Communities that want to attract freight facilities should examine themselves as corporate site selectors do before engaging in a full-scale business recruitment process. If a community is going to successfully compete in attracting a freight facility, it is to its advantage to understand what needs a company is seeking to satisfy and what kind of criteria they will use to select a site. What are the key things a planner, economic development strategist, or elected official should know to develop potential or develop competitive advantage for a good freight facility project?
Freight facilities will only consider locations that fulfill the primary objective of moving goods in the most efficient manner from point of origin to destination. This trumps most other considerations. Companies and carriers rarely base location decisions on personal relationships, government incentives, or regional promotions. These factors are only a consideration after a location meets the required criteria for the business to be successful. Local officials can make their communities more attractive to freight facilities by providing a hospitable climate through appropriate zoning, compatible land use, transportation infrastructure, and community support. When companies evaluate sites, some criteria are far more important than others. The ability to access key markets, availability of efficient transportation, sufficient qualified labor, and total costs are considered key criteria. Proximity and/or access to markets is the most important driving factor that determines the region or community in which a freight facility will locate.
Freight location decisions rarely respond to a “build it and they will come” approach by the public sector, yet it is also true that having the necessary support infrastructure in place can be a great incentive if the location is a good one and other factors are positive. This chapter will broadly describe how companies decide where to place freight facilities – beginning with the early planning stages up through final site selection.
Site Selection: The Big Picture
Companies will first internally examine their current and future needs and then develop a planning framework to determine how best to externally address these needs. Location planning is methodical and iterative, usually involving a team of individuals within a company. Site selection decisions typically involve at least the following four steps:
- Defining the company’s business strategy and the success parameters for the new (or relocated) facility.
- Developing the site selection criteria, usually phased in such a way as to allow a progressive evaluation from broad to specific, region to community.
- Examining the communities and sites directly through on-site visits.
- Involving three to four sites and communities in detailed discussions and negotiations.
As noted above, location planning is methodical and iterative. Factors will vary in importance throughout the process. For example, access location screening is methodical and iterative…. Freight Facility Location Selection: A Guide for Public Officials 31 to specific markets, costs, and population trends may drive the early stages. A secondary screening may involve examining highway and rail networks to determine areas with service advantages. The third screening may evaluate total costs of operation for the final candidate sites. The final stage may then involve more site-specific issues such as specific facilities and the labor available in a particular community.
Stages of Site Selection
While these steps are shown above as a sequence, stages often overlap and recycle in an iterative manner. For example, some organizations combine the network modeling and location screening stages. Others develop the financial model early in the project to determine overall feasibility and then refine it based upon new knowledge throughout the process. Sometimes location selection needs to cycle back to a previous stage.
- Planning and Strategy
- Network Modeling
- Location Screening
- Field Validation
- Cost Modeling
- Final Negotiations and Location Selection
Planning and Strategy
The location selection process for any freight facility begins with the identification of a need. This need may arise from the desire to serve a new market, to merge facilities acquired from another company, or to respond to a change in market conditions. Distribution facilities are inextricably linked to distribution networks. A change at one node in the network may have implications up and down the entire supply chain. As a result, companies will usually begin site selection planning by revisiting the goals and business context for their distribution network as a whole. As part of this process, a company may ask itself a series of questions, such as: Why seek a new site? Expand: To service a new market Contract: To downsize into a smaller facility, fewer facilities, or merge networks Change: To adjust for changing market or network conditions. Who are our customers? Where are they, and what do they want? How much of the supply chain do we wish to control ourselves, and how much of it do we wish to contract to a vendor or set of vendors? Is our goal to optimize cost or reduce time to market? How can the company best balance its customer service goals? What kinds of people do we need, and what do we need them to do? How does this balance with our capital needs? How might any of the above change over time? When might that change occur? How might this impact our decisions? How will we evaluate and adjust our decisions as time goes by? How often will we do this?
Any form of advance planning involves a calculated risk. Unforeseen business events, market changes, and other outside factors introduce the risk of significant error into any planning process, and the margin of variance increases the further out the target year. Nonetheless, any network or facility plan usually adheres to the following rules of thumb:
Once the company selects a planning time frame, the sales, operations, and/or supply chain staff can forecast or project the remaining strategic considerations
- Sales or through-freight volume by type.
- Demand points or markets to be served.
- Product sourcing.
- Product categories.
- Number of end (or source) points to be serviced by the facility.
- Freight pricing (including variability by mode).
- Facility ownership or leasing options.
- Any likely exit plan for the facility. The time frame and forecast of these strategic considerations establish the overall needs to be satisfied by the new facility or network. The location planning team will use this information to set overall parameters for the project. During the planning and strategy phase a list of criteria will be developed.
Network modeling and analysis, time to market, and overall logistics costs are prime factors driving freight facility location decisions. As a result, the first stage for locating a freight facility is to examine the interplay between location and freight costs. Transportation is a large consideration at this point in the analysis. Companies use computerized network modeling programs or equivalent methodology to estimate total shipping cost and time to market for a range of scenarios. These approaches use customer or store locations, sourcing points, freight loads, fuel costs, facility operating costs, and transportation modal choices to develop idealized distribution center networks. Modeling programs and other analyses may evaluate a variety of scenarios, examining the sensitivity of issues such as freight volume, population growth, customer change, sourcing, operations costs, and fuel costs. Linkages and infrastructure in any modeling must be compared against real-world data to reflect actual conditions, which network models sometimes have difficulty incorporating. Congestion and traffic on roadways may compromise what appears to be an ideal network, as may policies that promote passenger traffic take precedence over freight on rail networks. Companies often need to make off-line corrections, as network models do not always incorporate on-the ground issues. The network models do not identify final sites, but only show recommended areas where freight facility nodes would yield the best performance. Companies typically use this information as a starting point and attempt to find sites within a reasonable radius of these recommendations. This radius may be larger (50 miles) or smaller (10 miles or less) depending on the nature of the network or facilities under consideration. In this process, non-transportation factors such as workforce, regulatory environment, utilities, and the cost of real estate become important factors in the location search. The location planning team will typically construct either a grid or a weighting and ranking model that uses demographic, socioeconomic, workforce, tax, regulatory, utility, and other data to determine how each candidate community matches the company’s goals relative to the other communities under consideration. The location planning team, in addition to collecting available data from various public and private sources, may also submit a request for information to individual community economic development agencies if the team needs more specialized information. Communities prepared with available information or a means to readily provide requested information may find themselves in a better position to compete for a facility. The planning team typically constructs an evaluation matrix or model based on this data. By applying the evaluation criteria developed in the strategic planning phase, the team can objectively test how well each of the candidate communities or sites matches the company’s needs. The team may test a variety of alternative scenarios to reflect changing priorities. The team also examines how the community or site location impacts operating and cost considerations as compared to the network model’s ideal location. Communities that score well for the team’s identified priorities and that can also adapt to alternative scenarios make the “short list” for further analysis. Once a community or region is placed on the short list, the location planning team will further evaluate specific sites or facilities within the area. At this stage, the location team may seek the assistance of local government or economic development officials to explore possible sites, find out about permitting and regulatory requirements, and learn more about transportation and utility infrastructure. This communication will allow a better understanding of the actual operating environment in the community and can also serve to begin the negotiation process for land, facilities, and public assistance or incentives where appropriate. At the same time, the company will enter into discussions with land or facility owners on selected properties to ascertain:
- Size, configuration, or permitting ability vis-à-vis company needs.
- The site or facility’s ability to accommodate growth or otherwise adapt to future requirements.
- Ease of access to and distance from key transportation points (highway ramps, switching yards, intermodal facilities, etc.).
- Cross-dock, ceiling height, maximum floor weight, number of loading docks, rail access, and other materials movement requirements of pre-existing facilities.
- Utility capacity.
- Site engineering considerations.
- Environmental considerations.
- Potential rent, purchase, and operating costs.
- Safety and security.
This information, along with the financial analysis described below, allows the planning team to further refine the location recommendations.
Companies will typically develop cost models during the site selection process to provide critical information as to how well each scenario and/or location will provide an economic payback (and over what period of time) for the proposed investment in the new location. The amount of time required for the company to recoup its initial investment and the rate of return must be compared against other operational investments the company might consider in order to prioritize such investments. Cost models typically include start-up and recurring costs and may also include exit costs. Cost modeling allows for consideration of the impact of changing cost environments for fuel, labor, network service performance, revenues, and tax exposure. A location’s flexibility of use and potential to accommodate future growth substantially increases the chances that an appropriate location or scenario will be selected. These analyses therefore result in a determination of both absolute and relative feasibility for the alternative locations under consideration.
Incentives, negotiations, and final selection
Initial steps will likely be made during specific site analysis towards identifying, negotiating, and securing incentives from local or regional governments to address any perceived shortcoming of the location or to help offset costs that negatively impact the project feasibility. These incentives can include tax incentives, cash grants, expedited permitting and approvals, and other inducements. The project team will take extreme care to ensure that any action taken by the team, the company, or its partners is not construed as a firm commitment to any community under investigation, as any such premature commitment could eliminate the possibility of financial incentives and inducements. At the completion of the cost model, site analysis and negotiations, and the negotiations for public incentives, the location planning team will present their findings and recommendations to corporate stakeholders. The company then decides on a course of action, completes negotiations, and implements the new location strategy.
Content excerpted from Steele, C. W., et al. NCFRP Report 13: Freight Facility Location Selection: A Guide for Public Officials. Transportation Research Board of the National Academies, Washington, D.C., 2011, Chapter 4.