Look beyond the obvious in plant location

Operations Management Look Beyond the Obvious in Plant Location by Roger W Schmenner From the Magazine (January 1979) When on site expansion has become impractical, companies must decide whether to re[.]

Operations Management Look Beyond the Obvious in Plant Location by Roger W Schmenner From the Magazine (January 1979) When on-site expansion has become impractical, companies must decide whether to relocate or to open branches Although the location decision may appear straightforward, if it chiefly involves financial assessments, the company faces unexpected pitfalls, according to this author He discusses the relative advantages of relocation and new branches in light of a company’s unique problems and shows why simply relocating to the cheapest site is often the poorest solution for a growing company For many managers, plant location decision making merely refers to the selection of a site for a new plant, and for some the choice is straightforward: select the least costly site Often a consultant is brought in or a management team assembled with the sole purpose of scouring the South or the Far East, Mexico or Puerto Rico, for lowwage, low-cost, low-tax sites so that plant location can contribute to “the bottom line.” This mode of thinking invites disaster, as numerous companies have found out This article outlines what the typical company ought to think about before calling in the location consultants It draws on extensive interviews and research centering on manufacturing companies with operations in either Cincinnati or New England.1 I interviewed more than 30 companies In addition, more than 1,000 plants in the two locales completed detailed questionnaires that asked about present operations and recent history and that captured many features of the plants’ production, marketing, purchasing, and financial characteristics Of these plants, over 200 had recently relocated, and I gathered data about their former as well as their present locations and about the differences between them More than 150 of the plants were new, and most were new branch plants In addition, more than 120 corporate headquarters filled out surveys about their location decision making This wealth of information supports plant location as an integral feature of a company’s capacity planning Deciding plant location is more than choosing a site Indeed, the actual selection of a new plant site should come near the end of a chain of decisions concerning: (1) a company’s capacity needs, (2) the extent and quality of its present capacity, (3) the way in which its existing plants fit together in a multiplant manufacturing strategy, and (4) expected future demands on manufacturing, apart from mere space requirements Site selection should not be separated from these other decisions in the chain and should not be delegated to the finance department or some consultant Their decisions may be totally incompatible with the company’s needs for new capacity, given its product mix and technology, or with important interactions among existing plants Going straight for the bottom line may inadvertently harm a carefully constructed mosaic of manufacturing capabilities and may add to operating costs much more than tax breaks or low wages subtract Possible Options Given a forecast of future capacity needs, a company can add space in one of three ways: by plant expansion on existing sites, by establishing new branch plants, or by plant relocation On-site plant expansion is by far the most popular means of adding industrial capacity My data suggest that between 6% and 9% of all plants actually expand on-site during any one year It is generally the cheapest way to add capacity and the least disruptive to current operations The company does not risk dispersal of an existing and sometimes highly skilled labor force and does not have to wrestle with the separation of products or portions of the production process for location in another plant Expansion may also lead to economies of scale, although such a benefit is too often illusory Although attractive, on-site plant expansion can usher in a host of diseconomies, particularly if such expansion has been a repeated practice For example, as more and more production space is added on-site, the layout of the plant typically becomes less and less optimal Rarely is an entire plant shifted around during an expansion Rather, changes are made in only portions of the plant The result, over time, is that departments once close together become separated Materials handling and storage become more difficult, with more chances for delay or error Managers find themselves isolated from one another and/or from the work groups they are supposed to oversee In short, intraplant transportation and communication become strained, often to the detriment of product delivery and quality Staying at the same site often postpones the introduction of new process technology as well Old equipment is kept in use, old methods are followed, and the advantages of new equipment and techniques are forgone, with consequences for both future costs and product innovation Continued on-site expansion means more and more workers and often more and more products to be managed Such a layering of expanded responsibilities creates real complexities for managers at all levels The existing cadre of managers may have to supervise more than they are readily capable of, thus lessening the attention certain problems should receive With more products and output from the same plant, decisions on the levels, composition, and uses of inventories are likely to become more difficult and prone to error Decisions on production control—what and when to produce, how to run it through the factory—are likely to become vastly more complex as well, just as the cost accounting system is becoming more arbitrary and thus less helpful With more products in the plant, management runs the risk not only of complicating supervision, inventory, and production control systems and the like but also of placing demands on managers, workers, and systems that are incompatible For example, low-volume products of high quality demand a different mode of management, worker effort, and control than products produced in high volume with little attention to quality If both are manufactured in the same facility with common management, work force, policies, and systems, both products will most likely suffer in the dimensions (e.g., price, quality, delivery) that make a product competitive More than this incompatibility problem, the addition of workers to an existing site is likely to require the increasing formalization of the work force—management relationship The work force is also less likely to identify strongly with the company, and labor relations within the plant may become strained Earlier management concessions to the work force may come back to haunt operations With increasing size as well, the plant is more likely to become a target for unionization, if it is not already organized For these reasons, continued on-site expansion becomes less and less desirable The alternatives—new branch establishment and plant relocation—can obviate many of these long-term and frequently subtle pitfalls of on-site expansion, although their abilities to surmount certain obstacles differ The Exhibit outlines some of the relative advantages of new branches and relocations Relative Advantages of Branches and Relocation Vis-à-vis On-Site Expansion The new branch: If the plant’s problems involve product proliferation, work force size, or meeting expected future growth, establishing a new trend may be advantageous By branching, a company can avoid overloading one plant with either too many products or too many workers At the same time, the new branch can exploit the latest production technology and the most sensible plant design The company can ensure that operating policies and systems of the branch are carefully meshed with the product chosen for manufacture and with the competitive priorities attached to it Plant relocation: If the plant’s problems chiefly involve plant layout, materials handling and storage, new process technology, production and inventory control, and lack of management depth, then plant relocation may be the answer Relocation by definition means closing one facility and opening another, which implies that relocation can readily scrap old capital, technology, and policies for new Thus relocation gains in standing when the plant’s problems are less related to large size and more to process technology and control Research Findings Given this background of diseconomies of plant scale and relative advantages of branching and relocation, one should expect to find that the growing plant views on-site expansion, branching, and relocation not so much as substitutes but as distinct choices My research confirms these expectations Overwhelmingly, it is the small, growing plants, often independent of particular suppliers, markets, or labor sources and pressed for more production space, that move to larger, modern quarters and in the process alter their production technology, sometimes in fundamental ways The vast majority of relocations are over short distances (less than 20 miles), which helps to ensure continuity of labor force and retention of customer and supplier contacts To a lesser degree, relocations also occur to consolidate two or more plants into a single new facility and to escape from high site costs (wages, land values, taxes) It is the plants whose profits are hurting the most that see relocation chiefly as a means of lowering costs These plants are also the ones most likely to move distances of greater than 20 miles in search of these lower costs Plant relocations are traumatic experiences for many managers and hence are likely to be avoided if at all possible Only about a third of the relocations seriously contemplated are actually carried through, and actual relocations occur at a rate of only 3% per year for manufacturing establishments of all sizes, and less than 1% per year for plants of at least 100 employees More common, especially within larger companies, is the establishment of new branch plants Each year, between 3% and 6% of the existing stock of plants is added on as new branch plants, and, of those branches contemplated, more than two-thirds are actually established, which is double the rate of relocations New branches start out small (only 40% of the size, on average, of their existing sister plants) and are simply organized They are less likely to be unionized and more likely to enjoy simple logistics While often located in modern facilities with the latest technology, they are also frequently dependent on the corporate services provided by the plant or plants from which the branches were spun off The products they make are commonly mature ones, technically well established, and in need of few engineering changes, although, for a quarter to a third of new branches, the product line and/or technology is new Multiplant Strategies Analysis of these new branch plants and of the base plants from which they typically spring reveals that the new branch plant fits into a prescribed place in a multiplant company’s scheme of things It is possible to identify five general types of multiplant manufacturing strategies, and behind each one are compelling cost or managerial considerations Product Plant Strategy Perhaps the most popular strategy is the product plant strategy, in which separate plants manufacture distinct products or product lines, each plant serving the company’s entire domestic market area Roughly 40% of all the multiplant corporations surveyed (or the autonomous divisions of the largest companies) claimed such a strategy, which involved about one-third of all their plants The product plant strategy permits each plant to concentrate on a limited set of products, generally within a well-defined market niche This strategy has the advantage of permitting the plant management to select the process technology, equipment, labor force, manufacturing policies, and organization that are consistent with the particular competitive priorities (e.g., cost, quality, product flexibility, speed of delivery) associated with the plant’s products In this way, the company can avoid much of the complexity and congestion that plague many oversized, multipurpose factories In addition, a product plant strategy can take advantage of any possible economies of scale Product plants can also make use of any raw materials or expertise of a particular geographic area A product plant strategy is likely to correspond to a decentralized manufacturing organization with a relatively small staff at the corporate level Plant locations may be far-flung, though more often they are clustered within one or two broad regions of the country Within such a strategy, a significant challenge to management lies in recognizing when a plant has simply become too large What constitutes “too large” varies from industry to industry, from technology to technology, and from company to company, but I found that the most frequently quoted figures lie between 500 and 1,000 employees, with few companies stating figures in excess of 2,000 In many industries, companies can divide operations according to a product plant strategy because the products manufactured are many and varied Colt Industries, Fairchild Industries, and Insilco are large companies whose basic multiplant strategy is product plant For smaller companies, the product plant strategy is even more prevalent Market Area Plant Strategy Plants serve particular subnational market areas under this strategy The plants themselves manufacture all or most of the corporation’s product line About a quarter of the responding corporations follow this strategy, which they use in just a little less than a quarter of all their plants The market area plant is perhaps the classic notion of the branch plant When freight costs are significant because of high product weight or volume relative to value, it makes sense to spread plants apart geographically This is all the more true if products are consumed over wide areas and if the market requires a quick response by manufacturing A market area plant strategy is likely to require more corporate coordination than the product plant strategy The corporate staff is likely to be larger and to carry considerable clout Plant managers, however, are less likely to be able to act autonomously A different management challenge confronts the market area plant—namely, the sequencing and regional authority of new plants For instance, should an East Coast company’s second plant be in the Midwest, West, or South, and how should the market be split between plants? If the second plant is placed in the West, where and when should the company locate a third plant? The national breweries are classic examples of market area plants, as are many glass, can, food, and building products companies All involve products consumed in quantity everywhere and are subject to significant transport costs as a fraction of product values Product-Market Plant Strategy Sometimes a corporation is so large that it is possible to assign market area plants within a product division organization This is termed a product-market plant strategy, and while it prevails in only about one-sixth of the responding corporations, about one-third of all these companies’ plants fall into this category The product-market plant strategy combines elements of both the product and the market area strategies and thus must make both size and sequencing decisions at the same time For many of these companies, however, experience with past plant location decisions and a clear-cut organization often help to lessen what might otherwise be an exceedingly taxing series of decisions The large consumer products companies like Procter & Gamble or Standard Brands and diversified companies in standard product industries such as Georgia-Pacific are examples of product-market plant strategies Many other large companies may pursue a market area plant strategy in the largest divisions and a product plant strategy in the smaller or more specialized divisions Process Plant Strategy Rather than separate their manufacturing into individual plants by product, some companies, notably those with complex products, separate their production process by plant These plants are often viewed as feeders to one or more final assembly plants A process plant strategy, involving roughly one-tenth of the responding corporations and perhaps one-twelfth of their total number of plants, is less prevalent than the other strategies Like the product plant, the process plant exists to simplify an inherently complex and confusing managerial situation For such complex products as automobiles, large machine tools, and computer systems, a number of plants usually make components of the completed product The manufacturer faces a rash of make-or-buy choices for many of these components, but to be able to produce one or the other competitively may require different raw materials, labor skills, control systems, or management skills and organization This situation, coupled with the already discussed diseconomies introduced by large size, argues for a division of the complete manufacturing process into stages, with a separate plant for each stage This stage-by-stage division may lead to many feeder plants shipping to one or more assembly plants, or it may lead to one or few feeder plants (e.g., for a critical component) shipping to many other manufacturing plants In any event, the concept of plant separation to simplify operations persists In fact, for any one stage, there may be economies of scale Diverse manufacturing requirements explain why some plants may be located in the South or the Far East (for lower labor costs), or in resource or expertise-rich areas (e.g., “Silicon Valley” in California for the semiconductor industry), or merely in a separate location to provide surrounding plants with a special service that they could not provide for themselves economically The process plant strategy is even more demanding of high-level corporate coordination than the market area plant strategy A manufacturing organization that is highly centralized, technically well versed, and responsible for the control and coordination of materials and products between plants generally accompanies the process plant strategy For this reason, process plants are often located within easy commuting distance of one another General Purpose Plant Strategy Some companies not establish specific plant charters Rather, such companies prize plants for their flexibility in adapting to constantly changing product needs Defense contractors, among others, typically follow a general purpose plant strategy Roughly one-tenth of the responding corporations claimed this strategy, which involved about one-twentieth of all their plants The general purpose plant strategy demands a considerable degree of centralized control Coordination of plants is a real management challenge, as is the smooth staging of transitions in plant use and in employee assignments Consequences of Strategy What is striking and important about these five multiplant strategies is that almost all of a company’s new branch plants will and should conform to the prevailing strategy Management, particularly manufacturing management, should be suspicious of suggested new plants or charters for existing ones whose roles and/or locations fall outside the company’s established strategy Suspicion should be high, not because the role or location may not make sense but because the change is likely to have some significant and subtle implications for corporate and/or for plant management Three common situations bear particularly close scrutiny: As to the first suggested market area plant within a company’s product division organization—Would it be easier to split out a product instead? Can area-specific demand really be sustained over time? How would order taking and plant loading occur? Concerning a process plant whose suggested location may take it far away from existing plants—What are the logistics involved and their costs? How will new product introduction be supervised? How will inventory levels and controls change? Coordinating such plants may be more difficult than first envisioned In starting production on a vacant site or adding products to an existing plant with slack capacity or space for low-cost expansion— Do the production and the new site really fit together? Does the new product dilute the established plant’s “charter”? Does the new product draw on the same management and labor skills as prevailing products do, or is it qualitatively different? Like nature abhorring a vacuum, manufacturing managers abhor unused space For one reason or another, many companies find themselves owning vacant tracts of land here or there and are often seeking ways to fill them up Too often the idea is “What can we put at that site?” rather than “What site makes sense for this product, market, or technology?” Lower costs at certain sites due to lower wages, land values, or taxes, or to better and cheaper materials are likely to be behind such departures from prevailing manufacturing strategy Attractive cost savings are frequently highly visible and enticing However, evidence from my research suggests that most companies locate new branch plants not to take advantage of lower site costs but rather to take into consideration broader factors such as technology, logistics, personnel management, and organization The key question seems to be “Is this a location at which the company can remain competitive for a long time?” rather than “Is it cheaper to business here?” The answers to these questions may not necessarily be the same, particularly if the company expects to undergo considerable change over time I not mean to imply that lower cost sites should be avoided Rather, my research suggests careful review of any new site that pulls the company away from its established, and sometimes implicit, plant location strategy Plant sites in rural areas or tax havens may work well for many companies, but a host of companies have found rural areas, Mexico, Puerto Rico, or other intuitively appealing locations difficult places with which to communicate or to which to attract the management talent or labor skills needed to foster product development, engineering changes, or coordination with other manufacturing branch plants Selecting a Site Once a company has decided on a multiplant manufacturing strategy and on plant size, site selection follows The multiplant strategy can frequently imply a lot about the choice of region For example, clustering of plants in a particular region is most likely to occur under the process or the general purpose plant strategy and is least likely under the market area or the product-market strategy The choice of where within a region to locate, however, is sometimes very straightforward and at other times baffling Many people, including some location consultants, try to simplify the decision making by introducing elaborate rating schemes to measure everything imaginable about a particular location To my mind, much of this is false rigor There are, of course, a number of costs that can be usefully estimated—among them labor costs; construction, rental, or remodeling costs; taxes and other government payments; transportation cost savings or penalties for both inputs and finished goods; expenditures for needed services such as energy, pollution control, roads, sewerage, water, parking, and the like; insurance costs; moving costs; and costs associated with expected plant start-up inefficiencies or time delays due to start-up or to government approvals It is important to evaluate these costs, but they seldom tell the complete story nor they sometimes differ significantly enough to make a location choice strictly on their merits A company should not expect any quantitative analysis to isolate a single area or site as clearly optimal Rather, a company should expect that a number of sites will show more or less the same cost structure I would argue that the next phase of site selection should be an exploration of the intangible and qualitative features of a location that could be expected to contribute to the company’s competitive success It may be difficult or even impossible to quantify these factors, but they are no less real, and companies should thus resist the temptation of letting hard numbers drive out reasoned but qualitative analysis The intangibles can be of many varieties: risks associated with any of the quantitatively evaluated costs or the sales potential of the site; the area’s prevailing “business climate” (which means different things to different people but which is a euphemism for long-term competitiveness); educational and training strengths of the area; attitudes of the work force toward productivity, change, and unionization; the aesthetic and cultural attributes of the area (important aspects for attracting and holding managers); the cooperation of the local and the state government for resolving public service or other public matters faced by industry; the commuting distances for workers and managers; and the impact of other, perhaps competitive, industry in the area Frequently, a careful point-by-point comparison of these difficult-toquantify factors against the real demands that a particular product, area, or process will make on the manufacturing function can argue decisively for a particular site A site need not rate highly on all factors, but it should rate highly on those that truly make a difference in the plant’s competitiveness The company should be prepared as well for location analyses that, in the end, not favor one site over another If careful analysis ends in a toss-up, a company should not be disturbed if a seemingly inconsequential item tips the scale toward one site After all, in such a case, the company stands to gain or lose little by the location choice itself The company should also be prepared to take a long time deciding plant location My research suggests that the typical management team immediately involved with the location decision (two to four people, even in large companies) takes about five or six months simply deciding whether or not to move or to branch, another three to six months searching for a site, and still another three to six months planning the move or branch start-up I have heard too many stories in which hasty location decisions were also those most regretted See my pamphlet, The Manufacturing Location Decision: Evidence from Cincinnati and New England, report to the Economic Development Administration (Washington, D.C.: U.S Department of Commerce, March 1978) AReview version of this article appeared in the January 1979 issue of Harvard Business RS Mr Schmenner is a research associate of the Harvard-MIT Joint Center for Urban Studies and is now, under a grant from the U.S Department of Housing and Urban Development, engaged in research on the plant location decision making of the Fortune “500” companies during the 1970s His most recent HBR article is “Before You Build a Big Factory”(July–August 1976)  ... wealth of information supports plant location as an integral feature of a company’s capacity planning Deciding plant location is more than choosing a site Indeed, the actual selection of a new plant. .. space in one of three ways: by plant expansion on existing sites, by establishing new branch plants, or by plant relocation On-site plant expansion is by far the most popular means of adding industrial... How would order taking and plant loading occur? Concerning a process plant whose suggested location may take it far away from existing plants—What are the logistics involved and their costs? How