Who Needs - Or Wants - to be Near The Consumer?
Proximity to major markets was only ranked 10th in importance by the respondents to Area Development's 2007 Corporate Survey, but economic and environmental trends may increase this factor's relevance.
Christopher Steele, Global COO and North American President, Investment Consulting Associates (ICA) (Aug/Sep 08)
Access to markets for customers, raw materials, and clients affects location decisions for just about any industry, but some much more acutely than others. Indeed, proximity can be the sole driver in industries where it is imperative to get goods to an end consumer - particularly where the product is perishable - as well as in industries where customer desires change rapidly or there's a high degree of customization.
In addition to key industries such as food production, parts manufacture, and others that produce high-turnover, quick-demand items, other industries are actually being pushed by current trends to consider proximity to the end user when deciding where to establish their new plants.
Pressures and Adaptations
The world is, of course, always in flux. Current trends have forced a new look at transportation costs, impacts, and ultimately the relationship between location optimization and proximity to the end consumer. Hence, a sensitivity analysis to determine the relative importance of direct access to the product's end-user becomes critical. Let's look at what has driven this need:
|Corporate Survey 2007
Combined Ratings* of 2007 Factors
|Site Selection Factors 2007
|*All figures are percentages and are the total of "very important" and "important" ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent.
Shelf Life: Traditionally, product shelf life or perishability drove the greatest need for direct proximity to the end consumer. Some businesses - such as the preparation of fresh foods, blood products, and other perishables - have such short product lives and difficulties in long-distance shipping that proximity to the end users became an absolute necessity. Any increase in distance had a direct and remarkable increase in risk that the product would not make it to market in time for it to have any usable shelf life. In these cases, the proximity of the consumer market absolutely defined the search area for the function. Any location outside of a certain delivery time was simply not a reasonable option.
Just-in-Time: The "shelf life" model increased to include just-in-time production for some industries. Consumption zones defined the areas where manufacturing and distribution had to happen. Access to customers also became a distinct advantage when there was a direct give-and-take relationship between the producer and the consumer. This was certainly the case for highly customized products, such as some forms of consumer electronics and even automotive products. While not a direct producer-to-end-user relationship, component manufacturers and Tier I suppliers simply needed to have direct access to their end customers (electronics and automobile manufacturers) to understand their customers' needs, to meet their requirements for velocity to market, and to cut the logistics costs as close to the bone as possible and thereby retain maximum cost advantage.
Location-independent: Other industries simply did not gain any direct advantage from closer access to the end-user market. In fact, while electronic component manufacturers gained benefit from direct access to electronics manufacturers, neither gained any true advantage from locating closer to their eventual consumer pool. This lack of direct interaction, coupled with such trends as containerized freight and free-trade policies, led to the massive movement of manufacturing to a global model over past decades.
Put simply, the producer did not need to put much weight on proximity to the end user. Either transportation costs were cheap or the advantages of a distant location vastly outweighed the cost and other benefits of getting close to the end consumer.
Fuel Costs: The "location independent" manufacturer may become something of a relic if fuel costs continue to escalate. While annual oil price increases of about 100 percent are likely to prove to be an anomaly, manufacturers have been especially sensitive to the issue. Stories abound of companies that have outspent their 2008 transportation budgets before June, and there is speculation that we may very well be looking at the beginning of a significant change in the types and locations of distribution facilities.
Green Pressures: The greening of North America and of manufacturing, warehousing, and distribution generally has fed this same dynamic, but in a different fashion. While the oil crisis has forced behaviors that reduce the use of energy in an attempt to reduce costs, consumer and government pressures have forced companies to reduce reliance on carbon-based fuels and to generally make less of an impact on the environment. So although the driver is different, many of the strategies have been complementary. A distribution strategy that reduces a company's carbon footprint because of efforts to use less fuel has been embraced by environmentalists and accountants alike.
Security and Sourcing: Whether for nationalistic, regional, human rights, or product safety reasons, consumers have recently gained an acute curiosity about where their products originate. And, as noted in such infamous and diverse examples as Mattel's difficulties with lead paint last year and our difficulties with tomatoes this summer, the ability to track the exact route that a product takes from initial mining or seeding through final delivery can be very important. Simplifying and shortening this process through moving production closer to the end consumer market can provide as much of a marketing advantage as a risk-management strategy for manufacturers.