7 keys to facility location: Land, Labor and Capital
By John T. Mentzer -- Supply Chain Management Review, 5/1/2008
Classic Economic Factors: 1. Land, 2. Labor, and 3. Capital
Introduction
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Let's start our discussion with the three factors that derive from classic economics: land, labor, and capital. These are, in large part, the reasons why so much of U.S. industry has migrated over the last few decades from the traditionally industrialized Northeast to the Southeast. Where the Northeast has constrained land availability and higher priced labor, the Southeast has had—and continues to have—a more abundant supply of low-cost land and labor. It is these two factors that draw new facilities in this direction. Exactly the same dynamics have played out globally as businesses have located expansion facilities in nations such as Brazil, Mexico, China, and India.
Many would argue that capital is a global commodity, and as such, it does not affect location decisions. However, that view ignores the realities of the political climate surrounding today's global supply chains. It also fails to consider the economic benefits that accrue to a locale where a company chooses to build and operate new facilities. The U.S. auto industry has seen considerable growth in the Southeast over the last 20 years (think of the U.S. operations of global titans such as Nissan, Toyota, BMW, and Mercedes-Benz, to name a few) not only because of cheaper land and labor, but also largely because of the capital incentives offered by states such as Kentucky and Tennessee. Tax incentives, low-interest economic development loans, and a plethora of other devices to lower local costs of capital all have an impact on the location decision.To illustrate, consider this scenario in which executives of a company asked the right kinds of questions about capital. With facilities close to the I-95 interstate freeway in southern Virginia, they wanted to know what the cost picture would look like if they asked the development authorities in nearby North Carolina about incentives for building a distribution center there, just 40 miles south on I-95. The result: The company was able to cut its capital expenditures by $3 million because North Carolina effectively built the new DC for free.Countries have long followed similar strategies of economic development incentives to attract global supply chain facilities to their borders. For instance, the pharmaceutical industry for years has maintained manufacturing facilities in Puerto Rico to make product for the U.S. and European markets. As the demand for pharmaceutical products has become more global, and inexpensive manufacturing facilities have become available around the world, the pharma companies depend less on Puerto Rico for low-cost land, labor, and capital and they now have many facilities worldwide. In many cases, their moves to new global sites were prompted by promises of low-cost capital by the host country. Such shifts in production location, of course, lead to major shifts in storage facilities worldwide. But what's remarkable is how frequently supply chains must now be substantially reconfigured as a result.
Much the same has been typical of the automotive sector. Hyundai recently announced a $1 billion capital expenditure in Georgia to build a manufacturing complex in partnership with its suppliers. The South Korean automaker's move is effectively a three-way partnership with its key suppliers and Georgia's economic development authorities to take advantage of that states's low land, labor, and capital costs. As we will discuss later, the location of Hyundai's markets, and its partnership with its suppliers, makes this a total supply chain facility location decision.
Although obviously not the only factors in making any facility location decision, land, labor, and capital have significant bearing on the long-term costs of operating any facility. As such, they must be carefully weighed no matter what means are used to guide management's decision-making.
Questions managers should ask:
What is the relative cost of land, labor, and capital in the various locations we are considering?
Do we already own properties near the locations we are considering?
Are the local countries, states, counties, etc., willing to consider tax breaks, free land, low interest financing, or other capital incentives to move the facility to their area?
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