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Supply Chain Strategies Require Flexibility and Diversity

Volatility in logistics variables is creating a paradigm shift and making location decisions much more challenging.

John Morris, SIOR, Industrial Services Lead for the Americas, Cushman & Wakefield, Inc. (July 2011)
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Over-the-road transportation - Trucking: an industry under pressure Over-the-road transportation - Trucking: an industry under pressure
Beyond Trucking
Looking forward, container volumes are rising as world trade recovers. Additionally, U.S. exports are strong. This translates into increases in outbound containers loaded with machinery and semi-finished goods. Agricultural products, in containers or dry bulk form, have been flowing from the United States to the four corners of the globe, helped by the weak dollar and strong demand.

Coupled with the high fuel prices and strong regulatory and driver constraints on trucking, we foresee greatly recovered demand for port-proximate space. This will increase the need to be intermodally served. Traditional port cities such as Savannah, Norfolk, Charleston, and Los Angeles will see growth, as will emerging gateways like Jacksonville, Miami, and Prince Rupert, British Columbia.

New East Coast-to-Midwest rail corridors and the Panama Canal expansion in 2014 will drive special advantage to the Atlantic ports. Markets that will see dampened growth due to the Panama Canal effect include the port of Los Angeles, as well as the land-bridge markets of Chicago, Indianapolis, and, potentially, Columbus (OH). Additionally, user demand will likely result in smaller physical requirements on the West Coast and larger requirements on the East Coast.

Network Shifts: Easier Said Than Done

Today's unprecedented volatility in logistics variables, and in the commercial real estate market, is creating challenges and opportunities for U.S. companies. While many decision-makers, understandably, adopted a "wait and see" position late in 2008, now may be the best time to make supply chain strategy shifts that capture the upside of this unique climate, in both the logistics and the real estate markets.

Yet sweeping network changes can be challenging. They require capital investment. They generate asset and personnel changes and potential costs of migration. They can disrupt business flow. And new space commitments can lessen flexibility. In short, the value of change and the certainty that things will change again makes the ROI of network changes less clear.

The multiple conflicting priorities surrounding location and market selection - including labor, real estate, incentives, and others - must be managed concurrently. Take labor, for example. Generally speaking, preferred industrial labor pools - those with greater densities of target workers to support industrial operations and lower occupancy costs - typically are further from population centers. Generally speaking, moving your operations closer to the city, to reduce transportation costs, could represent significant employment risk.

What To Do?
It is not an easy time to be a supply chain executive. Finding solutions to reduce costs and raise service levels is concerning company boardrooms today more than at any time in recent history. The question is, what do you do, when do you execute, and what is it worth?

Oftentimes, it helps to know what other companies are doing. At Cushman & Wakefield, we are seeing several major trends emerging in clients' approaches to and prioritization of industrial location decisions. They include:

  • The rising importance of transportation costs and infrastructure (i.e., getting closer to customers and suppliers), with an emphasis on the value of mode flexibility

  • More attention paid to the quality and availability of critical labor profiles and skills, with some types of labor becoming scarcer and human resources being an increasing point of competitive differentiation

  • An increasing priority in location decisions on per-unit utility costs, in a U.S. market where utility cost variances by geography can be significant

  • A jump in less-than-optimal decisions (from a locational perspective) being made in order to catch real estate opportunities

  • Shifting of manufacturing location decisions from "offshore" to "near shore," i.e., Mexico and/or the U.S. Southeast, as labor cost arbitrage available in China, India, etc. has a declining marginal value for some companies

For every company, though, it is critical to quantify and understand the cost of change and the value of change. A sophisticated network study can answer these questions. It does not take long or cost much to understand the various options. If a company decides to stay on the sidelines during this market opportunity, when so many variables are in transition, they should at least know the present value of their decision not to act.
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Have questions, comments or concerns about this article? Submit to Ask Area Development here and the author or an expert from our network of site selection and facility planning professionals will answer:
What is meant by "less-than-optimal decision" being made to catch real estate opportunities.
There is a significant rise in the relative importance of "available buildings" in corporate site selection right now. Surveys from Area Development support the rising trend today of clients and companies looking for available buildings in site selection processes that previously would have been focused more on the optimal site and not necessarily a better building. More
- John Morris, SIOR, Industrial Services Lead for the Americas, Cushman & Wakefield, Inc.
How can moving warehousing, distribution and manufacturing operations closer to the city represent employment risks?
Generally speaking, industrial labor that fits more optimally with productive performance in warehousing, distribution and manufacturing live in less urban, more rural, and less metropolitan communities. More
- John Morris, SIOR, Industrial Services Lead for the Americas, Cushman & Wakefield, Inc.
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