Making a Proximal Location Decision | Corporate Survey Series: Site Selection Factors

In the most recent Annual Corporate Survey conducted by Area Development, proximity to major markets and proximity to suppliers were ranked 12th and 16th, respectively, in importance among the site selection factors. They were ranked below highway accessibility, labor costs, and corporate tax rates - but were ahead of availability of long-term financing, training programs, and raw materials availability.

We recognize that choosing the location for a new facility has become a complex, yet strategic, move that can equally spell success or failure for a company's business, especially when it comes to the placement of production plants and distribution centers. But none of the locations you may have under evaluation will be ideal if proximity to markets and suppliers isn't considered.

Three major factors weigh heavily in the proximity decision: Dispersion of markets and suppliers, transportation cost, and green initiatives.

Dispersion of Markets and Suppliers
Markets are recognized as where the finished goods are sold. If your company makes product that is sold universally, i.e., anywhere in the country or world, then locating a plant close to your customers is less important in the site selection decision. However, if your company makes product that is sold only regionally or even locally, then locating a plant close to your customers becomes more important in the location decision.

On the supply side, if your company receives raw materials and components from vendors around the country, and even around the world, then locating a plant close to those suppliers is less important in the selection of a new site. However, if the majority of your suppliers are already - or could be - located within a defined radius, e.g., an area of 250-400 miles, then locating your plant closer to your suppliers will be more important.

Once you perform an analysis of this dispersion, you're unlikely to find a situation where you can satisfy both proximity issues simultaneously in your location decision. Every cost reduction you find by moving closer to markets will probably be offset to some extent by the cost of being further away from suppliers - and vice versa.

Transportation Cost
As a function of logistics, transportation can be a significant factor in the cost of goods sold, and thus is an important consideration in the site selection decision. Depending upon the industry and products, it can be as little as 5-10 percent of the cost or as much as 30-40 percent. Transportation cost is a variable function of time, distance, size, mode, and fuel cost.

The longer the distance, the less restrictive the pick-up and delivery, the larger the shipment size, the more common the mode of transportation, and the lower the cost of fuel, the less it will cost per mile to move freight from point A to point B. Conversely, the shorter the distance, the more restrictive the pick-up and delivery, the smaller the shipment size, the more unique the mode of transportation, and the higher the cost of fuel, the more it will cost per mile to move freight from point A to point B.

Time - Here are some questions to consider in the time equation: Are your shipments going directly to manufacture, to retail, or to be placed in inventory elsewhere in the supply chain? Are they in support of any just-in-time operations, which will dictate the pick-up and delivery parameters? The answers to these questions will also drive the mode of transportation that will be needed.

Distance - The length of haul between the points of origin and destination are a big part of the transportation cost. A shipment generally moving 1,500 miles will travel at less cost per mile than a shipment moving 500 miles. This also impacts the time element. A good rule of thumb is to add one day for every 250 miles from point A to point B.

Size - For purposes of this example, we'll stick with domestic surface transportation. If a shipment weighs less than 10,000 pounds and only occupies part of a trailer, it is likely to be a less-than-truckload (LTL) shipment that will be moved by a regular-route, network-based LTL carrier. Network means there may be multiple transfer points depending on how far the freight moves. If the shipment weighs more than 10,000 pounds (and less than 40,000-45,000 pounds) or occupies the majority or all of a trailer, it is likely to be a full truckload (TL) shipment that will be moved by an irregular route TL carrier.

Mode - LTL, TL, dry van, refrigerated van, and flatbed shipments will move over-the-road. Some over-the-road shipments can also move as intermodal via the rails. Bulk shipments can also be moved on the rails via boxcar. The options are many regarding the mode of transportation that can be selected. Also a function of a time, intermodal is generally slower than truck.

Fuel Cost - Over the past year, the cost of fuel has played an increasingly important role in the cost of transportation. In July 2008, the retail price for diesel peaked at about $4.75 per gallon. And just nine months later, it reached a pre-2007 low of $2.00 per gallon. To recover the additional cost of fuel, carriers will impose a fuel surcharge, often as a percentage of the revenue on the freight bill. Fuel surcharges are negotiated between the carrier and the shipper, but most seem to use $1.10 a gallon as the base point. The fuel surcharge for diesel at $4.75 would be much higher than at $2.00. In some cases, the cost of moving the freight could nearly double. Trucking surcharges are generally higher than intermodal surcharges.

Green Initiatives
In recent years, the government, consumers, and even business leaders have become more aware of the need to make improvements - or lessen the damage - to the environment. Your company may have already established green initiatives that could have an impact on your location decision.

About five years ago, the Environmental Protection Agency (EPA) launched SmartWaySM (https://www.epa.gov/smartway) as a means to represent environmentally cleaner, more fuel efficient transportation options. SmartWay identifies products and services that reduce transportation-related emissions. Its transportation programs are focused on the attainment of significant, measurable air quality and/or greenhouse gas improvements, while maintaining or improving current levels of other emissions and/or pollutants. The SmartWay Transport Partnership was subsequently formed, and provides benefits for shippers, carriers, logistics providers, and even truck stops for participating in SmartWay.

Shippers - SmartWay shippers' commitment begins with the Freight Logistics Environmental and Energy Tracking (FLEET) Performance Model, which quantifies the shipper's current environmental performance level. Shippers then commit to move at least 50 percent of their goods using SmartWay-recognized transport carriers. They are able to further improve their environmental performance by adopting the EPA's recommended shipper strategies, including no-idling policies at docks, evaluating and modifying business practices at distribution centers and warehouses, and using a combination of truck and rail transport to ship goods. Partners commit to improve their environmental scores over a period of three years.

Carriers - SmartWay truck or rail carriers' commitment also begins with filling out the Freight Logistics Environmental and Energy Tracking (FLEET) Performance Model, which helps them quantify the environmental performance of their operations. By joining SmartWay, they agree to set and strive for attainment of environmental and fuel efficiency goals within three years that improve the environment and their bottom line. The following types of companies are eligible to be a SmartWay Carrier Partner: public for-hire fleets, truck owner-operators, rail companies, and private fleets.

Is making your firm more complaint with green initiatives a priority? If that's the case, then you will be striving to reduce the amount of travel your freight has to make. Less travel equates to less fuel used and fewer emissions. That's something to take into consideration when evaluating the proximity of markets or suppliers to a new manufacturing site.

In Sum
These brief examples about market/supplier dispersion, transportation cost, and green initiatives are intended to indicate that these variables may be more important in your site selection decision than the factor rankings from the survey may imply. Being ranked 12th or 16th on the list doesn't mean these factors are less important. It just means that the site selection process is a complicated one that has many variables and each of them must be considered before coming to a final decision that is right for your organization to meet its objectives.

Russ Dixon is director of corporate marketing and communications for Sunteck Transport Group. Sunteck is a non-asset-based transportation services company, providing transportation capacity and related transportation services through its agent network to shippers throughout the United States and Canada. For more information, visit www.suntecktransport.com.