Supply-chain managers are all too aware of the pressures that global competition is forcing on the traditional boundaries of time and space. This irreversible trend is now being reflected across entire enterprises in how they manage their global site-location strategies.

According to CoreNet Global, the Atlanta-based association for real-estate professionals, all corporate site-location decisions are becoming less tactical and much more strategic. In fact, a CoreNet task force report called The Strategic Role of Place predicts that by 2010 nearly all Global 1000 corporate facility decisions-from manufacturing plants, to distribution centers, to financial headquarters, to research and development centers-will be based on highly flexible strategies that take maximum advantage of technology, outsourcing, partnerships, resource management and extended business processes.

Barbara Hampton, vice president of CoreNet Global's 2010 corporate real estate projects, says findings in The Strategic Role of Place report have special significance for the supply chain industry.

"Rather than make site-by-site decisions on the lowest cost location for the next plant or DC, companies are beginning to look at how any site decision impacts their entire supply chain," she says. "Such decisions are now holistic. Companies' site-location decisions are based on a multitude of forces including technology, labor, loosening of global trade barriers and international redistribution of capital, just to name a few."

Even demographic forces are becoming a major decision factor. Birth rates are declining in traditional markets such as Japan, the U.S., and Western Europe. As a result, shortages of hourly workers, especially knowledge workers, will force companies to seek out locations where they can find the skills they need. Countries, cities and economic development authorities must devise ways to provide the skills and training needed by the world's leading companies.

Dennis J. Donovan, a principal with the site location firm of Wadley-Donovan-Gutshaw Consulting and a member of CoreNet's 2010 Strategic Role of Place task force, says that about 20 percent of Global 1000 companies already have adopted this holistic approach to site location. "By 2010, we estimate that two-thirds of the world's largest corporations will make all of their site-location decisions based on strategic, global considerations," he says. "What is just as important is that these global operations will be networked to the extent that each can work virtually with other locations anyplace in the world to take full advantage of its portfolio of locations."

Fitting right into this model is the supply-chain trend toward outsourcing of logistics, manufacturing, sourcing and even data processing. Especially in industries with short product cycles and fast-changing supply-chain relationships, there is an underlying need to build tremendous flexibility in location of people, materials, production capacity, inventory and information.

"The reality of most supply chains is that they need the ability to scale up or down as market conditions dictate, and move to where the resources and markets are," says Donovan. "Outsourcing certainly provides the necessary flexibility. Whether a function is outsourced or it remains with the organization, flexibility must be built into the site-location strategy with such techniques as joint ventures, short-term leases, contract labor and, most important of all, exit strategies in place for all facilities."

Another decision factor that has gained more importance is risk management. Just as an investor builds a balanced portfolio around a diversified collection of stocks and bonds that react differently to varying market conditions, a company's portfolio of facilities must be diversified and balanced to deal with all types of business risks.

"A company that considers locating a plant in some third-world country because of local material supply might ultimately reject it because of underlying political risks or economic instability," says Hampton. "But if that company looks across a portfolio of facilities with different risk factors, the third-world site and its material advantages might become acceptable. By looking at the big picture, risks and reward take on a different balance."

Risk factors to be considered include those commonly found in developing countries such as political, social/ethnic/religious, anti-Western sentiment, currency stability, legal issues, etc. But according to Dennis Donovan, the list also includes risks that are becoming commonplace in developed countries such as intrusive labor protection laws, aggressive unionization and restrictive business regulations.

"Certain parts of the world are just becoming so business unfriendly that they are no longer good places to operate," says Donovan. "France and Germany are good examples."

The combination of all of these factors is rapidly changing the site-location decision process for major multinational companies. Traditional sites in Western Europe are giving way to ones in Eastern Europe. India is becoming as attractive as China for high-volume manufacturing. Emerging countries such as Cambodia and Vietnam and Tanzania are being considered as low-cost production centers.

Another key finding by the Strategic Role of Place task force is that operating-level managers will play a much more direct role in site-location decisions. The corporate real-estate department will play a leadership role and work with operating managers, but it will not be in charge of site-location decisions. This shift is especially true with supply-chain facilities, according to Donovan.

"Real-estate professionals are increasingly becoming integral members of the supply-chain organization," he says. "Real estate is reporting through the supply-chain organization to become more integrated with logistics, manufacturing, marketing and IT to develop a whole corporate infrastructure that is working together in unison, not just as a silo."

The quintessential company for such strategic location is Intel. The company's regional real-estate groups are constantly scouting for new locations to support Intel's marketing and manufacturing strategy. Before actual capacity is needed, the corporate real-estate managers identify specific locations in countries targeted for future growth and negotiates property, government approval, and incentive issues. This pre-qualification legwork ensures that, once given the go ahead, the corporate real-estate department can rapidly carry out a project. Intel's advance planning supports its "first-to-market" strategy, substantially reducing the time from the initial decision to commencing the business operations. This often gives Intel a 12- to 18-month head start on competitors entering a new country or expanding in an existing one.

"The high technology business model is predicated on being an 'early mover' rather than a 'follower,'" says Michael Edwards, senior manager of global development at Intel. "The same logic applies to our location strategy. To that end our global site-development team identifies and positions specific sites in emerging locations for future projects. This approach allows Intel to deliver specialized assets, like semiconductor facilities, by as much as 12 months faster than a conventional requirement-based asset approach."

Three Strategic Drivers
Despite these external forces, the enterprise of 2010 will make its site-location decisions based on its own corporate strategies. The Strategic Role of Place task force sees three such drivers that are shaping the global location strategies of multinational corporations:

• Market access and penetration

• Cost reduction

• Knowledge acquisition

For example, health sciences technology company PerkinElmer has operations in 38 countries across a 3.3-million-square-foot portfolio. While its sales, distribution and service centers always will remain near key markets and its customers, the company is looking to shift more manufacturing to lower cost areas.

"As manufacturing costs continue to rise in the U.S., it is getting harder to justify keeping our manufacturing here while continuing to be competitive," says Ed Zielinski, the company's head of real-estate development. Zielinski isn't convinced that Asia will be the final answer for PerkinElmer's manufacturing. "Some Eastern European countries could be good choices."

PerkinElmer is in the process of outsourcing portions of its back-office processes to India. "We have a partnership with a company that is already set up in India," says Zielinski. "We will remain in the partnership until we are comfortable with the local environment and have enough scale to start our own operation in India."

"These moves don't happen overnight, though," adds Zielinski. "The challenges involved with moving out of a large manufacturing location require following a good exit strategy."

But costs are only part of the equation. Because supply-chain managers are very much involved with sourcing, manufacturing, logistics and other cost-centric functions, they may not realize that there are other drivers for site-location decisions.

"From a broad, strategic standpoint, market access is the most important driver for most site-location decisions by a factor of three or four over low cost," says Donovan. "Every business has to connect with its customers, and that is all about market access, sales, distribution, after-sale support and similar activities near the customer base. While manufacturers need low-cost areas for labor, materials, taxes and so on, you will see more attention on market penetration around the world to be competitive."

For example, Donovan points out that United Technologies makes many of its Carrier air conditioners in China. The strategy is not just to capture lower manufacturing costs, but also for market penetration into parts of the world where these products are still very much in the growth mode.

Knowledge resources are an important driver as well. When Intel was looking for a manufacturing site in Latin America, it gave priority to places with an infrastructure of suppliers, industry expertise, raw material inputs, and legal frameworks. Intel selected Costa Rica. Other Central American locations were less expensive, but Costa Rica had a more well-established physical infrastructure and a deeper pool of skilled labor. Costa Rica displayed moderate cost levels with the necessary resources to both support daily business operations and minimize business disruption risk from events such as electric power outages. These benefits ultimately outweighed the allure of business costs that were 20 percent to 30 percent lower in other area locations.

So where are the countries and cities around the world where multinational corporations should be considering for their supply chain and other facilities? CoreNet Global's Strategic Role of Place task force enumerates the leading candidates and divides countries (and cities) into tiers based on their attractiveness and readiness for various types of facilities, including supply-chain facilities.

The consensus winner in the near term is definitely China, with India coming on strong. Among the second tier of emerging countries that will witness significant direct investment by MNCs are Indonesia, Malaysia, Brazil, Chile, Argentina, Russia, and Eastern European countries that are European Union members. A third tier of countries comprises both low-cost destinations and sizable emerging markets such as Vietnam, Thailand, Pakistan, Sri Lanka, Cambodia, the Philippines, Central America, and parts of the Caribbean.

"China and India are the only two tier-one countries," says Dennis Donovan. "They combine low-cost manufacturing with large populations, so they have the dual advantage of satisfying the business needs of MNCs seeking to penetrate growth markets, while at the same time minimizing operating costs."

China is now the place where every MNC wants to be, both for cost savings and for market access. But Donovan cautions that these investors need to realize that penetrating the domestic Chinese market is a long-term strategy. For most companies, profits are years in the future, not quarters. For example, Donovan points to Amway, the direct-sales consumer products company with a worldwide distributor network. Amway has been in China for many years and has extensive coverage in many areas of the country.

"They started a long time ago, worked with local suppliers and with local distributors," says Donovan. "Business in China requires local partners at every level."

An area of growth for foreign companies that Donovan expects to be the next big success is consumer goods manufacturing for distribution to the Chinese market through Chinese retailers. Although Chinese consumers are not yet a large, wealthy class, there is growing demand for high-quality foreign goods, but it still takes local partners to understand the many individual market segments that constitute China today.

"China has a billion people, but it is made up of countless small markets," says Donovan. "It will be a long time before many U.S. companies have the market knowledge, and the political connections, to go it alone in China," he says.

The same can be said about distribution in China. Donovan does not expect to see very many U.S. companies building their own DCs in China any time soon.

"It is just too difficult for foreign companies to penetrate market at the retail or even wholesale level," he says. "DCs as we know them will come, but it will take much more experience, business scale and government acceptance to allow this market access to develop. The first wave will probably be consumer goods. Industrial goods distribution will require tremendous rationalization of state-owned producers, and that is some time off."

India is in direct competition with China because of its billion-person domestic market and its low costs for manufacturing and high-skill support tasks, including software development.

"India may be slightly ahead in many of the knowledge areas, and it also has the advantage of wide-spread knowledge of English," says Donovan. "India may also be slightly ahead in terms of logistics infrastructure, but like China, it has problems with roads, telecommunications and electric power outside of the major cities."

Among the second tier of emerging countries that CoreNet Global expects to witness significant direct investment by MNCs, especially in the supply-chain arena, are Indonesia, Malaysia, Brazil, Chile, Argentina (once economic reform takes hold), Russia, and Eastern European countries that are EU members. The latter now includes the Czech Republic, Poland, Hungary, and the Baltic states. As these countries continue to successfully recruit foreign direct investment, business costs will invariably rise. Therefore, in the next several years there will also be a profusion of investment in even lower cost Eastern European countries to include Bulgaria, Romania, Slovenia, and the Slovak Republic. Longer term, the Ukraine and Georgia could become prime destinations for MNCs if economic and corruption reform takes hold.

Among the third-tier, low-cost nations that are beginning to attract MNCs are Vietnam, Thailand, possibly Pakistan (English-speaking, but the terrorism threat must be addressed), Sri Lanka (if the Tamil insurgency ends), Cambodia (if recent economic reforms have staying power), the Philippines, Central America, and the English-speaking Caribbean. Low-cost South American countries that could vault into the third tier in several years include Ecuador, Peru, and Paraguay.

Africa has always attracted foreign investment in the natural resources sector (oil, gas, minerals), but a number of countries are becoming candidates for value-added industries. According to Donovan, South Africa, Botswana, Swaziland, Maurisus, Ghana, Senegal, Mozambique, Tanzania and Morocco have instituted economic reform and trade liberalization, and have invested in infrastructure, and are now cost-effective locations for manufacturing.

"The big problem is AIDS," he says. "Depending on where you are in Africa, 25 to 50 percent of the population has the disease. Not only is this a human tragedy, but also it has devastated the workforce. If a dent can be made in the spread of and improvement in the treatment of this disease, these countries could thrive."

Of course, site-location decisions are made at a very local level, so supply-chain managers and real-estate professionals need to know which cities offer the advantages their business needs.

In China, the eastern and southern parts of the country have become the world's shop floor with factories crowding areas around major port cities such as Shanghai. These areas are so over-developed that the government is offering incentives for companies to locate in lower cost, less developed areas in central and western China. Cities like Lanzhow, Chengdu, and Kunming will become increasingly popular destinations, though logistical problems may be a hindrance as these markets first develop.

A similar situation exists in India. MNCs have flocked to locations such as Bangalore, Delhi, Mumbai, and Hyderabad. In the future, less recognized cities will benefit from foreign investment for manufacturing and distribution because all operating costs are much lower. These include Ahmedabad, Surat, Lashkar, and Bandar.

Other Places
The challenge for those countries or cities that have established themselves as a good place for manufacturing, distribution of other supply-chain tasks is to maintain their corporate base even after other, even lower-cost areas emerge as viable options.

Mexico, for example, is no longer the low-cost producer in the developing world for most products. In fact, many companies that had invested in maquiladoras and other facilities in Mexico have shifted their production to Asia or lower-cost options in Central America.

While Mexico has its challenges, most experts believe it will continue to be an important site location option for U.S. companies' extended supply chains. Donovan points to how Monterrey and Guadalajara have taken advantage of the many years of U.S. investment to develop a managerial class, skilled labor, a supplier base and specific expertise in automotive, high-tech and other industries.

"Mexico can build more complex products than many other low-cost competitors," says Donovan. "Its proximity to our home market and the cost advantages of the North American Free Trade Agreement are also important advantages. There still is tremendous need for worker training and infrastructure development, so time will tell how successful they will be as competition heats up in Latin America."

Developed countries in North America and Western Europe are technically in the third tier because demographics and high costs strongly encourage the job export. But these countries also have the wealthiest consumers. All MNCs need to serve these consumers with sales and distribution support facilities in close proximity. The U.S. will continue to be a magnet for MNCs due to its market power and wealth. Canada will remain an option for MNCs looking to serve the U.S. market at a lower cost. In Western Europe, the U.K. represents a sizeable stand-alone market. MNCs interested in pan-European locations also will gravitate toward countries such as The Netherlands, Ireland, Spain, Portugal, Belgium (especially for distribution), and Northern Ireland.

Despite their wealth, many developed countries have developed bureaucracies hostile to business that limit the potential for profit and growth.

"Most MNCs are already in Western Europe, so they have on-going operations to service these consumers," says Donovan. "Unless there is a very good reason, I would not expect any significant increases in MNC investment there."

An often-overlooked element in the site-selection process is the quality of input from the countries and communities that are, or could be, under consideration. According to the Strategic Role of Place task force, however, few economic development groups have grasped the global dynamics driving MNC location decisions. Even fewer economic development agencies have "branded" themselves or their benefits to target companies. Without this input from the communities, good matches between themselves and the companies and industries they are targeting are far less likely.

"Economic development agencies and communities will have to compete on a different plane," says CoreNet's Hampton. "They can no longer succeed by just touting low costs or big tax incentives. They need to invest in capabilities that target companies need, and then they need to brand themselves based on those capabilities."

For example, Cambridge, Mass, San Diego and Raleigh/Durham, N.C. have branded themselves as life-science centers with so much success that few other cities in the U.S. are even considered.

"These places have taken the initiative to attract the people and knowledge to be life-science centers," says Hampton, adding that logistics and supply-chain activities are no different. Communities that are positioning themselves for supply-chain facilities first need to invest in the infrastructure, the technology and the skilled people. Then it's a matter of branding and focus to stay ahead of the competition.