SITE SELECTION

Medical Device & Diagnostic Industry Magazine | MDDI Article Index

Originally published June 1996

Greg Freiherr

The rapid growth of young, successful medical device companies can mean frequent site changes in the search for adequate space. With long-range planning, some companies have been able to minimize these costly, frustrating moves.

One such company is Tubular Fabricators, Inc. (Petersburg, VA), which is planning to expand its operations over the next several years. During this time, employees will not be uprooted from their current building, equipment will not be moved across town or even across the street, and phone lines will not be changed. In short, the staff will encounter none of the frustrations that can accompany a change of facilities resulting from corporate growth. That's because Tubular Fabricators is staying put.

Seven years ago, the company, which makes a variety of home-health-care devices from canes and walkers to commodes, purchased a 250,000-sq-ft facility on six acres of land. The company initially occupied just 75,000 sq ft. Even today, staff and equipment make use of just over half of the available space--about 140,000 sq ft. Why did the company move into such a huge space? "It's simple," says company president Joseph Battiston. "We don't have to keep moving."

EXPANSION WITHOUT RELOCATION

By purchasing a facility large enough to handle expansion well into the future, Tubular Fabricators can forgo the costs of repeatedly investing in ever-larger facilities. The extra space is readily available for warehousing the company's products, and Battiston says that's where expansion will be needed.

Battiston recalls the first few years after founding the company in 1979. "We kept expanding, and every time we did, we were renting facilities where our costs drastically increased," he says. "When we looked at what it cost us for all those expansions, it made a lot more sense to move right up to a larger facility."

Similarly, over the last six years, the workforce at Diametrics Medical, Inc. (Roseville, MN), a maker of blood and electrolyte analyzers, has grown from 4 to 230. Pressures exerted by corporate growth have been especially great in the last couple of years, as the company payroll has literally doubled. But throughout the history of the firm, and even in these last few years of hectic growth, administrative staff have not been uprooted, nor has the manufacturing and distribution process been interrupted. Instead of switching from one site to another, Diametrics has expanded into more bays of the same building.

In 1990, the founding staff occupied the same site they do now, but they took up much less space--beginning with about 7000 sq ft. Today the company occupies about 60,000 sq ft. "Our philosophy was that if we needed more space, we would work it out with the landlord so that as other leases expired, we would pick them up and expand our facility," recalls Elier Roqueta, director of manufacturing at Diametrics.

For both Tubular Fabricators and Diametrics, the key to painless expansion was long-range planning, though their strategies differed. Tubular Fabricators chose to buy a large facility, which, according to Battiston, was affordable because it was an old building. Diametrics, on the other hand, leased a modern facility in an industrial park. Both approaches successfully balanced the need to conserve capital with the need for enough space to continue expansion.

Before developing a strategy to meet future space needs, companies should carefully examine sales forecasts and staffing projections to make sure expansion will eventually be warranted. But such estimates can give only the crudest measures of what will be needed. Also, luck can sometimes determine whether a strategy works. When in 1990 Diametrics first applied its strategy of expanding into vacated space to accommodate corporate growth, the company had no guarantees that the space would be available when it was needed. Executives knew only that the leases held by the companies bordering its original 7000 sq ft were scheduled for expiration; there was no way to be sure they would leave. Nor was there any way to be certain that Diametrics would be in a position to use the space at exactly the time it became available. "In some cases the leases expired before we needed the space, but we ended up having to take it," Roqueta explains.

CHANGES IN DIRECTION

Small, swiftly expanding companies can also be subject to unpredictable changes. When PowerStrand Wire & Cable (San Antonio, TX) began in Corpus Christi four years ago, company founder and president Dee Johnson was a one-person shop, performing every task from sales to shipping to cleaning. The company's main products, electrical wires that are inserted into electrodes for use in such devices as muscle stimulators, were produced by a contract manufacturer. Since then the company has brought manufacturing in-house, and Johnson relies on a staff of 20 to do many of the tasks she once performed. Consequently, the 1000 sq ft Johnson used at the start would not fit the needs of today's company, which has long since moved to a 5000-sq-ft facility about 100 miles from the company's birthplace. In choosing the current location, Johnson recognized the essential needs of all businesses: to be near transportation outlets such as freeways and airports, to be near major clients, and to be near shipping facilities like the UPS office that is now only four blocks from the company.

Small companies are not only likely to expand, but also to change direction quickly. Business decisions of small companies are sometimes made by the "seat of the pants," says Bill Mavity, president of Innerdyne, Inc. (Sunnyvale, CA). Innerdyne exemplifies not only the volatility of small companies, but how that volatility can affect the growth of the business and expansion of facilities.

Innerdyne's origins extend back to a company called Cardiopulmonics (Salt Lake City), a well-capitalized firm that several years ago appeared poised for rapid expansion. Its technology, a lung-assist device for acute respiratory-arrest patients, showed good potential for growth, but product development was hamstrung by the regulatory process. Meanwhile, Innerdyne had developed an alternative to the standard device used in minimally invasive surgery, the trocar, but was having trouble finding investors. Recognizing the potential of Innerdyne's technology and the difficult road ahead for the lung-assist device, "we bought Innerdyne, dropped the Cardiopulmonics name, and positioned ourselves as a minimally invasive surgery access company," Mavity says.

The decision turned out to be the right one, providing the basis for payroll to leap from 20 employees at the two companies prior to the merger to 120 at the consolidated firm. Yet the only physical expansion was about 7000 sq ft for a distribution facility in Salt Lake City, which was nearly offset by a decline of 6000 sq ft at the Sunnyvale site, a decrease accomplished by subletting the space. The net expansion, therefore, was just 1000 sq ft, despite a fivefold increase in employees.

Mavity accomplished this real estate feat by turning the Salt Lake City facility, which housed the cleanrooms originally designed for the lung-assist device, into the manufacturing plant for Innerdyne's product and consolidating corporate headquarters in Sunnyvale. "The lease for the Sunnyvale facility had been signed when Innerdyne was a stand-alone planning for growth. The facility would have supported manufacturing and a larger technical role," Mavity explains. "When we decided to move manufacturing to Salt Lake City, we simply sublet the Sunnyvale space back to the owner of the building."

UNIQUE REQUIREMENTS

Though Diametrics' leasing strategy has worked in the past, the company will soon be facing a lack of space once again, and this time it plans to move. The choice of new facilities will be determined in part by the requirements of its cleanroom manufacturing processes. In the meantime, the company is caught in a wave of lease negotiations to hold onto the space it now uses. A series of five-year leases signed in the early 1990s have been coming due in rapid succession. While the landlord would like all the contracts to apply until the year 2000, Diametrics wants them to extend only long enough for the company to complete a transition to a new location. "We have to be careful what we agree to if we are going to move out of this facility," Roqueta says.

Moving is necessary because the company has finally exhausted virtually all of the space in its lease, and the rest of the space in the facility is occupied by companies that are unlikely to leave any time soon. "We're at the point where we can't expand any more," Roqueta says. "If we want to grow, we have to go someplace else."

One option is to move the administrative offices out of the current facility into a nearby office building and use the vacated space to expand the manufacturing operation. But Roqueta says doing this would not serve the long-term goals of the company. The company's cleanrooms impose a high capital expense, which makes Roqueta nervous about investing any more in a leased facility. "When you look at the money you are putting into the cleanrooms and what it would cost to move them, the best way to go is to set up a manufacturing facility in a new building and put the money into building cleanrooms there," he says.

Cleanroom manufacturing complicates the decision in more ways than one. "A lot of existing buildings are about 12 ft from floor to ceiling. To build cleanrooms, you need at least 14 ft," Roqueta explains. "So it is hard to get into existing buildings and make them work for you. The best thing is to plan a building to your specifications so you get what you want, rather than trying to conform to existing walls and ceilings."

For Battiston, however, older buildings with more than enough space offer advantages over newer ones. "A lot of people tend to make the mistake of saying they'd rather have a newer facility with less space," he says. "But that can mean tighter aisles where it's harder to work. Also, to make use of the higher ceilings in new buildings, the company has to use racks and special lift trucks. A company in a situation like that can run into a lot of other headaches that we don't have because we have ample space."

Planners of future expansions must keep in mind their companies' unique concerns, such as the need to maintain a location close to the workforce that has made the business successful. In the case of Innerdyne, that meant maintaining facilities in both Salt Lake City and Sunnyvale. "We had to ask what it would cost to move our key people to Utah," Mavity says. "That is a drain on cash that most small companies can't afford."

CONCLUSION

Successful companies share a commitment to their own future development and evolution. That commitment can be expressed by long-range planning for future space requirements. "We make this commitment in a sense to ourselves, but also to our customers, that we are going to be here well into the future," says Johnson of PowerStrand Wire & Cable. "We do it to prove that we're stable and that we can serve our customers and meet their needs."

Whether the decision is to sign a long-term lease for more space than will be needed in the near future or to move out of leased space and into a company-owned facility, taking steps to forestall multiple moves and disruptions can make corporate expansion easier.

Greg Freiherr is a contributing editor of MD&DI.