Integrated Planning for Food Processing Facility Expansion
Developing a successful facility expansion strategy requires focused insights from all teams led by a full-time project manager and often aided by outside expertise.
2015 Food Processing
There are several key steps to consider when working through an assessment of the total cost of ownership for your facility expansion including agreeing on the business case, commencing with site selection, creating a utility plan, and identifying available credits and incentives to enhance the ultimate bankability. These aspects can be looked at as separate roles within a company’s day-to-day operations, but ultimately the integration of these functional areas needs to be the focal point upfront and throughout your effort of planning an expansion.
Establishing the Business Case for an Expansion
Are sales driving production or is production driving sales? It often depends on whom you are asking and what the ownership’s goals are for the company going forward. It may seem like a simple question, but ask your team and see what the responses yield. Each team function will know what it is supposed to do to succeed (sell more, produce more, minimize waste, minimize tax, etc.). But what team should lead a facility expansion? The owner, director of engineering, sales, marketing, finance, supply chain, plant manager, environmental director, or tax director? I have seen any one of these people leading the effort, but often with limited coordination of the company’s teams throughout the process. It takes an entire team working full time every day to run a company, and the same goes for designing a new facility. Without focused communication among all of these parties, you can often influence the direction of an expansion project before it ever begins and sometimes inhibit its occurrence.
A financial model is only as good as what is supporting the numbers within it. Before a project can get under way, the question of what the proposed expansion’s current and future purpose will be must be established by a company. That is the business case for why the expansion is happening. Your team should then be built around a lead project manager who complements the business objectives. Additionally, it will be the project manager’s task to quickly evaluate the limiting factors for the business case to succeed. This manager’s role will need to evolve into a full-time day job to assess the effectiveness of both the people and departments involved and identify where outside expertise needs to be brought in to augment any gaps.
That expertise could be in disciplines related to engineering design, wastewater and utility infrastructure, state and local government regulations, tax structure, capital and incentives procurement, and/or construction management. At times, bringing in these parties is attempted to be a shortcut by use of lowest-cost strategy via a “turn-key” RFP. This could work for a food processing facility expansion. But generally, a low-cost equipment bid in an RFP never addresses the other 50-plus percent or more of the costs associated with the project because the design basis was unclear for those responding to the RFP.
Additionally, the introduction of outside expertise in this process can be received with skepticism by the department heads already successfully running their areas of the company. But the reality is these same department heads, even if they are the best to assume this project manager role, are already using all available hours in the day to run core company functions.
This initial step in establishing the business case for an expansion is far from an easy one, and it will take more time and effort than your company’s teams want to typically invest to be able to end up with useful planning information. However, this process will provide a clear picture of design basis required to get the project done, and that will lead to the most cost-effective strategy. With agreement on the business case, and key supporting project information in hand, it is time to identify the best site to support your business case.
Selecting the Site, Utilities, and Incentives
How do you choose the site for an expansion, and is it worth moving from an existing site to accommodate a greenfield? Outside of the obvious factors that are required to meet the business’s operational needs, have you ever thought of the site you select as one of the key drivers affecting both the overall net capital and operating expenditures the project will incur?
The right site can offer much of the balance of plant infrastructure that the project requires, a utility rate structure that is competitive, and a legislative framework to maximize federal, state, and local incentives. As food processors are large users of utilities, identifying areas with existing utility infrastructure can count for as much as 10–20 percent of a project’s cost. Incentives, either in the form of an upfront cash benefit or abatement of future obligations, can offset as much as 25 percent of the project’s costs. It’s important to note, some of these incentives will be very specific to the actual address of the project, which in turn coincides nicely with the utility infrastructure and rate structure that exists at a given site. The key is to have a clear understanding of what you are physically building in advance, so you can initiate meaningful dialogue about what benefits you can obtain at any given site.
Before a project can get under way, the question of what the proposed expansion’s current and future purpose will be must be established by a company. That is the business case for why the expansion is happening. Utility functions always have a cost to a company, especially food processors; the key, however, is to understand the “how and why” behind the cost, as well as develop an operational strategy that minimizes that cost. An organization’s understanding of how its process conditions affect service infrastructure of local electrical, water, and gas utilities, as well as how its future utility requirements will grow, are critical to the success of any expansion effort. Taking the time and effort to develop an informed, long-term plan to approach utilities can literally save your organization millions, not to mention help facilitate growth and expansion.
Taking steps to work with state environmental and regulatory agencies early in the site selection process to identify which utilities’ service areas may have the capacity to take on your expansion can significantly narrow your area of focus. Subsequently, advancing discussions with the identified utilities early on could yield a competitive rate arrangement or remove capital costs within your project scope if the utilities are looking to attract larger users into their service territory.
As the range of available sites narrow that fit your facility’s utility profile, it is important to simultaneously look at state and federal programs that are typically tied to specific areas within a community. State or local incentive programs affected by site selection may include Tax Increment Financing; Property Assessed Clean Energy; property, sales, or use tax abatements; or utility rebate programs. On the federal side, programs affected by siting include the New Markets Tax Credit (NMTC) program or Historical Tax Credits. Since some of these programs are not entitlements, it becomes important to have a strategy for how to approach the development steps of your project to maximize any of these incentives, or a number of them combined. Ultimately, since credits and incentives can be so site-specific, like the utility infrastructure, it is important to identify if both can be applied to benefit your business case. Additionally, it becomes important to not take action with capital spends or announcements of a given location until you understand the value of the benefits at stake.
Supporting the Financial Model
With a clear business case complete, and the range of sites that can help offset the capital spends, you can begin to hone in on the financial model that will ultimately support the project.
A financial model is only as good as what is supporting the numbers within it. Too often, I see an elaborate financial model with a lot of effort placed on the ramp-up of sales, with gross generalization around the estimated capital costs and the financial structure that can support it. As noted earlier, part of the business case must be bringing on board outside expertise to help accurately assess the project capital requirements. Food processors need to work through a preliminary engineering phase with EPC firms (engineering, procurement, and construction) and technology suppliers to secure a detailed schedule of capital costs up front. This, in turn, allows for establishing the possible process configurations to maximize current and future operating scenarios.
With these process configurations in hand, you can begin to run scenarios to sculpt the expected situations that the sales team have said are possible, and that the production team has agreed are feasible, at a given site. This is done by utilizing the available credits and incentives, under the actual utility rate arrangement you will experience, to accurately sculpt the cash flow required to approach your funding sources.
Achieving Your Potential
These integrated planning efforts of putting together a business case, commencing with site selection, creating a utility plan, and identifying available incentives are all part of the process of making your facility competitive for growth in the long term. A facility expansion does not happen overnight, but by taking a hard look at each of the above factors, you will be able to ensure a successful project is constructed with full visibility of the total cost of ownership.
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