Powering Logistics Development
What energizes logistics development? From access to infrastructure and proximity to a population center, to tax, energy, and land incentives, here are the driving forces behind site selection decisions and major investments.
Businesses considering where to expand or move their operations evaluate myriad factors. Among the top considerations, says Jeremy Sowders, economic development manager with Hoosier Energy Economic Development, are access to a skilled workforce; proximity to a population center and customer base; easy access to infrastructure like interstate highways or ports, so the company can move goods efficiently; and a location that can meet the needs of the company. In some cases, tax and other incentives influence their decisions.
Incentives can play a role in closing deals, but typically aren’t the first consideration. “The most important site selection question is finding the right place for a facility to operate,” says Michelle Comerford, project director and industrial and supply chain practice leader with Biggins Lacy Shapiro & Company, specialists in site selection.
Once a company has narrowed its options and decided on a handful of places that should work, it assesses the initial and ongoing costs. That’s generally where incentives come into play, Comerford says. For instance, a company may check into any offsets available to help cover the cost of needed infrastructure upgrades.
Changing Distribution Networks
Over the past two years, nearly three-quarters of supply chain leaders adjusted the size and number of locations within their supply chain networks, a recent Gartner survey finds. “In a fragmented world, global firms have been making changes to their heavily cost-optimized, one-size-fits all networks, and now favor a mix of global, regional, or local elements,” states Kamala Raman, vice president with Gartner’s supply chain practice.
This “once-in-a-generation shift” of many companies’ manufacturing footprint is a result of the shutdowns and disruptions the pandemic caused. To protect against future supply chain disruptions, “we see a shift to more regional production, all in line with a mindset of ‘make local, for local,’” Comerford says.
Customer demands for speedier access to goods are also driving these changes. “Companies have to bring more production and inventory closer to customers,” says Gregg Wassmansdorf, senior managing director of global strategy and consulting with Newmark, a global real estate services firm. Wassmansdorf also chairs the board of directors for the Site Selectors Guild, a global organization of the world’s foremost location strategy and site selection consultants.
Along with customers, companies want to be close to workers, Sowders says. Yet even as many companies look for access to population centers, they also need affordable properties. In trying to balance these often conflicting goals and hit “the sweet spot,” some consider properties just outside a metro area. “While this was already happening, the pandemic accelerated the shift,” he adds.
Higher transportation costs and the truck driver shortage also are impacting distribution network locations, Newmark research shows. “Firms looking to control costs and appeal to a broader-based potential labor pool may expand the number of warehouse/distribution points along the supply chain,” according to the firm.
Industry Types Impact Incentives
In general, economic incentives have been more prevalent in manufacturing and technology rather than distribution activities. These sectors are generally known for offering jobs that pay well and require highly skilled workers. “Incentives are a tool for economic developers to incent growth that’s considered desirable for a local area or region,” Wassmansdorf says.
Many tax and property incentives are calculated and awarded based on the investment level, the number of jobs a business is expected to create, and the multiplier effect the investment and jobs likely will have on the community, Sowders says. Typically, the greater the number of higher-wage jobs created and the larger the capital investment, the greater the incentive.
The jobs that warehouses and distribution centers tend to create historically haven’t been seen as highly skilled or offering the types of higher-wage positions that more technical operations often do, Wassmansdorf says.
However, that’s starting to change as more distribution operations implement technology. The global warehouse automation market is forecast to grow at a compound annual rate of 15%, hitting $41 billion in 2027, LogisticsIQ reports.
Sustainability Grows in Importance
The expression “greening the supply chain” has been around a long time. Now, however, more companies are responding to the challenges posed by climate change, Wassmansdorf says.
Among other steps, they are connecting with their utilities to evaluate renewable energy sources and trying to cut physical waste from production processes. “Many companies are making more focused efforts to figure out how to de-carbonize the global footprint of manufacturing and supply chain operations,” he says.
While sustainability might not lead the site selection process, “it’s definitely on the list,” Comerford says. When companies pick final locations, those that can provide more support to help them meet sustainability goals might gain an edge, she adds. That’s particularly true if the company sells to consumers, or operates in the sustainability market in some way.
Similarly, more agencies that award incentives are seeking companies that focus on environmental, social, and governance (ESG) initiatives. “This can influence how discretionary incentives are awarded and how companies comply with incentive program performance requirements,” Wassmansdorf says.
Sowders says he sees a growing number of communities using incentives to attract electric vehicle manufacturers. These incentives might include agreements to build the infrastructure—including roads, sewers, and water systems to the sites—in addition to tax breaks.
Tight Labor Market Has Mixed Impact on Incentives
With many employees continuing to work remotely, numerous central business districts are struggling. The national office vacancy rate neared 18% in the second quarter of 2022, up from about 13% in 2019, according to Cushman Wakefield.
In one sense, this trend doesn’t impact most supply chain jobs. As Wassmansdorf notes, “products still need to be made and transported, and that requires employees to be on site.”
However, the tight job market is prompting more supply chain and logistics companies to implement automation and robotics. As they do, the workers they bring on board need to have higher literacy and numeracy skills and be trained to work effectively in a robotic environment, Wassmansdorf says. This change may also make these projects more attractive to those awarding incentives.
The currently tight labor market can also work against companies, however, as it prompts some economic development agencies to ask if they even need to award incentives.
“If the primary goal is to create jobs, and there aren’t enough people to fill jobs, there’s a fundamental question, about the need for incentives,” Comerford says.
Still, many of the jobs now available offer high wages and require skilled employees—exactly the types of jobs many communities want to attract. The upshot? “We see many states and areas continue to be aggressive when it makes sense for them,” Comerford says. “But, they can be selective in what they’ll be aggressive for.”
Hoosier Energy: Assisting New and Expanding Businesses
Hoosier Energy’s Economic Development team serves 59 counties across central and southern Indiana and southeastern Illinois, and prides itself on its ability to help companies that are new or expanding their operations to do business in the region. One of its target industries is logistics.
The team possesses expertise in site location, economic impact analyses, property tax studies, local and state incentives, and planning and zoning, among other skills. The group is part of Hoosier Energy, a nonprofit generation and transmission cooperative serving 18 local member cooperatives.
Indiana—the Hoosier state—boasts numerous qualities attractive to transportation and logistics organizations. It’s first in pass-through highways, fourth in total freight railroads, and fifth in total tons shipped outbound by truck. It’s home to the second-largest FedEx hub around the globe and the sixth largest cargo airport in the country.
The Hoosier Energy region has 1.4 times as many residents working in transportation and logistics as the national average. More than 120,000 truck drivers live within a 100-mile radius of Hoosier Energy’s headquarters in central Indiana.
The state boasts three international-level ports:
- The Port of Indiana–Burns Harbor connects the midwestern United States to the Atlantic Ocean through two inland waterways.
- The Jeffersonville Port offers access to the Gulf of Mexico through the Ohio and Mississippi rivers.
- The Port of Indiana-Mount Vernon is one of the largest inland ports in the country. It’s 153 miles from the confluence of the Ohio and Mississippi Rivers and connects the Ohio River Valley with the Gulf of Mexico.
Focusing on Renewable Energy
Hoosier Energy’s Economic Development Rider (EDR) is modeled like a property tax abatement but applies to electricity rates. It phases in over the organization’s first six years, starting at 30%, and steadily dropping to 5%, for an overall savings of about 17.5%, Sowders says. To qualify, organizations need a minimum monthly demand and must meet job creation and/or capital investment criteria.
Hoosier Energy has long focused on sustainability and renewable energy. It operates 10 utility-scale solar sites, along with a range of other sources of renewable energy.
As a nonprofit cooperative, Hoosier Energy can work with speed and flexibility to assist new and expanding businesses.
“We’re usually a little smaller and a little more nimble and more local than investor-owned utilities,” Sowders says. “We know people by name.”
Steps to Take When Considering Incentives
Companies should consider these actions when deciding if and how to leverage incentives, says Jeremy Sowders, economic development manager with Hoosier Energy Economic Development:
- Identify your most important location criteria. Is it an abundant workforce? Or do you need a large footprint for your operation? Your answers should inform your search.
- Once you have a good idea of the geographic locations that will work, contact the state economic development corporation or utility. Most can help identify sites and incentive opportunities.
- If you look at multiple states or even multiple countries, consider engaging one of the many consultants who understand incentives. “They can help cut through a lot of the uncertainty and murkiness so you can make an apples-to-apples comparison,” says Sowders.