: Rules of thumb for planning horizons Facility Characteristics Planning Horizon Significant infrastructure investment (as for a port or intermodal facility) 20+ years Capital or machinery intensive investment 7-10 years minimum Commodity based or non-capital intensive 3-5 years The planning timeframe will then indicate the remaining strategic considerations. This will include projecting or forecasting the following: ï§ Sales and/or freight volume ï§ Demand points or markets to be served ï§ Product sourcing ï§ Product categories
35 ï§ Number of end (or source) points to be serviced by the facility ï§ Freight pricing (including variability by mode) ï§ Facility ownership or leasing plan ï§ Any likely exit plan for the facility This establishes the overall need requirement to be satisfied by the new facility or network. This framework allows the project team to set overall parameters for the following: ï§ Proximity or access to key markets ï§ Transportation network requirements o Access to key transportation corridors o Ability to balance modes ï§ Labor and workforce needs and costs ï§ Tax and regulatory requirements ï§ Utility requirements, including information technology considerations ï§ Real estate and facility requirements (including specific building design and engineering requirements) ï§ As a subset of the above, can the company move into an existing facility, or will it need to build a customized facility ï§ Overall costs to establish and operate the facility or network ï§ Incentives or other public sector assistance Each of the above can either be a gateway or a screening criterion. Gateway criteria are those factors which must be in place for a location or community to even be placed on the candidate list. This can include access to a key mode of transportation, such as a seaport or airport. It may also include the ability to serve a key market within a defined period of time, such as a requirement to serve markets X, Y, and Z within a one-day out and back truck trip. Screening criteria are factors which are important to the overall success of the facility but which may be traded off against other operational requirements This structured approach to developing the strategy accomplishes several aims. First, it allows the company to logically define the most critical elements for the facility type or network being planned. The key criteria are defined, measurable data points are established for those criteria, and the criteria themselves are ranked in order of relative importance. This relative weighting will be used later to rank the candidate sites or scenarios. Second, this structured approach ensures early stakeholder buy-in and ensures that the solution is grounded in a consensus on the importance of the key drivers. This provides decision support to the corporate officers, reduces parochial infighting, and minimizes the emotional component of the decision process. 5.3 Network Modeling Time to market and overall logistics costs drive many if not most freight facility location decisions. As a result, the first stage for locating a freight facility of almost any form examines the interplay between location and freight costs. Network modeling involves determining the number, size, and broad regional location of facilities required to service customer needs in a cost effective manner. This analysis usually involves some form of computerized modeling of total shipping cost and time to market for a set of scenarios. Programs such as ILOG,
36 Computer Aided Planning and Scheduling (CAPS), and ZALES allow the user to input customer or store locations, sourcing points, freight loads, fuel costs, facility operating costs, and modal choices to develop idealized distribution center networks. Similar modeling capabilities are provided by the larger third party logistics (3PL) firms for their customers and the very large firms such as UPS maintain their own internal systems for this purpose. The same modeling can be used for larger facilities (such as intermodal, bulk, or others) which will be used to feed smaller regional distribution centers. The network analysis phase is designed to determine: ï§ Where freight will be originating from ï§ The destinations where freight will be sent to from the facility or facilities ï§ The types and number of follow-on stores, distribution centers, or other operations which will be served by each facility ï§ How to best align the facility locations with customer markets ï§ The preferred mode or modes by which freight is to enter and leave the facility or facilities ï§ Tradeoffs between centralized operations (fewer facilities, but longer delivery distances) and dispersed operations (more facilities, but shorter delivery distances) ï§ How to build flexibility into the network to respond to changes in fuel costs, market changes, and the relative advantages of each transportation mode These models are run through a variety of scenarios, examining the sensitivity of the optimal network to issues such as freight volume, population growth, customer change, sourcing, operations costs, and fuel costs. While the company may use its own historical data as a baseline, it is important to test this against a range of possible outcomes to determine the breaking point between feasibility and infeasibility for each scenario. The scenarios may then be adjusted with regards to number of facilities, facility capabilities (size, modal choice), or position on various transportation networks. Companies perform a conscious tradeoff among cost, performance, and resiliency and build a network which meets their goals for each. This idealized network is then compared against the companyâs current network to both benchmark the accuracy of the model and to identify gaps in the network. This highlights areas which require changes, additions, or deletions and also provides an indication of where change is most required. This analysis of linkages and infrastructure must be compared against real-world data with regards to actual conditions. Network models are typically limited with their ability to incorporate such issues as congestion in transportation channels or changes to the transportation network itself, except as this may be incorporated into transit time costs passed onto the customer. An ideal network based on this kind of modeling may be significantly compromised by issues such as congestion and traffic on roadways, or through having passenger traffic take precedence over freight on rail networks. Companies need to make off-line adjustments to the network models to accommodate for these intangibles. Network models do not provide final sites, but only show recommended areas where nodes ought to exist for optimal network performance for the parameters fed into the model. According to interviews, supply chain companies typically use this as a starting point, and attempt to find sites within a specified radius of these recommendations. This radius may be larger (50 miles) or smaller (10 miles or less) depending on the nature of the network under consideration.
37 5.4 Location Screening The site selection team also gathers data which relates to non-transportation factors such as workforce, regulatory environment, utilities, and the cost of real estate. These factors impact overall business success, but must be evaluated using different methods from those of network analysis. The main challenges for the team are threefold: 1. Finding data which appropriately measures or predicts the dynamics for each major business driver 2. Developing some method for reconciling the relative importance of each data item or business driver 3. Following a process for gaining acceptance of the results of steps 1 and 2 among the other corporate executives In order to address these challenges, the team will typically construct either a grid or a weighting and ranking model which uses demographic, socio-economic, workforce, tax, regulatory, utility, and other data to determine how each candidate community matches the companyâs goals relative to the others in consideration. The team collects data from various public and private sources and may also submit a request for information (RFI) to individual community economic development agencies if the team needs more specialized information. Ideally, the team will review information from more than one source for critical items to ensure accuracy. This data can include: ï§ Availability and cost of skilled workforce ï§ Education system performance and presence of key training programs ï§ Unionization and union activity ï§ Electric, water, sewer, and gas utility availability, capacity, and cost ï§ Availability of adequate sites or facilities ï§ Rent, occupancy and construction costs by acre or square foot ï§ Income, inventory, sales, property and other taxes ï§ Other regulatory concerns ï§ General information on credits, grants, incentives or other public sector assistance ï§ Climate and natural hazard information ï§ Quality of life (if key personnel are to be transferred to the new site) The team constructs its evaluation matrix or model using this data. By applying a weighting scheme developed in the strategic planning phase, the team objectively tests how well each of the candidate communities or sites matches the companyâs needs. The team can evaluate a variety of alternative scenarios to reflect changing priorities. The team will also examine how the community or siteâs location impacts operating and cost considerations as compared to the network modelâs ideal location. Communities which score well for the teamâs identified priorities and which can also adapt to alternative outcomes are retained for field analysis. 5.5 Field and Site Analysis After the project team identifies its preferred short list of communities and gains the acceptance of any other corporate stakeholders, the location team performs on-site verification of the analysis performed above and further evaluates specific sites or facilities within the community. This process also assists in interpreting the objective data on workforce and other areas from earlier screening stages.
38 This is a stage in the process where the location team may seek the assistance of local government or economic development officials in various areas, including: ï§ Meeting with companies who have similar operating profiles ï§ Discussing permitting and regulatory assistance ï§ Incentives, grants, credits, and other public assistance ï§ Identifying any appropriate sites which may not have been uncovered in earlier due diligence ï§ Working with local utility officials to discuss load requirements and other considerations ï§ Other meetings and connections as appropriate All of the above allow for a better understanding of the actual operating environment in the community and also begins the negotiation process for land, facilities, and public assistance where appropriate. Discussions with land or facility owners on selected properties begin to evaluate each propertyâs: ï§ Match to company requirements for size, configuration, or permitting ability to construct on the site ï§ Ability to grow or otherwise adapt to future requirements ï§ Ease of access to and distance from key transportation points (highway ramps, switching yards, intermodal facilities, etc.) ï§ Cross dock, ceiling height, maximum floor weight, number of loading dock, rail access and other materials movement requirements ï§ Utility feeds and redundancy to the facility ï§ Other site engineering considerations ï§ Environmental considerations ï§ Rent, purchase, and operating costs ï§ Employee commuting patterns ï§ Crime, safety, and security This information, coupled with the financial analysis described below, allows the team to further refine the location recommendations. 5.6 Cost Modeling The team constructs a full financial analysis of the various location and network scenarios to evaluate the feasibility and the relative financial merits of each option. These cost models may be designed to evaluate the Net Present Value (NPR), Internal Rate of Return (IRR), payback period or other similar financial metrics. Each scenario may be compared to the current state, a defined base case, to the alternative scenarios, or all of these. Different entities use different investment feasibility criteria including a project hurdle rate, the corporate borrow rate, or the companyâs weighted average cost of capital (WACC) depending on corporate philosophy. The cost model may include any or all of the following: ï§ Start up costs o Land or facility purchase (if applicable) o Construction and fit-out costs o Recruiting, hiring, and training o Relocation expenses o Equipment and furniture purchases o Sales tax
39 ï§ Recurring costs o Ongoing inbound and outbound transportation costs o Transportation network service performance (such as traffic and congestion delays) o Rent (if applicable) o Building and equipment depreciation (if applicable) o Maintenance, repairs and other occupancy costs o Staffing and labor costs o Benefits and recurring training o Utilities o Property and income taxes ï§ Exit costs These models may or may not include revenue projections and full tax impacts for the location scenarios depending on the sophistication of the project team and overall project goals. Cost models provide critical information regarding how well each scenario and/or location provides an economic payback for the proposed location or network investment. The amount of time required for the company to recoup its initial investment and the rate of return must be compared against other operational investments the company might consider in order to prioritize such investments. Likewise, the cost model provides a sensitivity analysis for the network or site for measuring the impact of changing cost environments for fuel, labor, network service performance, revenues, and tax exposure. A network or locationâs ability to successfully address a variety of possible operating situations provides the company with strategic flexibility which substantially increases the chances that the location or scenario will be chosen. These analyses therefore result in a determination of both absolute and relative feasibility for the options under consideration. Cost models also play an important part in identifying any up-front or ongoing cost barriers which may be addressed through partnership with the public sector through the use of incentives, credits, grants, or other financing options. 5.7 Incentives Negotiations Project teams may also work to identify, negotiate, and secure incentives from local or regional governments to address any perceived shortcoming of the location or to help offset costs and improve feasibility. Other programs or incentives may be devised to solve a particular location problem or hurdle expected by the company in question. The project team will take extreme care to ensure that any action taken by the team, the company, or its partners is not construed as a firm commitment to any community under investigation. Any such premature commitment can eliminate the possibility for securing financial incentives and inducements. On the other hand, public sector agencies involved in these kinds of negotiations increasingly are seeking some form of âclaw backâ such that the public incentives or subsidies are contingent upon the private company delivering on job creation and sustained activity.
40 5.8 Final Selection At the completion of the cost model, site analysis and negotiations, and the negotiations for public incentives, the project team re-assembles the corporate stakeholders to present their findings and recommendations. The company then decides on a course of action, instructing their partners to complete negotiations and implement the new location strategy.
