DC site selection: Time to scrutinize the details
In today's economy, factors such as unpredictable fuel prices, shifts in global trade, new warehouse technologies and environmental sustainability weigh heavily on site selection decisions.
By Karen E. Thuermer, Contributing Editor -- Modern Materials Handling, 4/1/2009
Mirroring today’s retracting economy, logistics and supply chain professionals charged with site selection for warehouse and distribution center locations are being increasingly challenged. With all aspects of today’s economy off, companies involved in purchasing and locating warehousing and transportations services must take a hard look at their physical assets—and dig deeper into the details of their network.
In fact Dan Albright, vice president for supply chain management consulting at Capgemini, urges companies to spend less time adding capacity to solve immediate needs and more time upfront on network planning for near- and long-term requirements.
“Firms should have a continually updated five to seven year horizon for distribution networks,” Albright advises. “In addition, firms should always include two elements in their site selection program: flexibility and resiliency.”
Flexibility and resiliency are, without a doubt, two vital survival skills for today’s DC site selectors. In today’s weak economy, all spending or expansion decisions are being scrutinized more heavily than ever.
“Shippers or suppliers may choose to hold off and operate from an existing facility, but outsource another facility as a means of reducing their fixed costs,” says Bill Butler, president and chief executive officer of Los Angeles-based Weber Distribution, a nationwide provider of logistics solutions.
Although historic trends driving DC site selection have not really changed, those regarding DC development have. “Industry-wide, speculative development has all but halted,” says Mike Peters, first vice president at ProLogis in Denver, Colo. “Build-to-suit development, albeit at a much slower pace, is likely to be the status quo among the development community for the foreseeable future.”
This means companies will have access to fewer readily available DCs and need to be more involved in the development of new DC space. And while most site selection decisions focus on minimizing transportation costs and proximity to customers, factors such as unpredictable fuel prices, shifts in global trade, new warehouse technologies, and environmental sustainability now also influence site selection.
“Companies are planning for a different future than six months ago,” states Albright. “When companies consolidate to reduce costs, they use these factors to decide which sites to consolidate, then how to move inventory to satellite sites and remain nimble in their distribution.”
These decisions can be challenging, particularly since it is unclear how much further the economy will drop, whether or not fuel prices will spike again, and how many and what companies will not survive this recession.
The ProLogis Kaiser Commerce Center, which comprises about 5.9 million square feet in nine buildings,
is now fully occupied with a recent lease agreement of 484,000 square feet to a leading 3PL.
Instability of fuel prices is of particular concern for companies that spend a considerable amount of their budgets on transporting goods. Although fuel costs have eased since last summer, most executives expect them to spike again in 2009. “Firms now consider this component over others such as labor and real estate costs in making DC site selection decisions,” says Albright.
Although most companies have already adopted the strategy of locating DCs close to transportation hubs and gateways, such fuel spikes still have a huge impact on transportation and distribution costs. Consequently, more firms are analyzing their network optimization strategies, which include proximity to key interstates, vehicle traffic patterns, state and federal infrastructure improvement plans, proximity to alternative transportation modes such as rail, and the potential impact of environmental legislation.
Long haul shipping costs are not the only concern. Short haul transportation can also be masked with costs. “If you are going to locate a facility outside of congested cities like Atlanta or Washington, D.C., you are going to pay a lot for trucks to sit in traffic,” Albright warns.
Another issue to consider is whether a location is primarily served as an outbound or inbound market. “For example, Memphis has more outbound than inbound trucking service,” states Jeffrey Brashares, president of the logistics services group at Pacer Distribution Services. “If you put a DC there then you’ll need truck services that are going in.”
Of course, one of the best ways to optimize distribution costs is to make sure trucks are leaving DCs as full loads to single locations rather than less-than-truckload (LTL) to multiple distribution points, Peters suggests.
Yet another concern these industry voices suggest is that the bad economy could result in increasing numbers of trucking company failures, which could cause capacity issues. “This could sway site selectors into considering locations close to intermodal options,” Brashares says.
Already, many large companies that ship high volumes over distances longer than 500 miles are employing intermodal, a mode that combines trucking with the more economical service of rail. “Companies are looking at what railroads have to offer and co-locating near or on their property,” Brashares adds.
Impact of global trade
Shifts in global trade are also influencing site selection, particularly as more steamship lines from Asia call on U.S. East Coast seaports. Consequently, increasing numbers of companies find benefits in locating DCs or import centers at or near these ports to create increased distribution network efficiencies.
On the West Coast, distribution facilities are locating inland from the heavily congested areas surrounding the Ports of Los Angeles/Long Beach. As a result, developers like AMB Property Corp. are continuing to see demand for infill-located, Class A facilities at core hub and gateway markets that have strong ties to trade flows.
The cost of shipping from China, however, is causing some companies to move production closer to the United States to countries like Mexico and those in Central America. Consequently, Albright suggests that some West Coast DCs may be displaced to other regions of the country closer to customer regions. That’s because products made in Mexico can be directly transloaded to the DC. “This, of course, depends on the nature of the product and required transportation modes,” he says.
Albright adds that consolidations among steamship companies, fewer volumes, and the trend toward mega-container vessels are all issues leading carrier operators to call on only seaports capable of handing these large ships.
AMB Tres Rios in Mexico City is located near a major highway network to facilitate
efficient transfer and transport of goods through the distribution channel.
It’s the economy
Despite the fact that many retail products are imported and therefore redistributed from import centers or DCs, retail store closings are not affecting DCs unless they are dedicated to a particular area that has been hit hard by store closings. In those cases, closures will add to the downward pressure on real estate prices and create opportunities for companies needing space in those specific areas.
“If a supplier’s warehouse lease is soon expiring, they will have good leverage in renegotiating rates or have better opportunities in securing more desirable properties that have come on the market that were not available before,” says Butler.
Depending upon the length of the recession, companies may choose to consolidate multi-facilities to help reduce their overall footprint and operating expenses. Reduced consumer demand could alter how retailers order shipments from large quantity purchase orders to fewer, smaller ones. “Retailers may choose to hold fewer inventories and replenish orders in shorter cycles,” Butler says. “Other sectors may decide to follow suit and hold less inventory in their own warehouses, thus adjusting their production volumes.”
To save costs, many companies are already converting fixed costs into variable costs by outsourcing distribution and warehouse functions to third party logistics (3PLs) providers, a practice that has been ongoing for 20 years. “Right now the market is seeing a lot of pursuits, but it remains to be seen how this will play out,” says Peters.
Meanwhile, as more and more domestic manufacturers consolidate their production/manufacturing sites, they, too, are outsourcing their overflow to 3PLs. This has resulted in increased demand by 3PLs for DC and warehouse space. “In fact, contract logistics providers are one of the strongest growing segments of industrial space demand at the moment,” says Timothy Nolan, vice president of customer development for AMB Property Corp.
Companies are still considering either large and small DCs or a combination of both. “I’ve watched customers go to where they now have smaller DCs or actual crossdocks to get closer to their ultimate customer,” says Brashares. “If you’re trying to get as close to your customer as possible, you probably are going to want more DCs rather than less.”
Technology’s new role
Warehouse technology especially plays into today’s DC mix. “Companies must be able to predict and react to demand more quickly, otherwise they will find themselves in a poor position very rapidly,” Capgemini’s Albright says.
For the auto industry, for example, Albright imagines the day where giant lots full of cars will be obsolete. “We’ll go to the European model with only a handful of cars in a showroom,” he states. This, however, requires better demand planning, and product lifecycle and inventory management. “Companies have to get serious about inventory control technology,” he says. “Their risk is too great.”
Some firms are already consolidating large facilities while “forward deploying” quick turning inventory in satellite locations to handle heavy customer geographies. “Technology plays a major part in demand planning, inventory, transportation and labor management,” Albright says. “Firms operating advanced systems can do more with less space.”
While you can’t predict how long this economic down turn will last and the final impact it will have on warehouse and DC site selection trends, one thing is for certain: Those firms that remain flexible and resilient in determining their DC needs will be more capable of addressing company needs once confidence is restored to the economy.
| Author Information |
| Karen E. Thuermer covers air cargo and site selection for Modern’s sister magazine Logistics Management. |
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