The 2005 Annual Corporate Survey marks the 20th year Area Development magazine has published the results - reporting the corporate executive viewpoint - concerning factors important in making location decisions. In the latest survey, several ranking changes have occurred - including the one for proximity to major markets, which has jumped from 14th in 2004 to 9th in importance in 2005. This also represents a 14 percent increase in weighted significance. The response is very clear: Closeness to market is now of major importance to corporations as they consider where to locate their facilities.
As time changes so do business models.
Looking back over the 20-year time period that the survey has been conducted, it is apparent that the factors in motion have been the same; however, the rankings of certain factors have become stronger (or weaker) as time moves forward.
In order to understand changes that may be occurring, let's keep in mind that proximity to major markets will have a different connotation depending on the function or facility type being located, as follows:
• Manufacturing facilities may interpret proximity to market as a close physical presence to the consumer, or close to another manufacturer producing finished goods for their just-in-time inventory delivery.
• Warehouse/distribution facilities may view proximity to market as meaning closeness to a certain shipping port for exporting/importing goods on a more direct basis.
• Office facilities could interpret proximity to market as the same time zone for delivering service-oriented activities.
Each organization selecting a new location develops their own criteria to aid the process for specific location projects. It is fair to say that organizations with more than one location project under way will, more than likely, have differing criteria for each project. Also, projects with similar requirements but completed in a different era will have different criteria than a current project. Although the same factors will appear on the criteria list, the weighting (or ranking) will change based on the current business model. For example, as quality and affordable labor becomes tight, companies are usually willing to consider locating farther from a pre-selected target location rather than experience operating cost increases that may not be recoverable in price increases to their customers.
Customers really drive location strategy.
Although a company's location criteria and business model change over time, it is really the customers who establish broad location strategy. Furthermore, the business model established by most companies will be based on customer preferences - which also change over time. For example, the old-school model used for manufacturing included the need to inventory raw materials and sub-assemblies at the manufacturing site. Manufacturers did not rely on the supplier's ability to re-stock inventories on a short-term basis. This supply-chain model allowed suppliers to operate their plants on a remote location basis and to utilize various modes of transportation to satisfy their manufacturing customers' on-hand inventory requirements.
Simply stated, the customer sets the expectation related to product cost, quality, and delivery time - and it becomes the task of the supplier company to meet those expectations. For example, several major retailers may demand that suppliers ship directly to store locations rather than to the retailers' distribution centers. In setting this delivery expectation, the customer (the retailer) is establishing how its suppliers will arrange their physical locations to meet the delivery schedule, including how many distribution facilities and where they need to be located.
The world of logistics has strongly influenced corporate thinking.
Again, the customers are the ones who really drive location strategy and, over time, customer supply-chain factors and advancements have demanded that suppliers modify their business models - as well as locations - in order to satisfy things like just-in-time delivery requirements.
Logistics sciences have refined the manufacturing and distribution industry in a manner that drastically improves delivery times, inventory levels, and profitability. In many cases, this evolvement has taken logistics planning from an art to a science. The improvements realized have caused the typical business enterprise to examine other location-related decisions, including all facility types such as manufacturing plants, warehousing, office functions, and special-use properties.
The world of logistics and distribution has had a strong influence in corporate thinking, which, in turn, has influenced the manner in which organizations plan and make choices, including how and where to locate facilities.
How do we explain off-shoring?
if proximity to major markets - or closeness to customers - is an
important factor in choosing a location, why are many companies
off-shoring jobs to locations that are half way around the world from
their customers? The answer is in the business model dictated by the
Some 70 percent of the respondents to Area
Development's 2005 Corporate Survey were from the manufacturing sector,
and 15 percent of the respondents were from the distribution sector.
Collectively, 85 percent of the respondents are clearly driven by
supply-chain evaluation and influence. The respondent companies have
learned to fit into their customers' location expectations and - in the
case of both manufacturing and distribution - physical closeness is
On the other hand, in most cases involving
off-shoring of employment, it is the service sector making these
decisions. These location choices are still driven by customer mandate
of product cost, quality, and delivery time. Off-shoring allows for a
less costly product and an unaffected delivery time (via electronic
transfer), although, in some cases, quality is still under review. In
these instances, physical proximity is not expected by the customer.
the annual survey continues to report the trends and changes in
corporate thinking, keep an eye on this dimension. Also, keep in mind
that American industry, generally speaking, has now reached a level of
maturity, and finding "new markets" is rather difficult -
Cranmer and Art Wegfahrt are location and real estate consultants in
the Corporate Services Practice at Studley, Inc. Together, they have
over 60 years experience in advising corporations on strategy, location
selection, and implementation.