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Inward Investment Guides

Labor Trumps Other Factors in the Location Decision

Is the decision to relocate an operation from a community realistic - or just an attempt to receive benefits or incentives to remain?

Matt Jackson, Strategic Consulting, Jones Lang LaSalle and Matt Highfield and Scott Redabaugh, Strategic Consulting, Jones Lang LaSalle (June/July 10)
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A comparison of the composition of operating costs in the medical device and chemical industries. A comparison of the composition of operating costs in the medical device and chemical industries.
Labor Composition
Costs for direct labor are particularly important to location decisions and typically receive a lot of attention from manufacturing companies when seeking sites for new or expanded operations. This is because direct labor categories (i.e., unskilled, semi-skilled, and skilled labor) typically comprise the largest number of workers in a manufacturing facility. While the exact composition of an operation varies by industry, most headcount is represented in the direct labor groups, with the number of employees declining sharply with climbing skill grade to the maintenance, engineering, and professional-level employee.

Figure 3 provides an illustration of headcount composition for a sample group of manufacturing operations that cross industry verticals. The data illustrates that direct labor represents more than 80 percent of the total headcount found in most operations.


Labor Availability
The availability of labor is also a significant consideration in a location decision. If the growth, concentration, and volume of labor skills and target work force are not sufficient to support the scale of a new operation, a location that might otherwise demonstrate merit as a candidate for a facility might in reality prove to be an incorrect choice. The size of an operation must be aligned with the market's ability to provide talent (supply) and competition for the talent (demand).

Management
Another key consideration when locating a facility is finding management-level talent to run operations. Sometimes an investigation of management availability does not receive a comparable level of effort as expended on the investigation of the direct-labor categories because the number of management positions that need to be filled is notably lower. Figure 4 illustrates an organization's typical management structure.

Management talent, however, can be very difficult to source and companies tend to have significant difficulties finding qualified production, quality-control, and supply-chain professionals. If a company also requires that candidates possess an industry specialization, the number of individuals able to meet job requirements can quickly decline.

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If you have a question about how labor issues can affect your business, submit it below and the author will respond.
Labor Investigative Process
Accurate data on labor costs, availability, and quality is challenging to acquire and calibrate when making comparisons across geographic areas. During the location selection effort, the assessment of labor considerations evolves and becomes more focused on micro-market considerations as the investigation moves through each phase of the analytical process.

As illustrated in Figure 5, companies and consultants often adopt an increasingly fine-tuned, three-step process for the assessment of labor after project objectives are established:

1. Identification: Locations are subjected to a filtering exercise to identify a list of candidates that appear to align with the broader objectives of the investment. In this step, labor analysis would likely be conducted on the desktop using published and survey data with a focus on measurements of cost and supply.

2. Validation: Locations are commonly subjected to primary in-market research to obtain a detailed understanding of labor supply and demand characteristics, competitive compensation strategy, and market-entry strategy.

3. Negotiation: The investigation migrates to developing an under standing for how labor conditions might be influenced by utilizing economic development incentive programs. The investigation will focus on how statutory or discretionary incentive programs can support the relocation, recruitment, and training of potential employees.

A successful outcome of the process can be summarized as finding a location with the appropriate costs, labor supply, skills, government support, and the ability to successfully sustain operations for an extended period.

In Sum

Given the importance of labor to the cost of operations - and its position as one of the most significant geographically variable costs - labor costs will likely remain one of the most important considerations when selecting a location for new manufacturing operations. The geographic variability in costs, skills, supply, and regulation further support the need for robust labor analytics.

When analyzing a location for direct investment, it is important to get beyond desktop analysis and obtain market intelligence using field research interviewing techniques in efforts to obtain the insight necessary to confidently support decisions. In doing so, human resources strategies can be developed, risks mitigated, and confidence applied to communications concerning the merits of a location to support investment.

Matt Jackson, Matt Highfield, and Scott Redabaugh are executives in the Strategic Consulting practice of Jones Lang LaSalle. Contact information for each contributor is as follows:
• Matt Jackson, 571-215-5118 or matt.jackson@am.jll.com
• Matt Highfield, 612-308-5765 or matt.highfield@am.jll.com
• Scott Redabaugh, 703-608-3240 or scott.redabaugh@am.jll.com
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I am a county councilman in central Indiana. We are being asked by our economic development director and other community leaders to consider assisting in funding a learning center which will have participation by well known state univerisities. The premise is this is an attraction to businesses wanting to locate in our area because it will provide a place for workforce training locally. I am getting heat from nay sayers saying it is a waste of money. I was looking for an objective outside opinion
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- Matt Jackson, Strategic Consulting, Jones Lang LaSalle

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