By Dennis J. Donovan, Wadley Donovan Gutshaw Consulting
This article addresses the trends and challenges impacting advanced manufacturing today. Subsequently the site selective process/key factors are addressed. Primary topics highlighted in this article are:
- Advanced Manufacturing definition
- Manufacturing Industry Trends
- The Labor Supply Challenge
- Foreign Direct Investment
- Locating Advanced Manufacturing Operations
What is Advanced Manufacturing?
Advanced Manufacturing embraces the utilization of technologies and processes to markedly increase the competitiveness of an industrial enterprise. By implementing innovative advancements like artificial intelligence and composite materials a manufacturer can optimize every step in the value chain, from product conception to end of life.
The basic concept of advanced manufacturing involves the integration of machinery with digital and cloud technologies such as artificial intelligence, the Internet of Things, and augmented reality. The heart of advanced manufacturing revolves around innovative technologies that heavily lean on automation, computation, software, sensing, and information.
Advanced Manufacturing differs from traditional manufacturing. The latter comprises a basic factory where raw materials are made into finished products through mechanized and manual fabrication technologies. Production lines are dedicated with little flexibility. While time tested and historically successful (especially for high volume/long production runs), traditional manufacturers need to eventually transition into advanced production strategies to maintain market competitiveness.
Among the technologies most frequently associated with advanced manufacturing are:
- Machine learning
- Digital twin
- Additive manufacturing
- Advanced materials
- Network and connectivity (Internet of Things)
- Laser machinery
Advanced manufacturers typically make substantial investments in R&D. The median investment for R&D in all manufacturing is only 1.25 percent of net revenue. Most advanced manufacturers allocate significantly more financial resources for R&D, often over five percent of net revenue.
Today, advanced manufacturing is taking hold in a wide array of industries. Among those sectors that are furthest along in advanced manufacturing are:
- Medical devices
- Consumer products
- Scientific instruments
- Machine tools
- Energy equipment
Manufacturing Industry Trends
As suggested by IBM, manufacturing has undergone a major digital transformation in the last several years with technological advancements, evolving consumer demands, the COVID pandemic, and shifting supply chain dynamics. Drawing from IBM and other published sources, trends shaping the near-term future of manufacturing are:
- Adoption of innovative, transformative technology, especially by traditional manufacturers that are morphing to advanced manufacturing
- Sustainable manufacturing
- In response to consumer awareness and government mandates
- Companies are under pressure to mitigate the impacts of climate change by pushing for carbon neutrality and minimizing carbon footprint
- Involves waste reduction, greater reliance on renewable energy, adoption of circular economy principles (e.g., materials re-enter the economy at the end of their use), and implementation of eco-friendly production processes
- Service Plus
- Business model that embodies value added services, enhancing the customer experience
- Often involves maintenance, repair, and upgrades
- Extended Reality (XR)
- Merges physical and digital worlds such as virtual reality and augmented reality
- Enables manufacturers to provide virtual product demonstrations and visualizations
- XR can also improve employee training/education and tackle the worker shortage (with immersive solutions, employees learn new skills and procedures in a controlled environment)
- Advanced Materials
- In addition to processes, manufacturers are incorporating advanced materials into their making of products
- Examples of materials are composites, ceramics, and nanomaterials
- Strength, durability, and improved thermal properties are the main benefits
- A host of companies have brought back manufacturing operations, primarily from China and secondarily from other lower cost countries
- Due to the introduction of advanced technologies, many companies have reduced the proportion that direct labor constitutes of cost of goods sold
- Given this dynamic, there are several interlocking factors leading to the reshoring phenomenon
- Rising labor costs in China (and other countries)
- Geopolitical risk (such as strained relations between the U.S. and China)
- Disruption risk due to an extended supply chain
- Over-reliance on a small number of suppliers (also associated with an extended supply chain)
- Increased transportation cost
- Long lead times and inflexibility to meet rapidly changing customer demand
- Strong consumer and business sentiment to “buy American”
- Enhancing brand reputation
- The preponderance of reshoring has been to the U.S. while some has gone to Mexico
1. Typically siting a reshored factory in Mexico will involve operations that are still fairly labor intensive
2. Mexico has benefits, especially when contrasted with low-cost Asia
▪ Shorter supply chain
▪ Faster delivery to North American customers
▪ Established manufacturing hubs with solid labor markets
▪ Moderate utility costs
▪ Wage levels are attractive (e.g., $3.75-$4.50 an hour for qualified entry level)
▪ Favorable tariffs under the new NAFTA (USMCA)
▪ Industrial parks fully serviced
▪ Reasonable occupancy costs
3. However, there are challenges associated with operating a manufacturing plant in Mexico
▪ Longer shipping times to the U.S.
▪ Complex laws which require a time consuming and arduous processing effort
▪ Finding and building relationships with local suppliers
▪ In many locations, escalating labor costs
▪ Enforcing contracts takes up to 13 months
▪ Pervasive high crime which poses risk to supply chain and expat/visitor safety
The Labor Challenge
Labor comprises one of the most vexing and serious challenges facing manufacturers in developed countries including the U.S. Manufacturing employment has gradually increased since the great recession of 2009. Today, roughly 13.2 million people are employed in manufacturing (about 11.7 percent of the workforce). Relatively modest growth is forecasted for the remainder of this decade (manufacturing employment projected to be 13.7 million in 2030). However, this does not take into account annual turnover. Replacement hires over the next seven years could easily fall in the four-million or over range if manufacturers replace percent of the workforce because of turnover.
Despite modest growth projections, the manufacturing sector is experiencing a labor shortage which is expected to intensify in the coming years.
In fact, a recent analysis produced by Deloitte and the Manufacturing Institute forecasts that up to 2.1 million manufacturing jobs in the U.S. could go unfilled by 2030.
There are a number of forces that are responsible for the shortage of manufacturing talent. Among them are:
- Baby boomer retirements
- Low birth rates
- Shifting immigration policies
- Lower labor force participation since the COVID pandemic (currently 62.6 percent down from a high of 64.7 percent in 2010)
- The aforementioned annual turnover requiring new hires (replacement hires not included in growth projections)
- Higher skill levels due to automation
- Younger workers not interested in manufacturing careers
- Despite all the hype about automation, manufacturing output per hour in the U.S. has grown only 0.2 percent per annum. This rate trails the overall productivity growth in the U.S. (1.3 percent per annum) as well as that of other developed economies such as Germany. Consequently, the level of labor-saving automation still has a ways to go in the U.S.
- We have also observed that many manufacturers, especially smaller companies, do not take full advantage of technical training offered by secondary and post-secondary educational institutions
The labor crunch is certainly not uniform throughout the U.S. There are labor markets where either a surplus or equilibrium condition (i.e., labor demand is not overtaxing supply) exists. By contrast, the situation ranges from serious to severe in many locations.
Implications for site selection place a premium on (a) identifying locations that have an adequate pool of requisite skillsets and (b) assessing the competitive labor market situation at existing sites before committing to expansion. The outcome of such an assessment could call for capping headcount or downsizing at the respective site. Historically, companies opted against expanding at an existing site because of physical constraints or sometimes, sour labor-management relations. We are now seeing headcount limitations playing a prominent role in determining the efficacy of existing site expansion.
Whether at a current or new site, there are several tactical actions that manufacturers should consider enhancing employee recruitment and retention. These strategies require a holistic HR perspective. Action steps include, but are not limited to, the following:
- Optimize the compensation package to include: • Market competitive wage rates by position and • Pay-for-performance based on company, factory, and individual success metrics
- Ensure an attractive work environment which could entail air conditioning where needed and feasible
- Create a safe workplace
- Offer benefits customized to the needs of your specific workforce
- Offer more flexibility including shift hours, parental leave, and a PTO policy that fosters family-work balance
- Assess the company’s brand/reputation in the local market, upgrade where necessary, and promote the brand in the community (e.g., civic affairs, philanthropy, and social media)
- Gauge emerging skills requirements, invest in training (internal and with educational institutions), and modify job descriptions
- Build a talent pipeline for specific skills, including those hardest to fill
- Tap the underserved talent base (e.g., second chance, labor force dropouts, disabled)
- Develop a recruiting strategy to encourage more female participation
- Stress the company’s support and value of Veterans
- Streamline the hiring process which is often too long or cumbersome
- Relax hiring requirements to recruit more qualified entry level and then provide sufficient training
- Maximize career advancement opportunities
- Engage and reward workers for making suggestions on how to improve production operations
- Reduce mandatory overtime
- Implement an effective supervisory development and selection program, emphasizing both technical and soft skills
- Hire leaders that are well known in the local manufacturing community and have a following
- Participate in internship, pre-apprenticeship, and apprenticeship programs
- Subsidize education advancement including certifications
- Participate in programs sponsored by your local and state economic development organizations
- Consider sign-on bonuses for hard to fill positions
- Among the most critical actions is to implement advanced technology and develop an appropriate upskilling/training initiative
- Review the components of Industry 5.0: The Factory of the Future
- A cornerstone of nearly any effort to adopt Industry 5.0 – wholly or partially – should be putting the human touch back in production to transform the manufacturing process
Underpinning this strategy is collaborative robots or cobots
- Using cobots, workers and machines complement each other
- Cobots have more flexibility than industrial robots
- Cobots are also safer, easier to program, and lightweight
- They are less expensive than industrial robots
- Plus, workers are more energized realizing that a cobot is an ally not a threat
- Community Colleges are now offering cobot education/training programs
- Companies can also receive guidance from the state chapter of the Manufacturing Extension Partnership (a public/private entity that is part of the U.S. Department of Commerce’s National Institute of Standards & Technology)
- The Association for Advancing Manufacturing has also offered webinars on the use of cobots
The U.S. has seen an uptick in facilities investments by foreign manufacturers. Asian companies are attracted to the U.S. primarily because of the large North American market. Additional considerations include reduction in supply chain length, faster delivery to the customer, and promotion of “Made in America” to enhance sales. For European companies, the drivers are market size, supply chain, customer access, high energy prices, geopolitical tensions, and bureaucracy/regulations. In addition, federal incentives (Inflation Reduction Act and the CHIPS/Science Act) have bolstered Foreign Direct Investment (FDI).
FDI has been occurring across the industry spectrum and throughout the U.S. Among the most prevalent industries for FDI in the U.S. are automotive (especially EVs and batteries), metals, chemicals, semiconductors, food processing, and life sciences. Representative leading states for FDI are Arkansas, Indiana, Kentucky, Michigan, North Carolina, Ohio, South Carolina, Tennessee, and Texas.
Due to the size and stability of the market, we anticipate FDI to rise in the next few years. When companies site new manufacturing facilities in the U.S., the following factors often assume prominence:
- Proximity to customers and suppliers
- Multimodal transportation
- Presence of similar manufacturing operations
- Workforce availability, especially qualified entry-level and skilled
- Moderate labor costs
- Electric power capacity, reliability, and cost
- Available buildings
- Fully-served, ready-to-go sites
- Moderate taxes
- Meaningful incentives, especially for job creation and capital investment
Most Influential Location Determinants for Advanced Manufacturing
As can be drawn from the above discussion on trends, advanced manufacturers tend to display similar location tendencies. Among the most important considerations are the following:
- Well established presence in manufacturing
- Proximity to customers
- In many cases, proximity to suppliers
- Ample supply of qualified labor • Skilled (e.g., CNC Machine Programmer/Set-Up, Tool & Die Makers, Machine Maintenance, Welding, Electronics Technician, Robotics Technician, Quality-Control Technician) • Semi-Skilled (e.g., CNC Machine Operators, Assemblers, Testers/Sorters) • Qualified Entry Level/Unskilled (e.g., Material Handler, Packaging, Production Helper) • Engineering (e.g., Electronic, Mechanical, Materials) • Workforce with fundamental traits across the skills spectrum such as STEM competency, critical thinking, soft skills (e.g., reading and communications), and ability to function in a team environment
- Absence of overheated demand for requisite skills
- Stable workforce (low absenteeism and turnover)
- State-of-the-art education/training resources in manufacturing-related programs
- Moderate labor costs that will not rapidly escalate in the future
- Electric power reliability/capacity/cost
- Availability of green energy
- Robust utility infrastructure
- In many cases, available buildings
- Availability of fully-served, ready-to-go sites
- Excellent highway access and transportation services
- Favorable labor-management relations
- Low or no sales and/or property tax on machinery and equipment
- Positive state business climate
- Meaningful incentives for job creation and capital investment (if tax credits, strongly prefer refundable)
- Low natural disaster risk
- Attractive quality of life for talent that will be relocated
To choose a location which will engender success of a new advanced manufacturing plant, a structured analytical process should be followed. The process involves several interlocking phases. Fundamental to a successful outcome is to be as precise as possible in defining the project’s parameters. That step embraces the first of a typical four-phase decision-making process.
Phase One: The Plan
Phase One essentially involves defining why, what, and how. The first task is to assemble a team. Teams often include representatives from major business units such as operations, technology, human resources, finance, and real estate (facilities). The team will have a leader and a day-to-day coordinator. The team also needs to be connected with a senior executive(s) who will approve the final recommendation. Outside advisors such as design/build, site selection, and engineering consultants are often brought onto the team.
Now comes the task of mapping out the game plan which embodies the following:
1. Clearly understanding why, a new operation is necessary
2. Reaching concurrence on when the new factory must be operational
3. Determining if any existing site should be considered for expansion
4. Plotting existing and potential customer locations
5. Identifying locations of key suppliers
6. Quantifying the new plant’s year one and future operating requirements, such as
- Environmental/hazardous waste
7. Defining and weighting location criteria, e.g.,
- Presence of an industry ecosystem
- Proximity to other company operations
- Proximity to customers
- Proximity to suppliers
- Labor market
- Available building
- Available site
- Business regulation
- Highway access
- Transportation services
- Natural disaster risk
- Annual operating costs
- Quality of life/transferee appeal
- Community appearance/reputation
8. Geographic Search Region
9. Outlining the location selection process
10. Clarifying team roles/responsibilities
11. Agreeing on team communications
12. Specifying confidentiality protocols, including a project code name
Phase Two: Location Shortlist
This phase has three stages, Stage One embraces desktop research to generate a longlist (often 6-10) of promising locations. Stage Two involves issuing a confidential Request for Information (RFI) to the lead economic development organization in each longlisted area. Stage Three calls for combining desktop and RFI results to rank the longlist and generate location finalists (or the shortlist).
Stage One: Desktop Research
The process begins by creating a series of statistical thresholds to screen potential locations in a multi-round exercise. Fundamental thresholds could include factors such as a minimum population size, distance from a commercial airport, percent of workforce in manufacturing, or household income well above the U.S. average (often a mismatch for a manufacturing entity where costs are important).
Once the baseline threshold is established (e.g., all metros over 100,000 population within the search region), a multi-round screening process to eliminate/retain locations is launched. Other illustrative screening factors include:
- Population trends
- Manufacturing Employment (size and percent of workforce)
- Specific industry employment (size and percent of workforce)
- Number of requisite skills (e.g., machine operators)
- Talent pipeline size (e.g., annual 2 and 4 year college graduates)
- Workforce educational attainment
- Labor cost
- Electric power cost
- Natural gas cost
- Distance from a commercial airport
- Highway access
- Natural disaster risk
This screening effort will yield the longlist. It might also be advisable to carry through a couple of locations of interest (e.g., an existing site) for benchmarking purposes.
Stage Two: Request for Information (RFI)
The RFI is intended to gather intel not available from statistical sources. The RFI would frequently ask for information such as the following:
- Roster of manufacturing employers
- New/expanding manufacturing employers (possible future labor market competitors)
- Downsized industrial employers
- Available buildings meeting specific criteria
- Available sites meeting specific criteria
- Electric power, natural gas, water, sewer availability and costs
- Education/training resources
- Green energy availability
- Transportation services
- Selected tax practices/rates
- Unionized companies
- Possible incentives
Stage Three: Longlist Ranking
It is helpful to develop a scorecard to compare and contrast the long-listed locations. The scorecard should be divided into cost and operational considerations. Each longlisted area is assessed and scored on individual factors (e.g., competitive labor demand). Scores are then rolled up into a topical category (e.g., labor market). Category scores are subsequently tabulated.
Ideally, the best locations will rank high on operating conditions and low to moderate on cost. The emergent shortlist (two to four locations) is then brought forward to the empirical evaluation phase.
Phase Three: Finalist Location Evaluation
The main objective in the third phase is to pick the best longterm location and alternate. This decision requires applying considerable judgment to research conducted, especially for gauging future operating conditions.
The lead economic development organization can coordinate the Phase Three initiative wherein a combination of virtual and on-the scene investigation will be necessary. Among the key research inputs will be the following:
1. Interviews with manufacturing employers to learn of their current operating conditions and opinion on future dynamics affecting industrial businesses
2. Interviews with other entities that can shed light on operating a manufacturing business in the area: e.g.,
- Staffing agency
- Workforce development board
- Utility representations
- Education/training officials
- Transportation representatives
- Business associations
3. Tours of candidate sites/buildings
- Virtual initially
- In the field during visits
4. Discussions with site/building owners
5.Dialogue with the economic development agency relative to issues such as incentives, permitting, regulatory barriers, etc.
In assessing each shortlisted location, it is particularly important to be certain that a preferred site/building is in the best sub-labor market. The site should be viewed not just in physical terms, but also from an HR perspective. If the site is dislocated from the residential concentration of requisite talent, then the ability to recruit/retain a top-quality workforce could be compromised.
Once empirical research is complete, the team gathers to rank and score each location. Dialogue should include viewpoints on current and emerging conditions. Among the most critical factors will be the availability of requisite skillsets at acceptable cost levels now and in the near to mid-term.
The team will present its conclusions/recommendations to executive management. Once approval is obtained, the process moves into the final due diligence phase.
Phase Four: Final Commitments
The team is often expanded as final due diligence is conducted in the preferred and back-up locations. A well-coordinated effort is imperative. Among due diligence tasks are:
- Real estate negotiations
- Construction/building retrofit commitments
- Incentives negotiations
- Human resource game plan
- Environmental compliance
- Utility commitments
- Permitting commitments
- Taxation rates/exemptions
- Motor carrier service
- Licensing requirements
- Internal/external communications
- Getting into business support from the lead economic development agency
At this point, the team recaps the due diligence outcome and prepares a business case for the recommended location. Executive management reviews and then signs off on the recommendation. The project now enters the decision implementation arena (existing building retrofit or new building construction).
Advanced manufacturing continues to be more widespread in most industries. The utilization of the latest technologies is pivotal to advanced manufacturing; these technologies should include far greater reliance on cobots in the production process, for example.
Skill requirements are more sophisticated in advanced manufacturing, but importantly, this also includes entry-level workers with STEM and basic skills. Finding these skills in ample supply now and in the future will be a predominant locational determinant.
State and local governments need to offer greater incentives for manufacturers to introduce innovative technologies. These incentives should include refundable tax credits for capital investment. Education/training institutions also need to “up the ante” for advanced manufacturing programs.
Siting advanced manufacturing operations (whether domestic or foreign investment) should be be driven by human resource considerations. A viable labor market is critical for future success at any advanced manufacturing site.
About the Author: Dennis J. Donovan is a Principal and Larry Moretti the Consulting Practice Leader of Wadley Donovan Gutshaw Consulting, based in Bridgewater, NJ. WDGC has been advising companies on corporate location strategy and site selection for four decades. Client assignments have included many manufacturing projects, most of which involved comprehensive labor market assessments.