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Leading Practices to Consider When Beginning the Location Decision Process

Identifying all stakeholders early on, defining evaluation criteria, staying ahead of the changing environment, and assessing risk lead to obtaining an appropriate site and avoiding costly mishaps.

Directory 2015
Real estate and related facility investments represent a significant cost of capital whether owned or leased, new or expanding, or industrial, commercial, or not-for-profit. These investments generally represent a longer-term business commitment, making it important to implement leading practices in site selection to obtain an appropriate site and avoid costly mishaps. A few leading practices are summarized below.

Identifying All Stakeholders Early for Improved Results
The location decision process can be led by many in an organization — e.g., real estate, operations, supply chain, legal, etc. — however, it is important to identify all stakeholders early in the process and have a cross-functional, collaborative team. Consensus and input from team members can provide a better overall result. Costly mistakes and inefficient processes may be mitigated by focusing on up-front team planning to obtain agreement on the strategic objective, determining that evaluation criteria are fully developed, and keeping up with available business information to respond to changing market conditions.

In the past, a company’s strategic objective may have been focused solely on productivity. This strategic objective may lead to a site selection process where cost reduction is the focal point. A new strategic objective may be concentrated on innovation, with productivity as a secondary consideration. Reviewing a new or existing location should involve understanding the strategic objectives so that the business needs can be met. The site selection project manager may have broad authority to act on a vision for innovation that may not have had input from a variety of functional areas and, therefore, has not been fully reviewed within the company. What may seem like the ideal solution for innovation could prove to be too costly. By involving all stakeholders from different functional areas early and throughout the process, the strategic business objectives or business needs and what is to be accomplished can be defined, as can the available resources that can be committed.
Leading Practices to Consider When Beginning the Location Decision Process - Michele Kitch, Senior Manager, Global Location & Expansion Services, KPMG LLP, Chicago, IL
Identifying all stakeholders early on, defining evaluation criteria, staying ahead of the changing environment, and assessing risk lead to obtaining an appropriate site and avoiding costly mishaps.
Evaluation Criteria - What Is Important?
Defining evaluation criteria - and being able to determine the relative importance of the criteria — is another area where a collaborative team approach may provide a better process. Evaluation criteria are different for different types of projects such as a headquarters, shared service center, warehouse, etc. Changing business and market conditions and the continued interest in access to information and data can also necessitate different evaluation criteria.

For example, improved technology access and cloud enablement may be important evaluation criteria for a manufacturing site, whereas historically this was not identified as a need. While reviewing warehouse options from a financial perspective, real estate and other operating costs may suggest one location is preferable, but upon review from the supply chain perspective, the location may not be acceptable because delivery to the customer is going to increase in total number of days. Obtaining input from the cross-functional team may better define the evaluation criteria that should be considered in the location decision process.

While there may be many evaluation criteria that should be considered, are all criteria of equal importance? Being able to define the relative importance of the criteria can provide the identification of better locations and sites. In the previous example, where the number of days for product delivery was an important evaluation criterion, this factor would be assigned a greater relative importance as the number of days begins to increase with each option, eventually to a maximum tolerance where no option is appropriate. A product may have specific requirements for a raw material source, or is fragile and cannot be within proximity of natural disaster areas, which dictates general geographic areas that can be weighted for relevance. Financial and tax incentives can make a significant cost differential when comparing one location versus another when all other factors are relatively the same.

Many, but not all within an organization, focus on business incentives in the site selection process. It is an unfortunate circumstance when a team learns after securing a site that locating a short distance away would have resulted in being in a preferred zone for economic incentives, where cost savings such as property tax and other cost offsets were available. Alternatively, negotiated tax credits may appear to have more value until it is known that the business has net operating losses from prior years carrying forward, or that a headquarters project is not going to create taxable income in that jurisdiction. Assigning relative value to business incentives and the type of business incentives available can provide the comparative information that the site selection team needs to review. These are a few examples of how having a cross-functional team and other members’ perspectives can increase the potential of properly defining and understanding the importance of the evaluation criteria in the location decision process.
While there may be many evaluation criteria that should be considered, are all criteria of equal importance? Being able to define the relative importance of the criteria can provide the identification of better locations and sites.
Staying Ahead of the Changing Environment
This process can be further improved by having access to changing business and economic conditions to allow modifications to be made, or even halt the site selection process. A teaming approach is more likely to provide opportunities for the collaborative sharing of internal data that has not yet been finalized in a month-end, quarter-end, or year-end report.

Some changes may be difficult to foresee and alter course because they are so abrupt. Recall the end of the third and fourth quarters of 2008 when sales orders dramatically dropped for some businesses. However, softening product demand, loss of customers, small reductions in force can be communicated to the site selection team to assess the potential impact and whether an unanticipated downward trend is occurring. The new or expanding site may no longer make sense if such changes are happening.

Keeping current with external changes is as important as keeping current with internal changes. External changes such as new industry regulations, changing tax regimes, and the introduction of a large competing project may result in the need to modify the location decision process. If the team is not monitoring changing conditions throughout the process, there may be an unexpected cost or a challenge in workforce hiring for the selected site. The team can adapt and alter the process by scrutinizing changing external factors throughout the site selection process.

Emerging Markets: More Opportunity, More Pitfalls
Companies continue to be interested in emerging markets such as Brazil, Russia, India, and China — the so-called BRIC nations — to potentially capitalize on the large populations, improving economic conditions, and the possibility of satisfying new market demand. In emerging markets there are additional factors to consider in the site selection process, and obtaining comparative data can be more challenging.
Comparative factors such as government at all levels — federal, regional, and local — and its overall stability; current and trending economic conditions; growth and the ability for the country to keep pace with the growth cannot be overlooked.
Comparative factors such as government at all levels — federal, regional, and local — and its overall stability; current and trending economic conditions; growth and the ability for the country to keep pace with the growth cannot be overlooked. Is there adequate infrastructure in place for transportation and utilities now and/or in the future? What is the labor force availability and does the workforce have the appropriate skill level? What are the intellectual property laws and related enforcement? Is safety a significant consideration such that it can interrupt business?

An understanding of business organization and property laws should also be obtained. Utilizing in-country resources, as well as those familiar with site selection in emerging markets, can facilitate a thorough review of the additional factors. In addition to the increase in comparative factors, obtaining current, objective data for those factors can be another challenge in emerging markets. Is the market data reported frequently enough to keep up with the new developments or is the information already obsolete? Local interviews and preparing for and organizing effective site visits can become a critical component of the location decision process. Moreover, allowing for more time to perform site selection due diligence and keeping a greater number of location options are ways to mitigate some of the increased risk in selecting new locations in emerging markets.

In Sum
Real estate and related facility investments represent a significant cost of capital and a longer-term business commitment. Some leading practices in site selection include early identification of stakeholders and creating a cross-functional team, understanding the strategic objective and importance of evaluation criteria, assessing changing business and market conditions, and allowing additional time for some reviews, depending upon facts and circumstances. The implementation of leading practices in site selection can lead to obtaining an appropriate site and avoiding costly mishaps.

Note: This article represents the view of the author only, and does not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
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