The only thing that never changes is that everything changes (Louis L'Amour). Often the ideal location for your business shifts. But how do you know if it’s the case? If it is, what should you do? When should you move and where to? Which factors need to be taken into account to evaluate, and how do we know the best choice? Tefen has the answer.
Few months ago, an international chemical manufacturing company asked Tefen these questions. The focal question asked was if Toronto Canada, their current location, is their best choice, or if the United States, where most of their customer reside, is a more promising option.
Tefen assessed the situation from the following aspects:
When to move: Revisiting the business goal is generally, if not always, the first step of the process. By comparing current capacity, potential capacity with improvement levers, and projected business growth, we concluded that the current site cannot support growth beyond 8 years, when the demand is expected to double.
Where to move: We answered the question by calculating ROI (Return on investment, Total Saving / Total Cost). By comparing the ROI percentage (the higher the better) of each alternative we drew a logical conclusion. It’s also important to calculate the breakeven period (How long it takes to break even) so that you may arrange the movement timeline more effectively.
How to assess: the following are the critical elements for the assessment:
Real Estate Investment. If moving to a different location, real estate will be one of the biggest costs. Provide real estate agency with your dimensions and specifics. The commonly asked questions include dimensions of lands and facilities, requirements for number of docks and heights. There are two types of real estate, Greenfield (with no building) and brownfield (with existing facility). In the case of Greenfield, keep in mind to also ask for the costs of the detailed design for a new plant, cost of construction, pallet racks, low voltage system, office furniture etc. In the case of brownfield, note that at times price per acre includes miscellaneous cost. We also examined the possibility of both rent and buy land.
Upgrade / replace equipment cost. This is a good chance to examine the status and potential of your current equipment. Even if the decision is a “no go” for relocation, at the end of the day, upgrading equipment may still improve your productivity and efficiency significantly. Expertise of industrial engineers are required at this stage. Sometimes replacement is more reasonable than upgrading, especially when the equipment is old, or costs irrational amount to move to the new location.
Maintenance cost / other miscellaneous cost. Maintenance costs can range from machinery maintenance to building maintenance. Utility cost can cover electricity, gas, and water. Other costs may include property tax, insurance cost etc.
Transportation cost. The geographic locations of your raw material, customer, distribution center is crucial for your business since they may affect the transportation cost. We will continue to examine in detail in return section.
Human resource related cost. Together with shift of location, there will be changes in the workforce. Prepare for layoff expenses since some might not travel with the company, and recruit expenses for the new hires.
Other unforeseen expenses. It’s a good practice to leave a 10-20% buffer in your budget to deal with other unforeseen expenses. Cost of operation downtime shall also be considered.
Labor savings. It could be due to new equipment unit with high automation and lese operator needed; or improved layout / process at new site that enhance the efficiency of operation, thus for the same quantity of sales order, less people will be needed ; or a different salary baseline (hourly wage, minimum wage) based on the location. More importantly, keep in mind that the change is not only a matter of money, but also expertise and knowledge. It varies across industries, but recruiting and training employees can be costly as well.
Real estate savings. This goes in hand with real estate investment. If the alternative is to move, the difference of current and future property cost is calculated here. If the alternative is to stay, it’s still worth examine if there are other ways of fully utilizing the land, such as renting the vacant space to third party.
Transportation savings. This includes transportation of raw material and finished goods. Location that are closer to your raw material supplier, distributors, and end customers will contribute significant saving. When conducting the analysis, distance is not only taken into consideration, but the distribution of quantity and value of each customer/supplier should not be overlooked either. Also, locating close to busier port or terminals will at times provide you more choices of shipping as well as a more competitive pricing.
From such a systematic approach, Tefen was able to conduct a thorough assessment for the company. However, evaluation is merely the first step, implementation is another whole new world. For more expertise, please contact us.
Director of Tefen Isreal | Yuval Barek
Consultant of Tefen USA | Jiahui He