Firms pick sites based on logistics

By Staff -- Logistics Management, 9/1/1998

In a recent survey of Fortune 500 companies, 83 percent of respondents indicated that they planned to launch new operations over the next three years. Respondents also said that regardless of whether those facilities would be devoted to manufacturing, back-office operations, or distribution, logistics would be their first concern during the site-selection process.

"Logistics is absolutely critical because market access has become the most important factor in choosing a site," says Mark Klender, a partner with Deloitte & Touche Fantus Consulting, which did the "1997 Business Location Study" with Fortune Magazine. "Companies are on the move, using new operations as a means to enter new markets, reduce costs, and improve productivity."

Many of the opportunities for improving productivity are coming from mergers or acquisitions, says the report. "A company may find itself with duplicate distribution networks, so there is a lot of consolidation and rationalization going on," explains Klender.

The survey also reports that companies are using site selection to address the challenges of globalization, intense competition, consolidation, and cost reduction. For example, 61 percent of the respondents said that they planned to open locations outside the United States, up from 48 percent in 1993. Many planned sites in the Asia/Pacific region, where acquiring the knowledge necessary for making site-selection decisions is a challenge. "Once you narrow your site choices to a few locations, you then must look at political risks, business conditions, and infrastructure and labor issues," advises Robert Hess, a senior manager with Deloitte & Touche Fantus.

Hess cites the example of a manufacturer that located in India, only to be surprised by frequent electricity brown-outs and black-outs. "The company even had assurances from the government that the electricity was reliable, but they obviously needed better information," he says. "Situations like these make it difficult to do site-selection modeling up front."

On the domestic front, more than half the companies surveyed said they planned to expand in the United States. U.S.-based companies most often chose the South as the most likely region for locating new operations. Next most popular were the Midwest and West. The Western United States held the most interest for foreign-based firms, with the South and the Northeast tying for second place.

Foreign- and domestic-based companies also differed in their priorities when selecting sites. Foreign-based companies focused on infrastructure, real estate, and business-climate issues. They rated stable political/social environment, access to suppliers and contractors, and access to business as being most important. Challenged by tight labor markets, U.S.-based firms ranked labor issues (including availability, cost, and skills) as being the most critical.

The survey reported that distribution and back-office operations, such as service and call centers, and manufacturing facilities dominated U.S. companies' domestic expansion plans. Foreign-based firms focused equally on distribution and manufacturing facilities.

Klender says companies should re-evaluate sites whenever their customer base shifts, when they change their mix of inbound materials or suppliers, or when they add new facilities. Even if there are no major changes, companies will benefit by examining their site-selection strategy annually, he says.