For Manufacturers, a Complex Mix Can Determine Location
Posted July 17, 2018 3:55 p.m. EDT
John Saunders had an unlikely path to becoming a manufacturer.
Born in rural Ohio, he ventured east to study entrepreneurship at Babson College in Boston and then moved to New York, where he worked in the finance industry focusing on real estate.
But he was an entrepreneur at heart and had an interest in competitive riflery. He wanted to produce a rifle target that would reset automatically without requiring a sports shooter to venture into the firing range.
Unhappy with the first prototype, he bought a CNC, or computer numerical control, machine that he kept in his small Manhattan apartment to better understand the manufacturing process. “I realized that if I were to succeed, I needed to be smart about the process,'’ he said.
He began learning the technology on evenings and weekends and built a second prototype that he and a partner sold through their company, Strikemark.
With some success selling it to military and government agencies, he and his wife moved to Larchmont, New York, where he had more room for his equipment.
But he knew he needed even more space to become a full-time manufacturer.
Ultimately, he quit his job at a private equity firm and returned to his hometown in rural Zanesville, Ohio, where he set up shop near his family’s farm. He created a new company, Saunders Machine Works and a YouTube channel on machining, under the name NYC-CNC, — where he has roughly 238,000 followers.
Despite his years in New York, Saunders said he was “in hog heaven” building out his manufacturing business, which now concentrates on making fixture plates. He employs six people and has revenues nearing “seven figures,” he said.
While Saunders’ path had some unique twists and turns, it was not completely atypical.
Small manufacturers — those employing fewer than 100 people — comprise 94 percent of all domestic manufacturers, according to statistics from the Manufacturing Institute, which helps employers build skilled workforces.
Rural manufacturers often stay in their original location because of historic roots, according to Steven Deller, a professor at the University of Wisconsin-Madison who specializes in economic growth and development patterns.
The manufacturers who remain close to — or return to — their roots often play a significant role in their local communities. On average, they are the second-largest regional employer after a category that includes education and social services, according to statistics from the Economic Research Service of the Department of Agriculture.
But the rural labor force is not necessarily less expensive.
Bob Hess, a vice chairman of Newmark Knight Frank, the global real estate company, explained that labor costs were no longer significantly lower in rural parts of the country.
The change is most often the result of a need to hire workers with higher skills than in the past or to entice them to commute longer distances or even relocate.
One defense industry client, whom he declined to name, was based in the Los Angeles area and sought to move a new line to a pre-existing Kentucky plant, but found that the California wages were equivalent — or in some instances slightly lower — than those in Kentucky, he said.
While the cost of complying with California’s strict pollution laws could have tilted the balance, the overall costs of relocation resulted in the company’s decision to expand in its West Coast location instead of moving.
With the advent of lean manufacturing that relies more heavily on automation and robotics, compensation is a smaller portion of overall expenditures. Salaries amount to, on average, 10 percent to 15 percent of the cost of manufacturing a product, according to John Molinaro, the president and chief executive of the Appalachian Partnership.
Other costs, like real estate, energy and taxes, for example, can differ significantly, even within a region. According to a Newmark Knight Frank analysis, property costs can vary by as much 500 percent from one location to another in the Midwest. Energy — whether electricity or natural gas — can deviate by as much as 45 to 60 percent.
These variations make the calculus of factory location difficult, whether the manufacturer wants to expand or cut costs. Site selection can also depend on the industry.
Companies working in the energy industry might cluster in more rural areas in Texas or Louisiana, for example. Other influential factors include where the manufacturer is in the supply chain.
Food companies often choose to be near their suppliers because of concerns about perishability and the expense of shipping, said Sarah Low of the Economic Research Service of the Agriculture Department.
Others who ship globally may focus on proximity to transportation hubs. “Ultimately, location is not dependent on whether the manufacturers want to be in a rural or urban area. It’s where they need to be.”
Essentially, Deller said, “If you’re a startup manufacturer, it may make more sense to be in an urban area where you have more access to infrastructure as well as industry clusters and thicker labor markets. But the disadvantage is the cost of operation.” For example, the Plastek Group, which makes items, like deodorant containers, for the consumer products industry, started in Erie, Pennsylvania.
When it sought to expand, it chose rural Hamlet, North Carolina, at the behest of a customer. “One of our customers is in that area, and we were shipping to them from Erie,” said Don Prischak, vice president for sales and marketing at the Plastek Group. “The cost to the customer was $4 million to $5 million per year, and they wanted us to be closer to save the transportation costs.”
Plastek’s solution was to buy a plant in rural North Carolina and invest $10 million to $15 million to develop the site into a fully automated factory, Prischak said.
Apart from historical location, workforce availability sometimes drives site selection. With low unemployment and a need for highly skilled employees, competition can be fierce for a relatively small pool of potential workers.
Yet, while urban manufacturers may be able to find a larger pool of skilled workers, clusters of related industries sometimes can result in higher wages and the ability of workers to leave one company for another that pays more.
To combat worker shortages, employers are focusing on training. The Plastek Group helps support a program at Penn State Behrend for plastics engineering. Some graduates work at Plastek, but many wind up at competitors. Saunders offers training programs for job seekers as well as hobbyists through Saunders Machine Works.
The workforce shortfall can disproportionately affect smaller manufacturers. To fulfill orders, some, like Dana Jordan, the chief executive of the Cascade Rescue Co. in Sandpoint, Idaho, which makes search-and-rescue equipment, have employees work longer hours until they can hire more people.
Manufacturers are also watching the new tariffs imposed by the Trump administration and their effect on costs. The often thin margins of smaller companies can be wiped out if costs rise, but cannot be offset by higher sales prices.
For small manufacturers, no matter where they are, volatility is especially troublesome. Many factory owners rely on predictable expenses, and sudden spikes can cause disruption to a consistent cash flow.
Other problems can arise when factories have been located — and grown — close to a large customer who then retrenches or moves.
Randy Altschuler, the chief executive of Xometry, an online marketplace based in Maryland that connects small manufacturers with customers, hopes to help bridge that gap.
His company, which recently raised $25 million in new financing and bought MakeTime, a competitor based in Kentucky, uses a proprietary algorithm to help its customers find manufacturers that can fill orders quickly.
Altschuler said the goal was to connect sometimes disparate manufacturers and customers that fills gaps for both.
“Many of these companies are second- or third-generation businesses, but they’re scattered throughout the country,” he said. “There’s so much capability and capacity, but often there’s no access” to other customers outside of their immediate industry.