Feature Article: Rising Energy Costs Modify the Site Selection Landscape

November 1, 2008
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Energy costs, logistics, sustainability and workforce issues cause processors to rethink location, location, location.

Anheuser-Busch’s Fairfield, CA facility ships Bud all over the Pacific Northwest via the rails to save transportation costs. In the foreground is a garden of hops. Behind the building will be a 6-acre, 1.18 megawatt solar array.

Source: Anheuser-Busch.


Today, the soaring cost of energy, which underlies the cost of utilities and transportation, forces processors to rethink site locations. Where should the next production plant or distribution center be located, and how big should it be? If it’s a refrigerated warehouse, can solar or other alternative energy sources help offset the cost of electricity? And then there are water, environmental, sustainability and a host of other concerns to help complicate site selection.

Calbee America’s president and CEO, Masanori Yasunaga, spent a year traveling throughout the San Francisco Bay area in search of a site to relocate his company’s Sebastopol, CA snack food products manufacturing plant. “We chose Fairfield after looking at many Bay Area sites-from north of Santa Rosa, south to Fremont, and in the end Fairfield was the most favorable. Its location near major freeways makes it a good distribution point,” says Yasunaga.

“When processors begin to consider a new site, logistics should be the first consideration,” says Darrin Buelow, principal, Deloitte Consulting, LLP. This assumes the processor already has a handle on its supply chain and its distribution. Deploying a plant with favorable logistics, in the case of Barilla’s new Avon, NY plant, meant locating it next to an interstate for shipping products and near the railroad for incoming semolina.

“Logistics is pretty much king in all site selection criteria,” says Bill Vaughn, principal, Vaughn, Coltrane, Pharr & Associates. But sometimes there are factors such as taxes that can put a crimp in logistics planning. For example, Vaughn relates, “Nevada has a large number of distribution centers because California has a warehousing tax.”

A major part of logistics is transportation, and Stuart Kendig, vice president and principal at TranSys, says transportation was important two years ago and twice as important today. Several processors and distributors have created megacenters of one and two million sq.ft., and Kendig says the bigger they are, the bigger the transportation costs. “With fuel costs today,” he says, “this strategy has been rethought. I think there will be several strategy moves in the future to make some of these facilities more local.”

Not only is the cost of fuel affecting transportation, but the new hours-of-service rules for truck drivers will create some availability problems for trucks, according to Don Schjeldahl, vice president and director at Austin Consulting. There has been a shortage of drivers and trucks, and some geographical areas are more affected than others.

Part of the reason for the shortage, says John Morris, managing principal, Cushman-Wakefield supply chain solutions consulting, is that the job is simply not attractive to today’s young people. The average age of the truck driving population is going up as is the age of manufacturing personnel. While the problem may improve temporarily, he sees it as a long-term issue.

Tools can help A&E firms assist processors with transportation and logistics. According to Facility Group’s Senior VP, Food and Beverage David Dixon, logistics software can be used to narrow down regions based on transportation costs, raw material costs, labor availability and supply chain. Dixon thinks network logistics modeling, however, is leading to different results than he saw three to four years ago, and much of these changes have come about because of increased fuel costs.

Scott Kupperman, senior vice president, A. Epstein and Sons International, says an important issue has been overlooked. “The number one issue as far as effective planning for the food industry is flexibility-in terms of future use of the facility.” Looking down the road five to 10 years, the processor needs to think of what changes it will make in its processing lines due to changing consumer tastes, the expandability of the facility and the future resale value in case the processor ceases operation or decides to move elsewhere.

Dippin’ Dots chose to locate in Paducah, KY because the area offered fresh talent from universities and technical colleges with curricula in food, nutrition, agriculture and technology. Source: Dippin’ Dots.

"I hear that train a comin'"

From a sustainability point of view, rail makes sense. According to CSX’s “Clean Air Challenge” Web site calculator, one rail car can move 90 tons of freight 1,000 miles, creating 2.6 tons of carbon emissions; moving the same cargo with five filled-to-capacity trucks the same distance produces 8 tons of carbon emissions.

Unfortunately, for many years the rail companies weren’t motivated to develop rail-served industrial parks, and neither were speculative builders and communities much more interested, says Buelow.

“Railroads weren’t very attractive,” adds Kendig, “and frankly a lot of grocery clients really were fed up with the service levels because arrivals were so unpredictable.” Over the years, TranSys filled in rail sidings to create more warehouse space, but when clients now plan large facilities and warehouses, they ask about the availability of rail service.

Economic development groups (EDGs) are hearing the call and responding. Mark Heath, president and CEO of Martinsville Economic Development Corp., says, “Rail transportation is increasingly more popular due to rising transportation costs.”

In Fairfield, CA, Assistant Director Community Development Department-Economic Development Curt Johnston reports that a 23-acre beverage manufacturer has processed permits to extend the existing rail service across the street.

“Fairfield’s Anheuser-Busch brewery,” says Plant Manager Kevin Finger, “ships approximately 50 to 80 60-foot boxcars [of brew] per week to the brewery’s Pacific Northwest territory depending on the time of the year, and receives inbound grain for our brewing operations.”

Austin Consulting assisted Tanimura & Antle, Inc. with site location issues for this building retrofit project in Plymouth, IN, including access to highways and major Midwest markets, competitive local wage and benefit practices and reliable and affordable electric power. Source: Austin Consulting.

Sustainability

Environmental concerns are not only important for conserving vital resources, they’re also important for your image. First, consumers like to know the location you chose to make your products is clean and free of contaminants. Second, thanks to the sustainability efforts of Wal-Mart and its public campaign, consumers are on track with any energy-saving steps you take to reduce your carbon footprint.

Frito-Lay located a snack food plant with the help of the Jonesboro Economic Development Group. The Jonesboro, AR plant set out to reduce 1.6 million pounds of pollution in an EPA Performance Track program by adding a secondary wastewater treatment system, reduce total water use by 31.5 million gallons used during potato peeling and recycle more than 1,000 tons of waste through increased recycling efforts. Site Technical Manager Boyce Sherrill wanted to reduce water usage by 50%, gas consumption by 30% and electricity by 25%. “I’m happy to report that the Jonesboro site reduced those consumption rates by 74%, 67% and 66%,” says Sherrill, who attributes the success to the quality of the workforce in Jonesboro and its commitment to the environment.

In selecting a site, processors can face several sustainability and environmental challenges. Dixon offers two good pointers. First, if a processor is looking at sustainable criteria to guide its real estate selection, it needs to look at LEED criteria before making a decision. Meeting these criteria after the fact may be very expensive or not possible at all.

Second, Dixon suggests preliminary borings (samplings) and wetlands evaluation plus checking for geotechnical issues (typically phase 1 of any site evaluation) be made during due diligence and before signing the final agreement of sale.

Other environmental issues respect the surrounding community.  For example, Joe Shaffer, VP of architectural-structural at Webber-Smith, advises that a meat processing plant shouldn’t be located close to a residential community because the odors will certainly create ill will. Two other environmental issues relate to noise pollution created by the plant and sight pollution caused by tall silos affecting views and skylines. While tall silos or buildings present an aesthetic problem, they may also interfere with airports or create a potential danger in earthquake zones.

For all these reasons, Kupperman advises processors to think long ahead and plan a major buffer zone away from residential areas. He’s seen projects built a quarter mile away with a corn field separating the residential area, only in five years to have the corn field turn into a subdivision. When this happens, variances for, say, operating trucks 24/7 or running a refrigeration truck 100 ft. from someone’s backyard will be almost impossible to get.

While electric rates vary across the country, rates are not as important as reliability, says Schjeldahl. California has had a bad rap for some years now, especially with its brownouts and blackouts in the summer months.

Johnston says PG&E is trying to fix these issues. “PG&E now has a competitive process where it’s selecting additional power plants.” He adds, “Our rates are an issue when it comes to manufacturing. But the manufacturers are responding. Anheuser-Busch is a good example. It’s adding six acres of solar (1.18 megawatts), a wind turbine and a biomass (methane gas) system that converts its wastes into energy.”

Quality people

Workforce issues should never be underestimated when a search is underway for the ideal site. Dr. Pearse Lyons, founder and president of Alltech, looked for a suitable site in the US to start a facility specializing in yeast fermentation and enzymes. Leaving Ireland 25 years ago, he located in Nicholasville, KY with the help of Kentucky’s Cabinet for Economic Development. The cabinet helped finance his $11 million Center for Animal Nutrigenomics and Applied Animal Nutrition. To Lyons, the area is everything he wanted. “We’ve been delighted with the innovators we’ve found in Kentucky. Excellent universities and a strong work ethic are major factors.”

Locating in a city can help revitalize the town, drawing on an ample workforce. Schjeldahl says Austin helped Sunrich Fresh Foods locate in the heart of the inner city in Reading, PA in a brownfield site. Drawing upon a pocket of Hispanic workers, the facility has been a perfect fit culturally. The quality of the workforce was excellent, there were good incentives, and the community benefited as well.

As with Alltech, processors don’t have to locate in or near large metropolitan areas to find the expertise they need. Dippin’ Dots, with its international headquarters in Paducah, KY uses cryogenics to make frozen ice cream beads. “A lot of companies feel like they have to look in metro areas for experts. We have found our experts right here, whether it’s a lab manager or brand manager,” says Terry Reeves, Dippin’ Dots’ director of corporate communications.

Education matters

EDGs can provide information on how well the workforce is suited to the needs of food processing. According to Emily Stock, project manager, business development, Virginia Economic Development Partnership, “Strong occupational and technical training programs, designed to meet the needs of the food processing industry, are provided by the Virginia Community College System, through its 23 colleges. One of these colleges offers an advanced manufacturing and packaging technology curriculum.”

Managing Principal, Cushman-Wakefield Supply Chain Solutions’ John Morris says education and training of operators and skilled technicians are what makes a particular location work. He quotes a recent Chicago Tribune article that reports a real shortage of vocationally trained, two-year community college graduates with technical and engineering skills. While it may be easier to find and train operators to run a machine, the ability to fix the machine when it breaks requires a much higher level of education than high school.

In Fairfield, CA, the mayor’s office has been holding roundtables on key issues such as lean manufacturing, and there has been a targeted effort to develop the “2+2” program, where students in the last two years of high school study technical subjects and then go on to community college to study subjects such as PLCs and mechatronics. Johnston says students graduating from this program are snapped up by the wine industry as it automates.

Politics and taxes

EDGs, state and local governments will often provide several incentives to get a processor to locate in their jurisdiction. Incentives are not necessarily free, and often there is a catch, called a “clawback.” For example, a clawback might be money given for infrastructure based on the agreement the processor will hire so many employees.

According to Kupperman, the good EDGs are getting creative with incentives. However, there are often incentives manufacturers can’t actually use because of their tax structure. Processors must be careful about the clawback provisions. If they don’t make the numbers, they may have to hire people within a geographic area who may not be as qualified as needed.

Schjeldahl has some good advice to help avoid the clawback. When a processor negotiates incentives with the EDG, the obligations on both sides should be spelled out. Processors must be very careful about committing to incentives. It’s usually better to set sights lower and exceed them, rather than promise too much and not be able to fulfill it. Incentives go away at some point in time and should never be a processor’s primary objective. It’s location first, then make the best deal.

Location, location, location driven by supply chain logistics, transportation, workforce quality, resources, energy and sustainability plus several more issues can make successful site selection a daunting experience. Fortunately, a lot of help is available to make the process much easier.  

For more information:

Mark Heath, Martinsville-Henry County (VA)
Economic Development Corporation, 276-403-5940, mheath@yesmartinsville.com
Darrin Buelow, Deloitte Consulting LLP, 312-486-2096, dbuelow@deloitte.com
David Dixon, Facility Group, 770-437-7155, david.dixon@facilitygroup.com
John Morris, Cushman-Wakefield, 847-518-3218, john.morris@cushwake.com
Stuart Kendig, TranSys, 800-505-9221, skendig@transystems.com
Curt Johnston, City of Fairfield, CA, 707-428-7445, cejohnston@ci.fairfield.ca.us
Joe Shaffer, Webber-Smith, 717-291-2266,jshaffer@webbersmith.com
Bill Vaughn, Vaughn, Coltrane, Pharr & Associates, 877-230-5315, bvaughn@vcae.com
Don Schjeldahl, Austin Consulting,440-544-2617, don.schjeldahl@theaustin.com
George Harben, Greater Paducah Economic Development Council, 270-575-6633, george@gpedc.com
Scott Kupperman, A. Epstein and Sons, 312-429-8237, skupperman@epstein-isi.com
Emily Stock, Virginia Economic Development Partnership, 804-545-5746, estock@yesvirginia.org

Site Selection Gotchas

The following is a list of considerations for due diligence submitted by the A&E firms participating in this article. Don’t wait to assess these after closing the deal, or they may become “gotchas.”

    1.    Can permits be completed within your timeline? Are “air permits” available to cover odorous emissions? What about noise?

    2.    Are there unique conditions such as wetlands, geotechnical or other environmental issues?

    3.    Are there unique site remediation problems, superfund site, etc?

    4.    Are there any weather-related problems? What is the probability of flooding, seismic activity, tornados, hurricanes?

    5.    Are there encroaching residential areas?

    6.    Is there road/rail access?

    7.    Are there industrial park rules? What are they?

    8.    What are the height restrictions and why?

    9.    Is there public water/sewer? Or will it be necessary to use a river, creek or lake?

    10.    If fresh water is used as an ingredient, what impurities does it have?

    11.    Is sufficient power available? If not, will therebe any help in supplying it? How reliable is the power?

    12.    If the building is brownfield, does its height meet application needs?

    13.    Are there adequate water flow and pressure for fire protection?

    14.    What incentives are there, and how long do they last? What are the conditions?

    15.    What are the “clawbacks?”

    16.    Is the land free? What is the catch(es)?

    17.    Is there a backstop site or two in mind to inspire competition and prevent the loss of a site due to permit failure?

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