Where Do We Grow From Here?

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Moving or expanding a company can take many forms, from locating near headquarters to moving cross-country and letting technology fill in the gaps.

By Patrice D. Bucciarelli

WHEN THE U.S. GOVERNMENT responded to the September 11 attacks by beefing up security at ports across the country, Nuclear Safeguards and Security Systems (NucSafe) LLC was a young company poised to respond to an expanding market for its radiation-detection equipment. But as demand for its product surged, so did production, sending the firm's decision-makers looking for an appropriate place to expand its manufacturing facilities.

According to Steve Heiner, NucSafe's chief financial officer, the firm, which has seen its business double each year since its establishment in 1999, had some specific location requirements to satisfy.

"Our primary customer is the federal nuclear industry," Heiner says. "Because we're a government vendor, we needed to locate our expansion within a HUB [Historically Underutilized Business] Zone. Aside from that, we needed labor with the skill sets compatible to our assembly operation."

The solution to the Oak Ridge, Tenn.-based firm's location equation was found 84 miles away - a little more than an hour's drive to the north - in Corbin, Ky. Not only did the Corbin site offer NucSafe the labor it needed to meet its expanded production requirements, but the location also qualified as a HUB Zone under the U.S. Small Business Reauthorization Act of 1997, a measure designed to generate jobs in economically disadvantaged counties throughout the United States.

Firms that locate in HUB Zones receive better access to federal contracting opportunities, and Corbin also offered NucSafe even better marketing connections to its biggest customer.

In fact, according to New York-based business management consultant Bill O'Connell, the expansion site that offers the opportunity to get a leg up on competition in order to win and maintain a major customer is often the one that wins the site selection sweepstakes - even if, he says, that site is far afield from a company's headquarters or primary operations facilities.

"A lot of expansions are made in order to get closer to or better connect with the customer," says O'Connell, who provides finance, management, and human-resources consultation for a variety of industries. "But how much proximity to the home office figures into the decision depends upon the manufacturer. The first question is, What is labor like? What is it going to cost me to have somebody on the ground?"

Weighing Proximity

For NucSafe, proximity to its research and development division and primary manufacturing operations figured significantly. According to Heiner, having a location within roughly 60 minutes' drive-time allows the firm's executive and management teams to keep tabs on the fledgling expansion operation and to shuttle workers between the sites for training.

"We're served by secondary air service here," Heiner explains. "It's not as easy to get in or out of here as it is, say, in New York. So it makes sense to us to be closer. Also," he adds, "there is going to be some training involved at our Oak Ridge site for the labor that will be working in Corbin. When you're moving around large numbers of people, driving just makes more sense."

The nearby location also makes sense given NucSafe's size and youth, says Bill Cannis, vice president of the Manufacturing Institute, the education and research arm of the National Association of Manufacturers (NAM). That's in part because many small firms are more focused on taking advantage of local clout to grow close to where they're planted. And young ones often don't have the human resources it takes to scout and establish operations far from home.

"For a smaller company adding just one plant, proximity to the original operation is a good way for them to begin to grow," Cannis says. "Larger companies tend to think more globally. When Caterpillar began, its plants were concentrated in Illinois because it was headquartered there." he says. "Now it has plants all over the United States - in Indiana, Mississippi, and in the Carolinas."

Growing Big

When Sauer Danfoss went hunting for a spot to expand its operations, the manufacturer of hydraulic transmissions, steering components, motors, and electrohydraulic controls searched nationwide for an appropriate site. For the firm - which has manufacturing plants scattered around the globe and in seven states including Illinois, Minnesota, South Carolina, and Oregon - the distance from plant to plant or from its U.S. headquarters in Ames, Iowa, wasn't a factor.

The firm's Lawrence, Kan., location is just 260 miles away from its Ames, Iowa, headquarters and some 575 miles from its corporate offices in Lincolnshire, Ill. For key personnel traveling among the firm's Midwest factories, that's a shuttle trip from nearby Des Moines or a short flight from Chicago's O'Hare Airport. But getting to the floor of Sauer Danfoss' Hillsboro, Ore., plant requires a trek of more than 1,800 miles. So, according to Keith Folkmann, director of plant operations for the firm's Lawrence facility, when Sauer Danfoss establishes new facilities or acquires existing ones, teams suited to operations at each location are culled from well-established operations and dispatched to the new site.

"We pulled together a startup team and those people did a lot of traveling," Folkmann says. "After that we rely on technology. We have a teleconferencing system that allows us to communicate with any plant anywhere in the world in real time via telephone and the Internet, and we do outsourcing."

According to Steve Davies, chief executive of the Alternative Board for Nassau/Long Island, N.Y., a franchise company that brings together small-business executives to create advisory boards in cities across the United States, distance becomes relative on balance with potential savings on a manufacturer's cost of doing business and customer-base proximity. In the best of scenarios, manufacturers can choose locations where production-related services such as equipment repair and maintenance, and even some customer services, can be outsourced, and travel-related expenditures - both financial and temporal - can be streamlined.

"I think a rule of thumb for considering a distant expansion location is, How am I going to manage it?" Davies says. "If I'm going to be leapfrogging from city to city, I have to ask, Can I farm it out?"

In fact, Folkmann says, in Sauer Danfoss' case, outsourcing plays a significant role in operations at geographically diverse plants. Certain materials, even some labor, are provided by outside contractors depending upon the needs and location of each plant. The practice is a cost saver, Folkmann says, and a way for each plant to get what it needs when it's needed. The key, he says, is to cultivate relationships with contractors who can provide consistency from location to location.

"About a year and a half or two years ago, we began contracting for temporary workers at individual plants," Folkmann explains. "Eventually we were able to enter a North American contract agreement with one temporary-labor firm to provide temporary workers for all our locations at a cost savings to us."

According to NAM's Cannis, outsourcing and advances in communications technology such as video conferencing have freed manufacturers from placing their facilities in geographically contiguous locations. But ultimately, he says, bread-and-butter elements such as labor, tax climate, and elbow room figure more prominently than how many clicks one facility is from another - or from the company's home base.

"Manufacturers typically need lots of land, and you can't find that kind of space in more urban settings where older plants may be located, Cannis says. "Most importantly, though, manufacturers need transportation routes and skilled labor. If those things aren't there, manufacturers aren't going to go there."

"Beyond that," he says, "it depends upon what the manufacturer is looking for. When GM sited its Saturn plant, it went to Tennessee in part because it wanted a location that was totally different because they wanted to communicate that the product was totally different."

Expanding Far and Wide

Los Angeles-based CS International, a manufacturer of kitchen textiles for major retailers under the Cecil Saydah label, was looking for relief from California's high-ticket costs for labor, benefits, and utilities when president Harold Schierholt sent out teams to search for a location for its new manufacturing facility. According to Schierholt, the scouts examined potential sites in several Midwest and Mid-South locations before settling on Somerset, Ky. - more than 2,000 miles east of the home office.

"We've been in business in California for 60 years," says Shierholt of the firm that does some $80 million in sales annually. "But the cost of doing business there and the cost of trucking product to our customers was such that they were driving up the cost of the product. And nobody is going to pay more for a potholder just because it was made in California."

Still, according to Shierholt, a friendly business climate was just one of CS International's location selection criteria. A Midwestern site was critical for serving major customers while containing distribution costs at the same time. With all that in mind, he says, his site selection team examined numerous locations before choosing Somerset, where a facility was waiting, incentives were sweet, and skilled labor was plentiful. The firm's board of directors and its research and development and design divisions will remain in California, along with some manufacturing and West Coast distribution operations, to serve clients there.

While the new plant gets up and running, Schierholt says he and other key personnel overseeing the process will travel between Kentucky and California frequently - at least for the short term. After that, he'll rely on technology to bridge the gap via twice-weekly videoconferences. And, unless a problem demands that he be on the ground at either location to find a solution, Schierholt says, crisis management will also take place electronically.

"If there's a problem to be solved, I'm more likely to go downstairs, get in front of a 32-inch screen, and try to solve it than I am to fly back and forth," he says.

Though he admits the notion of keeping the two distant operations is nerve-racking, Schierholt maintains that the economics of the move are sound. "It was something we had to do," he says. "It was the way to go without sending our operations offshore - which was something we definitely didn't want to do."

Ultimately, says Steve Davies, economics still dictates whether it's in a manufacturer's best interest to grow close 'to where its planted or extend its presence far from home - even as communications technologies render distance nearly meaningless and states continue to aggressively court manufacturers for the jobs they generate.

"The way I always consider it, if it takes long enough to get there - more than two hours away by car or by air," Davies says, "it might just as well be on the other side of the country - as long as the numbers make sense."