Location decisions in times of uncertainty

Area Development Site and Facility Planning, Oct 2001 by Schriner, James A, Genet, Peter

SITE SELECTION

In light of the recent terrorist attacks, organizations should review their facility location strategies both at home and abroad for the short as well as long term.

THE SEPTEMBER 11 World Trade Center attack represents a disaster no business-risk model ever seriously considered. Yet it is not that one act, but rather the confluence of events over the last year, that will change site selection decisions forever.

Centralization: the "Mega" Dilemma

Over the last five years companies shifted to a "mega" operational model. Companies established campuses housing 5,000, 10,000, and - in some instances 15,000 employees. Warehouses grew to two and three million square feet. Executives centralized operations because it was easier to manage a single operation of 2,000 employees than four facilities of 500 persons each.

Economies of scale initially drove the consolidation decision. Yet the real reason for "bigger is better" was the perceived lack of management talent and span of control issues. In addition, recent prevailing wisdom suggested that only a handful of select metro areas had the infrastructure necessary for many mega headquarters and R&D functions, especially as operations became more dependent upon technology.

The first chink in this strategy was made several years ago as companies experienced problems staffing operations. Acceptable annualized turnover of 10 percent or more translated into finding, hiring, and training hundreds of replacement staff, while also trying to meet recruitment goals in an effort to substantially grow total headcount. Competition and limited, qualified labor caused salaries to escalate rapidly.

The second setback to the mega strategy occurred last year, when the economy began slowing. Companies no longer needed large campuses or the huge expenses associated with their operation. But they were stuck. They were unable to easily dispose of large portions of unneeded space in their campuses that were configured for single occupancy. The market for mega facilities had contracted as quickly as the financial markets.

The end of the consolidation era occurred with the September 11 attack on the World Trade Center. The attack brought into sharp focus the risk of concentrating operations in a single location. The disaster not only impacted the local vicinity of Lower Manhattan, but also created business disruptions throughout the region.

Risk Management through Decentralization

Organizations will need to review their scale of operations, cost structure, and the risk associated with where they physically operate. Whether companies were located at "ground zero," or simply in the region, businesses experienced substantial problems with access - workers found it took hours to commute to and from work or around the region, telecommunications were disrupted, and people were distracted.

And the impact of this action is not just limited to New York or the other major U.S. cities - It will alter the decisions companies make on how and where they locate operations in the world. How will site selection change? New critical success factors are likely to be considered:

Disasters

* Prior to the terrorist attack of the World Trade Center, locations in North America were assessed for their potential exposure to natural disasters. It remains important to decentralize operations in regions susceptible to natural disaster - weather pattern (i.e., snow, hurricane); earthquake; heat (utility brownouts); etc.

* Since September 11, location assessments must include reviewing communities and regions for their susceptibility to a man-made disaster (terrorist attack).

Facility Network

* Organizations must evaluate how operations are deployed. What is the ideal number of facilities and their configuration? A cost-benefit analysis and business-unit-proximity best practices will provide a basis for facility network redeployment.

* Businesses must also ask themselves how far apart operations should be to minimize particular regional risks to the network yet allow for reasonable drives to avoid disruptions to the airtraffic system.

* And they must review operational redundancy to insure that a potential business disruption in one part of the network does not affect the organization's effectiveness in serving customers.

Strategies

* Operating critical organizational functions on a 24/7 basis provides flexibility. A "follow the sun" deployment strategy, where similar functions are located at various time zones throughout the -world, ensures that a localized disruption creates only minimal risk to the overall operation.

* An organization should review its facility image. A marquee building may send the wrong image to shareholders in a down market. It also has the potential of being a target in a world where many Western firms and multinational corporations are vilified. A well-deployed organization with a small headquarters may be perceived as more flexible and resilient.

* Political risk has always played an important role in global location assessments. It is even more important now. It is important to note that the political landscape is changing more rapidly today and organizations must remain flexible when locating in certain countries.