Location and Logistics: Risky Business?

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Synopsis

All business owners and their advisors should carefully consider the apparent underpinnings of a Canadian plant closure announced May 24, 2017 by Proctor & Gamble (P&G).

Three important questions that beg to be answered are – irrespective of geography:

  1. Is business size increasingly – and for many reasons – taking on a “life of its own” in the context of the long term business viability of some medium and small sized companies?
  2. Is this Proctor & Gamble announcement a further directional indicator that this “business size” issue should be disconcerting for owners of mid-sized and smaller business owners – irrespective of jurisdiction?
  3. Will “big data” analysis tools and other technological advances increasingly result in larger companies making business decisions that will significantly directly and indirectly impact many medium and small-sized companies?

P&G announces Canadian plant closing!

Brockville Martinsburg Map

On May 24, 2017 P&G announced it was:

  1. permanently closing a manufacturing plant in Brockville, Ontario (red arrow on map) in late 2020. That plant employs just under 500 people. It is reported to be Brockville’s largest employer. It manufactures P&G’s “Bounce” and “Swiffer” products.
  2. over the next three years moving that plant’s production to a new manufacturing facility it currently is building in Martinsburg, West Virginia (green arrow on map). Martinsburg is 53 road-miles from a P&G Shippensburg, Pennsylvania distribution center. It is reported the Martinsburg plant will employ about 700 people, and will produce multiple P&G products – including the two currently produced by the Brockville plant that is being closed.
  3. Perhaps importantly beyond the Brockville plant closing, P&G is reported to have said this plant closing is part of P&G’s North American supply network redesign, being a plan to “leverage scale in conjunction with our supply chain partners”.

Brockville is a town of just over 20,000 located slightly closer to Montreal (to its east) than it is to Toronto (to its west). The closest rail and road bridges between Canada and the U.S. are located about 25 miles west of Brockville, approximately half-way between Montreal and Toronto. Brockville is 453 road-miles north-east of Martinsburg.

Martinsburg is located proximate to Inter-State Highway 81, 96 road-miles south-west of Harrisburg, Pennsylvania’s state capital, and to the states of Maryland, New Jersey, New York, Ohio, Pennsylvania, and Virginia. Those states collectively have a population about twice that of Canada.

The Martinsburg plant was announced in prior to September 2015. It is reported as being only the second plant built by P&G in the United States since 1971. Clearly P&G’s decision to build the plant came in advance of Mr. Trump’s Presidency.

P&G business reasons discussion

37967945 - scissors cuts word costs. conceptual business image

A review is important of what appears to – or may – be the business reasons P&G has elected to close its Brockville plant and move its operations to Martinsburg. The P&G cost and operational improvements discussed here are based on my own assumptions and perceptions of likely outcomes. To the best of my knowledge such details have not been stated either publicly or privately by P&G.

As previously noted, P&G’s has publicly stated that it is closing the Brockville plant as part of a North American supply network plan to “leverage scale in conjunction with our supply chain partners”. On its face this makes sense to me for at least the following reasons:

  1. The Martinsburg plant, being brand new, presumably will require less annual repair and maintenance costs than the decades old Brockville plant.
  2. It has been reported that when fully functional the Martinsburg plant will employ about 700 employees versus the Brockville plant’s current approximate 500 employees. This where the Martinsburg plant is expected to produce eight or nine P&G product lines when the Brockville plant is reported to currently be producing two of those. That sounds like the Martinsburg plant will be both technologically advanced with greater productivity per employee than is the Brockville plant.
  3. Given the comparative distances between Brockville and Martinsburg to the U.S. eastern seaboard markets current Bounce and Swiffer transportation costs are likely to reduce when those products are produced in Martinsburg.
  4. Producing Bounce and Swiffer in the new Martinsburg may result in lower cost and better “big data analysis” opportunities for P&G in an efficient supply chain and other contexts.

Going forward

54207806 - 3d rendering of the flags of usa and canada on woven fabric texture. detailed textile pattern and grunge theme.

Going forward it strikes me that things Canadian governments, Canadian business owners, and Canadians generally need to watch for – any North American Free Trade Agreement re-negotiations aside – include:

  1. Other “P&G type” closures of Canadian plants where for logistics reasons U.S. multinationals with manufacturing plants in Canada determine that there are cost savings and operation efficiencies available to them by consolidating what are now Canadian based operations into U.S. based operations.
  2. The fallout from the closure of further Canadian manufacturing plants should that occur – irrespective of reason. This where such closures are likely to result in structural unemployment, contagious damage to local businesses and Canadian logistic companies, and in increased Canadian Federal and Provincial government social costs.
  3. Increases in individual and business taxes to offset negative impacts on Canadian Federal and Provincial deficits.
  4. My increasing concern that from business standpoint “bigger will increasingly prove to be better” in many industries and business segments.

Why “bigger” might be better in a business context going forward

Aside from any specific business consolidation activity – by P&G or any other company – I am increasingly thinking that things are transpiring such that in the future well managed larger businesses may enjoy more competitive advantage than they have in the past. I believe reasons for this include:

  1. Ongoing business combinations in many industry and service sectors presumably are contributing to economies of scale for the consolidators – with, depending on fact-specific circumstances, resultant possible pricing and cost pressures for non-consolidated smaller competitors.
  2. Technology advances seem to be accelerating in speed, and are likely to have significant impacts on both capital-intensive and non-capital intensive businesses. This where many believe technology advances – including increased robotics, deep-data analysis, increased clerical functionality, and artificial intelligence – are likely to increase productivity.
  3. Ongoing technological advances seem certain to enable enhanced data analysis that will aid in business restructuring and reorganization decisions. This where those decisions are likely to enhance profitability and free cash flow.
  4. Many technological advances seem likely to require significant capital and ongoing investment. This arguably means larger better funded companies may have significant technology head-starts on smaller, less well funded, companies. See Technological Advances: What Business Owners and Advisors Need to Know.
  5. Expected large business long-term competitive viability in the contexts of competitive business size, product/service offerings and supply chain management, geographic coverage and other competitive advantages, disadvantages, strengths and weaknesses.

Conclusion

Risk - 123RF

Businesses are driven by profitability and more importantly after-tax free cash flow. Businesses function in a competitive environment. Societal needs and interests drive governments. Risks to businesses and governments are quite different, but in the end government risks (read deficits) must be paid or defaulted.

From 10,000 feet this means that businesses and governments are to some degree “risk inter-dependent”. This is something that is likely to be ever more evident in future years in the face of changing and evolving:

  1. business conditions that are increasingly impacted by global, country and region-specific events and circumstances.
  2. individual business competitiveness in the face of those changing business conditions.
  3. government policies and spending in circumstances where government debt at all government levels is in many jurisdictions continuing to escalate.

It also means all companies need to review their important suppliers and customers to determine which, if any, are vulnerable to multi-national company restructuring decisions similar to the one just announced by P&G.

These changes, aside from age demographics where they are relevant, further supports the proposition that business owners and their advisors should be planning now for business transition. This where business transition can mean either a sale of the business to an arm’s length third party (or parties), or an inter-family (or generational) business ownership transition. See Not Strategizing for Business Transition Now? A Precursor to a Tale of Woe?

References

  1. Proctor & Gamble to close Brockville plant in late 2020 or early 2021, May 24, 2017.
  2. Proctor & Gamble to close Brockville, Ont. Plant, CBC News, May 24, 2017.
  3. West Virginia: Groundbreaking for new P&G plant, September 18, 2015.

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50 Hurdles: Business Transition Simplified

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The book 50 Hurdles: Business Transition Simplified, is available here at a price of Cdn$37 (including sales tax where applicable and free shipping). Read book testimonials here.

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Ian R. Campbell FCPA FCBV

Ian R. Campbell is a Canadian business valuation and transition expert. He is the author of several Business Valuation texts and of 50 Hurdles: Business Transition Simplified. The Canadian Institute of Chartered Business Valuators recognizes his contribution to the Canadian Business Valuation Profession through the annual The Ian R. Campbell Research Initiative.

He curates economic and business news relevant to business transition and valuation filtered from world media sources. He writes, with other contributors, The Business Transition and Valuation Review newsletter for business owners and their advisors.

You can reach him by email at icampbell@ircpost.com, or by telephone at 905 274 0610.

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