Automotive Site Guide: Site Selection: Getting Closer to Automotive Manufacturers

Logistics outsourcing has grown in size and scope over the past 20 years. This has occurred largely because manufacturers across many industry sectors have found it can be more cost-effective to have third-party experts handle supply-chain matters while they focus on competencies more central to their core business. However, through the passage of time, many people have forgotten that the roots to logistics outsourcing were actually born within the auto industry.

As with most everything in business, cost is the primary driving factor for changing a logistics strategy. Labor and physical assets are the most obvious ingredients to these costs. In the auto manufacturing business, they're huge.

So it should come as no surprise that site selection has become an increasingly important factor for Tier 1 and other automotive suppliers to consider when serving their automobile manufacturing customers. The so-called "Big Three," as well as the many transplants that have located in North America in the past 20 years, can often make up the largest share of their sales. Determining the right size and locations for a distribution network that serves auto manufacturers can mean the difference between keeping customers or losing them.

It is a fact that an increasing number of auto manufacturers are demanding better logistics service from their suppliers. Some are even willing to switch suppliers if they don't get it. As a result, running a quality logistics process has become increasingly important for every auto supplier interested in growth. And while there are many components to such a process, logistics professionals say that one of the most important - and easiest to control - is selecting the point of distribution, often a warehouse or distribution center.

The Importance of Distribution Centers
Before proceeding any further, it's important to define distribution center. A distribution center is any site a company uses to facilitate the flow of its raw materials and finished goods. A center can range in size from a small corner of a public warehouse to a larger facility operated by the manufacturer or its contract logistics provider; and it can provide a myriad of services from basic shipping and receiving to custom packaging and special service parts orders. The discussion in this article will be restricted to outbound distribution centers, which usually deal with parts and components that go to auto manufacturers.

Distribution centers are important in any industry. However, they are especially vital in the auto industry because logistics costs represent a large part of the manufacturers' money spent. As a result, inventory-reducing techniques that lower or eliminate the need for on-site storage at the auto manufacturer's plant have become the norm. This pushes inventory holding pressure back on the suppliers.

Selecting a Center
Auto suppliers generally have two options when it comes to selecting a distribution center. The first is to purchase or lease a center and operate it with internal resources. The second is to use a center owned or leased by an outside provider who would also serve as the operator. Either way, the same basic issues must be considered.

Define "on time": The first and most important issue is timing. The center or centers of choice must be able to get products to the auto suppliers' customers in a timely fashion, which is often on a specific day and even time. Timeliness also depends on whether the products made by these suppliers are destined for line-side delivery at the plant. If they are, a delay in shipment can potentially cause the expensive shutdown of an assembly line - something no one wants. Thus, meeting their manufacturers' on-time logistics needs is a critical concern.

Determine the optimum size of the distribution network: Figuring out how many distribution centers an auto supplier should use is important for two reasons. First, the number of centers needed could make a big difference in the locations a supplier selects as its distribution points. A supplier that decides it needs only one distribution center should probably place it in a location central to the auto plants that it supports. Second, the decision will affect the size of the distribution centers sought in each location. Research shows a growing trend toward using fewer distribution centers, each containing minimal square footage.

Unfortunately, no magic rule exists for determining how many distribution centers the typical auto supplier should use. The decision depends on its customer service requirements, the cost of its products, the size of its logistics budget, its financial ability to support inventory carrying costs, and its own comfort level.

Choose distribution locations: Once a supplier has considered the issues of timing and number of locations, it is ready to move forward with the next step in site selection, choosing distribution locations. As a general rule, auto suppliers will want to consider many of the same issues as other business sectors when selecting distribution locations. These issues include proximity to customers; the cost of reaching customers from a particular site; the potential quality of the work force in a given area; access to a good selection of transportation providers (unless a company's entire market is served by an in-house fleet); and the quality of an area's transportation infrastructure.

Another issue to consider is weather. The more last-minute and urgent a customer's orders tend to be, the more vital it is that at least one of its distribution locations be in an area where Mother Nature rarely if ever makes it impossible to get shipments out. This might rule out places like Buffalo or San Francisco as sole distribution sites.

Comparing site criteria can be a painstaking process that can take weeks or months. However, many site selection software packages are available to help. These packages enable a company to pinpoint its optimum distribution locations based on a number of variables including product volume, location of origin and destination points, performance standards, and budget limitations. In addition, they can help a company compare any number of scenarios - such as a two-facility network versus a three-facility network - to help configure the network that will work best for its needs. Auto suppliers can purchase this software themselves or work with logistics consultants or providers who already have the software in place.

Individual Facility Attributes
Once an auto supplier knows what locations it needs to distribute from and how large its facilities must be, the distribution center site selection process comes down to searching for and comparing individual sites based on necessary features.

Good access to roadways: Most products move by truck; as a result, proximity to interstates and highways is a must.

Proximity to small-package delivery hubs: One auto supplier we know whose customer has a lot of emergency orders chose its current location because it's directly across from that city's FedEx air hub. This added a much-needed hour to its FedEx cutoff time each night, which often made the difference between getting an emergency order out on the same day or having to wait until the following day.

Clean, well-sealed facilities: Cleanliness is essential and no distribution facility should threaten these conditions. Although most facilities will look clean to the naked eye, a few telltale signs - daylight showing through closed dock doors, cracks in the floor - will help companies cull out buildings where dust and other contaminants are likely to be a problem.

In addition, a facility's manager - whether an in-house employee or an outside provider - has a significant effect on the facility's efficiency. A few of the questions that auto suppliers should ask themselves if they are using an outsourced provider include:

• What are the provider's information systems like?
• How many hours of coverage does the provider offer from a particular location?
• What is the provider's performance history?
• Does the provider offer toll-free telephone numbers?
• Does the provider offer Internet access for parts ordering?

Comparing Costs
The next step in the distribution center selection process is often the most dangerous one, because it's where companies most frequently lose their strategic way. Although auto suppliers should always consider cost as a factor in choosing a distribution center, too many make the mistake of letting a seemingly good price get in the way of their good judgment.

For example, auto suppliers may automatically assume that the lowest rent equals the lowest cost, but that's not necessarily true. Additional expenses like taxes, insurance, and utilities can make the total tab significantly higher. So can the fact that a facility is older or odd-shaped, which research has shown isn't as effective as a rectangle because of travel distances within the warehouse.

Additionally, some suppliers choose a location in a less expensive, more remote area of town without factoring in how much more they'll have to pay in transportation costs. Perhaps worst of all, some suppliers let price alone dictate where they place their distribution centers - and their customer service declines as a result.

To find the distribution center that is the most cost-effective for its customers, an auto supplier must look at the big picture, factoring in all the potential costs and benefits. Based on these criteria, it may decide to go with a very different facility than the one it originally might have chosen.

The Need for Compromise
Sadly, even companies that conduct a textbook-perfect search for a distribution site don't always wind up with a perfect facility. This is especially true in popular distribution markets where larger facilities are in great demand, or in growing markets like Mexico, where particular kinds of facilities simply don't exist.

In such cases, companies have three options. They can look in another, comparable market; they can build a facility themselves, which is expensive and time-consuming; or they can use sophisticated computerized decision-support tools to make the best of their less-than-perfect facility of choice. Such software helps companies determine the best layout, the optimum methods of storage, and the most efficient number of shifts needed.

Auto suppliers should also remember that their choice of facilities doesn't have to be permanent. By using a facility operated by a third party, they can afford themselves the flexibility they need to re-evaluate and reconfigure their distribution center network as often as needed.

No matter how well an auto supplier chooses its distribution locations and individual distribution centers, it must never think its site selection job is complete. Good logistics is a process, not an event. A distribution center and network that do the job well for an auto supplier today might not even come close to doing the job adequately tomorrow. This is especially true in today's volatile auto business, where manufacturers continue to announce plant shutdowns and network realignments.

For this reason, many logistics experts recommend re-evaluating logistics configurations and centers every couple of years. This may seem like a great deal of work, but considering the value a well-planned and executed logistics program can have, it is probably one of the wisest investments any company interested in progress can make.