Global economics, consumer demand, innovation and technology are impacting location strategies for all kinds of manufacturing industries.
But, it is a complex proposition. How should a company compare costs of operating in the U.S. vs overseas? What factors are important to consider? How should non-cash factors such as risks and opportunity costs, be accounted for?
BLS & Co. has partnered with the Reshoring Initiative to help provide a full scope of services around guiding companies through the processes of reshoring or locating in the U.S. for the first time . Our step by step guide below will help guide you through a decision making process.
Go beyond wage arbitrage, purchase price variance and landed cost. Total Cost of Ownership (TCO) may show that, for product to be sold in the U.S., you will be equally profitable with a U.S. manufacturing cost up to 20% to 35% higher than offshore. The TCO tool is recognized by the U.S. Department of Commerce for use in the reshoring/offshoring decision.
The Total Cost of Ownership (TCO) Estimator is a free online tool that helps companies account for all relevant factors — overhead, balance sheet, risks, corporate strategy and other external and internal business considerations — to determine the true total cost of ownership. Using this information, companies can better evaluate sourcing, identify alternatives and even make a case when selling against offshore competitors. All inputs are user generated, except freight, which is calculated to Chicago. Explanations and references are provided. All calculation formulas are shown for transparency. The system automatically generates for each source, the current total cost, a forecast for 5 years and a graph showing the mix of hard and more subjective costs. The system has been used by 1,500+ individuals/companies. Here is a guide to getting started using TCO.
If a location in the U.S. is being considered, go to the next step.
For a manufacturing plant, the production process and equipment should be planned with a process engineer, recognizing that the U.S. version of the plant will likely be more highly automated than its emerging market counterpart.
Define the plant inputs, including suppliers, transportation, labor, real estate, utilities and other location factors such as community preferences, accessibility and other operating factors. Calculate the project investment and identify the desired timeline to begin operations.
Although there are financing programs and incentives available from most states and local communities, these programs rarely fund 100 percent of a project. You will need to provide at least a portion of the capital required, whether through internal means or outside investors. Having a firm understanding of any gap will be important to incentive discussions.
There are many resources available to assist with site selection, most notably economic development agencies and site selection consultants.
In the U.S. at the state, local and regional levels economic development agencies have been given responsibility to help attract and retain business investment and jobs to their respective states and communities.
They can be excellent initial resources of preliminary information at no cost; however, there are also some limitations: the information available from one ED organization may not be available at the same level of detail or in same format as other regions you are considering making it difficult to compare locations. Also, bear in mind that economic development organizations do not have a fiduciary responsibility to your company. Rather, they are required to represent the best interest of the communities they represent. – i.e. to get you to choose their location for the lowest incentives.
A professional site selection consultant assists companies in formulating their site selection process and executing their strategy including data collection, analysis and field work. Most site selection consultants work closely with state and local economic development agencies as well as utilizing internal and subscription-based data services and other tools through an established methodology. This expertise can be a valuable resource to your project to keep the search process objective, confidential, focused, on-schedule, and efficient, while also not draining your internal personnel resources.
An efficient site selection process is really 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. While each project will require a customized approach, weighting of factors, and sequencing of analysis, each step of the process should allow you to narrow down to options that hold the greatest potential for the new operation, while eliminating those that do not.
Once the finalist 2-3 locations are selected, it is time to initiate formal incentives negotiation. For maximum leverage, it is recommended to have at least two finalist locations in different states. As finalist locations, both options should be able to meet all operational needs, so at this step, you will want to prepare a detailed financial analysis for each finalist site and negotiate incentive programs that will help “close the deal” by providing upfront and/or ongoing cost savings and risk management.
Simultaneously, it is prudent to conduct property due diligence to obtain commitments on utility services and other needs, as well as to ensure there are no surprises once the first shovel goes into the ground for development. At this phase, it may be appropriate to engage an engineering firm to assist with the technical review of the site attributes.
The final step is to acquire the property and begin detailed engineering of the facility and implementation of the project. Many construction timelines for new manufacturing operations are 12-18 months, or more, depending on the type of operation and the location.