Small manufacturers are putting down roots in rural America, attempting to solve a complex site selection equation.
Manufacturers that employ fewer than 100 people comprise 94% of all domestic manufacturers in the U.S., according to the Manufacturing Institute. They often play an important role in their communities, being on average the second-largest regional employer, statistics from the Department of Agriculture show. Historic roots often compel rural manufacturers to remain in their original locations, or return to them, says Steven Deller of the University of Wisconsin-Madison.
What may be surprising is that their location does not necessarily guarantee rural manufacturers a cheaper workforce. Bob Hess of global real estate firm Newmark Knight Frank says that labor costs are no longer significantly lower in rural parts of the country. Reasons for this include the need to hire workers with higher skills or to compensate them for longer commutes or relocation.
That said, compensation takes up a smaller portion of overall manufacturing costs than it once did, with salaries typically amounting to 10% to 15% of the cost of manufacturing a product, says John Molinaro, Chief Executive of the Appalachian Partnership for Economic Growth. This is largely attributed to lean manufacturing, automation and robotics.
Other manufacturing costs, such as real estate, energy and taxes can be more problematic, as they can differ dramatically, even within a single region. In the Midwest, real estate costs can vary by as much 500% from one location to another, according to Newmark Knight Frank. Energy, whether electricity or natural gas, can vary by as much as 45% to 60%.
Site selection can also depend on the industry, the New York Times notes. “Companies working in the energy industry might cluster in more rural areas in Texas or Louisiana, for example.” A manufacturer’s location within the supply chain is yet another consideration. Food companies often want to be near suppliers because of perishability issues and shipping expenses. Those that ship globally may need to be close to transportation hubs.
Finally, the competition for talent can be an important determinant in site selection, especially for small manufacturers competing for skilled employees in a time of low unemployment. Urban manufacturers may have access to bigger talent pools, but within clusters of related industries, they also must contend with higher attrition and pay.
“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,” said the Agriculture Department’s Sarah Low.
