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Inward Investment Guides

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, Ivestment Consulting Associates (Aug/Sep 08)
(page 2 of 2)
Implications
Rising oil costs are very likely to cause manufacturers and distributors to move their facilities closer to population centers as a cost-cutting measure. Proctor and Gamble has announced that they are developing strategies to do exactly this, using some of their Chinese facilities as a test-bed. The company has already noted that this is only the first step in moving toward a more decentralized and customer-market-oriented manufacturing and distribution location strategy.

Likewise, Wal-Mart recently announced a new strategy for sourcing food products for its mega centers. As part of a larger initiative to broaden its offerings, the retailer is moving toward buying more of its produce directly in local markets and from local farmers. In addition to providing more local flavor to the food offerings, this also gains the company a host of cost and product-safety advantages.

Corporate Survey 2007
Combined Ratings* of 2007 Factors
Site Selection Factors                   2007
Ranking
1. Highway accessibility 96.9
2. Labor costs 92.3
3. Energy availability and costs 89.0
4. Availability of skilled labor 88.7
5. Occupancy or construction costs 88.2
6. Available land 85.4
7. Corporate tax rate 83.8
8. State and local incentives 83.4
9. Environmental regulations 83.2
10. Tax Exemptions 82.8
10T. Proximity to Markets 82.8
*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.
These changes also carry some intriguing implications for other aspects of the real estate strategy. A more diverse, market-access-centered network strategy naturally calls for a greater number of medium- and small-sized facilities as opposed to a small number of large, centralized facilities. In addition to the advantages of getting closer to the end market and serving consumer needs more quickly and at a potentially lower transportation cost, this strategy also carries with it the additional real estate advantage of not putting too much of an investment in any one facility. This allows a company to make smaller, incremental changes on a rolling basis as market changes or opportunities occur. Any one addition, change, closure, or even mistaken location decision carries much less operational and P&L risk.

In sum, some measurable advantages have evolved for locating more manufacturing and distribution in close proximity to the direct zones of consumption. Even so, it's important to note the sensitivity of these decisions to environmental and economic changes. Certainly, we did not foresee the circumstances that would push for on-shoring even a short five years ago. Given the compelling dynamics outlined above, it is important to remember that times change, and remaining flexible is the best strategy.
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