The automotive industry in North America is experiencing a robust rebound from the Great Recession. All of the major automakers in North America have announced one or more expansions of their assembly plant capacity - from BMW in South Carolina to Ford and GM in Kansas City. Over the past two years, my former employer -Toyota - has announced expansions at six plants in North America (Alabama, Indiana, Kentucky, Missouri, West Virginia, and Ontario, Canada), and started up production at its new assembly plant in Tupelo, Mississippi.
The Center for Automotive Research in Ann Arbor, Michigan, projects that light vehicle production in the United States will increase by 2.5 million units over the next four years, the equivalent of 13 auto assembly plants. Most of this expansion will likely take place in existing facilities, but new greenfield assembly plants are also possible. This rebound in auto demand means new opportunities for auto suppliers, and selecting the right site and community for a company's new facility is a critical part of the decision-making process. In my experience, the most important parts of the site selection process are creating the site selection team, identifying the critical factors that are driving the site selection process, and executing the plan.
Site Selection Team
Site selection involves myriad factors. To ensure that all relevant factors are included in the calculus of the best site, the members of the site selection team should include representatives from key company functions that impact, or are impacted by, the site selection decision. The team needs a leader - a "quarterback" who oversees the process and serves as the primary liaison between the company and the communities under consideration. During my time at Toyota, I served as the site selection quarterback, and I relied heavily on input from various functions at Toyota including facilities, engineering, environmental, legal, human resources, finance/tax, logistics, marketing, purchasing, government relations, and public relations. If the company has little or no experience in site selection, it should consider retaining a professional site selector to either lead the process or work closely with the company insider who has been tasked to oversee the process.
Identifying Critical Factors
The second important part of site selection is identifying the critical factors that are driving the site selection process. For example, if the company is a just-in-time supplier, the primary factors driving the site selection process will be logistics and close proximity to the assembly plant. If the company is producing a highly engineered, high-margin product, the critical factors will likely be the skill level of the work force and the training resources available in the local community.
Recently, I was retained by a company to assist it in selecting a site for a large industrial facility. The site search had been going on for nearly a year, and had been led by the company's facilities team, which focused on the engineering and construction aspects of the project, i.e., the physical characteristics of the site, particularly the soil conditions. The company had established a strict set of criteria for the site - to minimize site preparation costs - but had not paid sufficient attention to what should have been the primary drivers of the process: logistics, property taxes, and energy costs. Site preparation is a one-time cost, which many communities will help offset. High logistics, tax, or utilities costs work as a negative incentive over the life of the project.
At the time I was brought into the search, one of the leading sites was located nearly 1,000 miles from the primary destination of the plant's end product - and none of the sites then under consideration had barge access, which would have substantially reduced in-bound logistics costs of the bulky raw materials used to make the end products. The facility was capital-intensive, and thus its long-term costs were directly affected by the tax structure of the states and communities under consideration. The project also had a heavy electrical load.
I persuaded the company to revise its site criteria to focus on the recurring costs - logistics, property taxes, and energy. The site that was eventually selected had higher site prep costs than alternative sites, but had lower logistics, energy, and tax costs - and the 30-year PV cost estimate showed it to be the company's best choice.
Executing the Site Selection Plan
Each site search is unique, and driven by unique criteria. A few years ago, after siting Toyota's assembly plant in Tupelo, Mississippi, my team and I worked with a parts supplier that was selected to build components for the assembly plant. Governor Haley Barbour had recruited Toyota to Mississippi, and designated part of the state's incentive package to be made available to suppliers. The component supplier planned to invest $50 million and expected to employ about 300 people, with the potential to expand.
The company was a just-in-time supplier, which meant multiple daily deliveries of parts to the assembly plant, in synchronization with the assembly plant's production schedule. From a logistics point-of-view, which initially dominated the site selection process, we sought sites closest to the assembly plant. But as we got further into the process, we put emphasis on other factors. We created a site selection team from the various functional areas impacted by the site selection process and reached consensus on the key requirements for the site:
- A 50-acre, shovel-ready site that was relatively easy to build upon, in an industrial zone with no nearby residential housing, outside a 100-year flood plain, with no significant environmental or wetlands issues;
- Necessary infrastructure, which included natural gas, 200,000 gallons of water per day, with similar sewer and wastewater treatment plant capacity, and a non-interruptible electricity supply of 11,000 KVA;
- Good highway access and a maximum driving time to the assembly plant of 45 minutes, with an alternative back-up route; and
- An easily trainable work force drawn from an area outside the primary labor shed of the Toyota assembly plant. (As a just-in-time supplier, the company wanted to be close to the assembly plant, but not too close to avoid head-on competition for the same labor pool).
As communities responded to the RFP, we requested the following:
- Schedule, cost estimate, and sources of funds to pay for the infrastructure;
- Up-to-date topographical map, flood plain data, soil boring results, and a Phase 1 environmental report;
- Estimate of the site preparation cost;
- Utilities map showing lead-ins;
- Pro forma showing expected property tax over the next 20 years;
- Estimated cost of utilities;
- Cost of licensing fees;
- Timetables for securing needed permits;
- Driving time from the site to the Toyota assembly plant;
- List of nearby contractors with experience in building industrial plants;
- Information on climate conditions, including average temperatures by month, frequency of tornadoes, any nearby earthquake faults, average precipitation, and prevailing direction of the wind in each season; and
- Information on the work force and community, including demographics, education levels, wage rates, labor climate, major employers, workers' compensation costs, absentee rates, medical facilities, schools, and nearby housing.
Many communities responded to the initial RFP, and based on the speed and substance of their responses, we narrowed down the eligible sites to five. Some of the rejected sites lacked solid infrastructure plans; others hadn't completed soil boring tests or Phase 1 environmental reports; and one had an at-grade railroad crossing, which is a "no-no" for a just-in-time supplier.
For the remaining five sites, we conducted due diligence visits, which included meetings with community leaders and local businesses to assess the business environment. After a review of the community responses to the information requests and the due diligence visits, the site selection team did a second culling and identified two finalists. The team then conducted another, more intense round of due diligence visits, focusing on work force and site "readiness." The project was under a tight timetable, as its start-of-production was tied to start-up of the Toyota assembly plant.
Each company function impacted by the site selection decision was given the opportunity to participate in the selection of the finalist site, and there was robust debate within the company about which site was best. Engineering and Logistics favored Site 1, because of its lower site preparation costs and closer proximity to the assembly plant. Human Resources and Business Planning favored Site 2, which had a more defined infrastructure plan (including funding) and would draw from a different labor pool than the assembly plant. Because of the overriding concerns about completing the plant on time and drawing from a different labor pool, Site 2 was picked as the finalist. The entire process took about three months from the initiation of the search to the announcement of the finalist.
As mentioned at the beginning of the article, the most important parts of the site selection process were creating the site selection team, identifying the critical factors, and executing the plan by giving proper weight to each of the critical site selection factors.
Perhaps the most important lesson from this case study is that site selection is too important to be left to an outside consultant or the domain of just one function in a company, such as that involved with facilities. Site selection requires the active engagement of all the functions in the company that are impacted by the decision, and all of those functions should be given the opportunity to develop the key criteria and to play a role in the decision-making for the finalist site. Site selection is all about keeping the whole picture in mind.