Re-printed from Ontario Industrial Magazine

When you plan a new facility it is clearly important to determine the optimum size , but what is the best process for making your decision ?

The first step is to analyze your operation at current volumes and at the volumes that are forecast for the future.

The second step is to examine the range by which volumes might vary over periods of 5 Years, 10 Years and beyond based on your best assumptions regarding market volume, market share and product mix. You will also need to build in the impact of strategic plans for adding or exiting customer segments, adding or abandoning product sectors and any changes that you foresee in geographical territory coverage.

Third, the impact of technological change upon demand, product mix and operations must be considered.

Fourth, will volume changes be evenly spread throughout the year or will there be “seasonality” that dictates significant peaks and valleys in activity from one period to another?

Unless you are in a very mature and stable industry these projections will be at best crude estimates, with their reliability dropping as the time-frame lengthens. For this reason  your forecasts for each year should be expressed as a range from “Best Case” to “Worst Case” with a larger spread between the extremes for each succeeding year, and with seasonal peaks and valleys identified for each scenario.

While all of this seems obvious, the point is that there are so many variables for most businesses that producing a reliable long-term forecast is very difficult, therefore the objective is to have a facility that can accommodate a fair amount of flexibility in volumes.

The  fifth question is whether the operation is currently running 24 hours, 7 days a week and if not, can volume changes be accommodated by increasing the hours of operation?  If adding shifts is not an option then volume changes above and beyond what can be handled by increased efficiency will require additional capacity and therefore additional space.

At this stage it is helpful to work with a professional facility planner to calculate the following :

A/ Determine the space and layout that would most efficiently handle your “Best Case” or highest volume, then calculate your total Occupancy Costs and your Labor Costs under this scenario.

B/ Determine the space and layout that would most efficiently handle your “Worst Case” or lowest volume, then calculate your total Occupancy Costs and your Labor Costs under this scenario

C/ The difference in Total Occupancy Costs now represents the maximum financial risk if you planned for your Best Case but in fact your Worst Case materialized. In practice this risk would either be increased or partly offset by changes in unit labor costs arising from the more spacious layout. Your facility planner will be able to identify these and thus determine the “Net Risk” of excess space.

D/ Next, assume that you planned your Worst Case volume but it turned out that the opportunity for Best Case had existed. Your facility planner can help you calculate how much of this business you might manage to ‘Shoe-Horn” into an under-sized facility as well as the costs of over-time and the general labor inefficiency that would be involved. It is very important to remember that some labor inefficiency would apply to your entire volume, not merely to that which exceeds your Worst Case forecast. To these costs must be added the lost profit contribution on volume that could not be accommodated as well as attributing a value to the loss of Customer Service that would likely result. The resulting total represents the “opportunity cost” of having insufficient space.

E/ The final step is to compare the net risk / cost of having excess space……. rent or capital cost, taxes, insurance, heat and utilities etc………. identified under C/against the opportunity costs under  D/

With this comparison in hand you can make an informed decision on whether to plan for one of the two extremes, or more likely on where best to strike the middle ground.

Naturally, the lower your unit Occupancy Costs, the higher your unit Labor Cost as a percentage of Sales and the higher your profit contribution on Incremental Sales, the more attractive it will be to provide space for your up-side volume. Conversely, the higher your Occupancy Cost per unit of volume, the lower your Labor Cost as a percentage of sales and the lower your incremental profit contribution, the more conservative you will need to be.

As always, if you plan to own rather than lease, then allowing room to construct additional finished space later will help provide a “Win / Win” situation

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.  Please direct your questions to paul@buyerscall.com or to his direct line, 905-607-4400