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Inward Investment Guides

Evolution of the Global Supply Chain

Congestion at established hubs, volatile energy costs, the need for sustainability, and cost-cutting initiatives are among the trends affecting where companies are locating their warehouse and distribution operations.

Tim Feemster, Managing Principal, Foremost Quality Logistics (Aug/Sep 09)
If you're thinking of renegotiating your lease to reduce costs, now is absolutely the time to act. It's just like refinancing your home to lower the interest rate; you have to pick the right time to do it, and this is one of those right times in commercial industrial real estate when you can exploit your rent-paying leverage. Landlords in today's economy are motivated to get creative to keep existing tenants and get new ones. But if you are breaking your lease just to save a few bucks, you are not really taking advantage of the overall market situation. The key is not just to lower your rental cost, but also to look at your network holistically, considering all of the four trends in the logistics landscape outlined below to more strategically adapt your network.

Supply Chain Trends
The ongoing evolution of the global supply chain continues to mold new patterns and trends in industrial real estate across North America. The following trends are impacting how companies design their supply chain networks:


1. One trend is the shifting of ocean container import traffic coming from Asia to U.S. Gulf and East Coast ports in lieu of the West Coast ports, and even the potential of near-sourcing down the road.
Companies are moving the inbound port of entry to the Gulf and East Coast ports to reduce transportation costs and drive down their carbon footprint for goods destined for the Southwest, Southeast, and Northeast. Since 2006, the Gulf and East Coast ports' share of the overall container volume has moved from 39.7 percent to 43.9 percent (YTD May 2009) of the total U.S. container trade. That is more than a 10 percent change in just three years. This shift is expected to advance rapidly when the Panama Canal expansion is completed in 2014/2015.

2. Volatility of energy prices and its related effect on transportation costs impact domestic distribution networks.
The cost of diesel has moved from a low of $2.44 a gallon in 2006 up to $4.76 a gallon in 2008. In 2009, it fell to $2.02 and then shot back up to $2.62 a gallon by mid-year. Oil and diesel prices are driven by the global demand. That demand is driven by the economic situation, and the experts predict that when the global economy returns to "normal," oil and diesel will rise beyond where they are today. Company executives need to look at future cost of transportation plus fuel surcharges when looking at their network, not at past costs.

3. There has been an increase in the importance of sustainability as it relates to our transportation methods and building LEED strategies. Do you shift transportation to rail and/or rail intermodal? What can you do to make your existing facilities more sustainable, if not LEED-certified?

As most best-in-class performance companies adopt a sustainability strategy, there is a need to look at your supply chain, as it is a large contributor to the carbon footprint of an organization (including manufacturing locations as part of the supply chain). We know that water transport is more energy-efficient than rail, and that rail is better than truck. So you need to look at ways to utilize the lower cost/carbon footprint modes of transport for longer legs as you redesign your supply chains.

In addition, the Environmental Protection Agency has a partnership with carriers called SmartWaySM (http://www.epa.gov/smartway). All these carriers have committed to specific goals to improve the efficiencies of their fleets/equipment to reduce their carbon footprint. Again, best-in-class performance companies are selecting only transportation providers from this group.

Inside the four walls of company facilities, there are many things that can be done to increase sustainability with no or low upfront cost. You can design sustainable buildings by utilizing LEED construction practices when building new facilities, even if there are no plans to certify the structure. For more information on LEED certification standards, go to http://www.usgbc.org.

4. Today's focus on supply chain cost-reduction initiatives is allowing users to take advantage of market vacancy and the current recessionary economy situations to generate network cost reductions.

Some of these cost-reduction initiatives have been highlighted. It is important to note that whatever initiatives you adopt, they need to be coordinated with overall company strategies. Often companies realize that they need professional help in some areas of this process, e.g., strategic planning, commercial brokerage, network modeling, incentive negotiation, lease administration, project management, property management, and/or corporate finance. Often full-service commercial real estate firms may be a better choice than a supply-chain consultant because they have all these capabilities and more in-house.

Overall Strategy
So how do you attack the situation? First and foremost, you need to step back and look at the overall supply-chain strategy and how it meets the overall goals and objectives of the company. Some key questions to consider are:

• How is the increasing cost of fuel impacting your inbound and outbound transportation costs?

• Should you take advantage of "all water" routes to the East Coast on inbound container freight as a means to reduce your carbon footprint as well as to lower the cost to deliver to your East Coast distribution centers?

• Should these centers be at the port or close to inland intermodal hubs?

• Do you plan to "near source" your production or continue to "offshore" source?

• Is your outbound transportation expense being driven up rapidly by escalating costs for less-than-truckload deliveries?

• Can you utilize more domestic intermodal for outbound shipments to customers in order to lower costs and reduce carbon footprint and, therefore, need to be closer to these facilities to minimize drayage cost?

• Should you consider a more "market-centric" network to minimize your overall supply chain costs?

• When do your leases expire?

• Do you own facilities that have become "functionally obsolete" in today's environment?  

• How do you stack up against your competition on your go-to-market execution?
You need to answer all these questions with a comprehensive analysis of the company's overall cost structure and go-to-market strategy before you should even consider updating a single lease.

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