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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)
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A Five-Step Process
The five-step process outlined in Figure 1 will allow your company to take full advantage of all the planning, restructuring, optimizing, and/or right-sizing it needs to execute in order to maximize the impact of revising the supply chain to meet the future expectations of the firm, the economy, and market globalization.
First, let's start with the compatibility of strategies, goals, and objectives within the organization. The ideal is that all functions are aligned using a sequence of balanced scorecards that all point to company goals as set by the senior management and board of directors.

We all know that, in reality, many companies have silos that have little or no linkage between their goals and those of the company or each other because these functions don't sell, produce, or operate anything - they are overhead departments. Most corporate goals revolve around sales growth and profits within certain customer service criteria. It is the "within certain customer service criteria" that causes the divergent and conflicting departmental goals. 

When it comes time to do a performance review, how do you think the real estate VP would fare if he just closed a deal on a ideally designed and located 500,000-square-foot facility where the rent was $7.50 per square foot when he passed up a similar size building with a rent rate of $5.50 per square foot that was not the ideal configuration or location? On the surface, it would seem he just cost the company $1 million annually. These numbers are right, but they do not tell the whole story; the real estate person may have just made an exceptional deal at $7.50 per square foot, in partnership with his operations team, since the overall supply chain cost - including rent, transportation, and labor - of the "expensive" building was $1 million less than that of the "cheap" one.

For "the rest of the story," we have to look at supply chain costs in various functional groups. According to a recent study by Establish, Inc./Herbert W. Davis and Company, over 50 percent of the total cost of logistics is transportation. Labor and customer service costs total an additional 17.3 percent. Rent only accounts for 4.3 percent of total costs. (See Figure 2.)

Some companies believe they can largely disregard transportation costs and base their location decisions on tempting incentives from local government agencies. As you can see from Figure 2, this can lead to a suboptimal solution based on overall costs.

Rather than leave the site selection decision-making process to any single department, best-in-class performance companies are putting together a cross-functional team combining logistics and real estate, along with finance, operations, and sales. This builds a companywide consensus on strategy that takes all the goals and objectives of all groups into consideration.

The first step in the process is to research costs and set overall project objectives and timelines. The big drivers in choosing any location for warehouse and distribution centers should be transportation and labor. When calculating transportation costs, most companies have traditionally focused on outbound costs because they are easier to calculate than their inbound costs. The company knows where its customers are, and which routes and transportation modes must be used to supply them. Inbound costs are more difficult to calculate because you have less information, and many times this cost is paid by the supplier and buried in the price of the item.
But best-in-class companies now are taking inbound logistics costs into consideration when they select sites for distribution centers and warehouses. As supply chains spread around the globe, they become increasingly complex and difficult to manage. For many global companies, inbound transportation routes are changing, along with the identity of suppliers, who come and go according to their cost structure and quality performance.

Once the strategy is set you begin step 2, modeling the total landed cost of the supply chain to find the "optimum" networks that are within a narrow band of the lowest cost given your customer service guidelines. There may be multiple iterations in this step since your company may have to research new inbound gateways and outbound transportation companies and modes.

Then you move into step 3, where you narrow down the overall list of network options for further analysis. In this step, you rate site/city specific attributes of each node in each of the network options. You also look at things like quality of life, unemployment rates, labor rates, community size, labor force education levels, right-to-work situation, foreign-trade zones, existing lease terms, owned facilities, and local/state business climate. The ensuing "priority matrix" clearly identifies the total score of each network and node within it. Now you can narrow the number of options to run through steps 4 and 5.

In step 4, field visits are conducted to make contact with economic development groups, commercial brokerage professionals, local labor providers, and potential real estate developers. You will tour the market to determine how well the existing and planned facilities meet the company's needs, and talk to the economic development teams to determine what incentives at the city, county, state, and federal level would be in play for this node in the revised network. Now you have the basis to pick the best two networks to move to step 5.

You get serious in step 5 with final network locations regarding incentives, lease rates, length of lease, free rent, facility buildout requirements, etc. Once you have analyzed all this data, you are ready to make a recommendation to your company's senior management. Once approval is granted, maybe with slight modifications, you begin the process of implementation and execution.

By utilizing this process, you have built a new network to support your company's business that is based on shared goal achievement, future cost expectations, and solid analysis. You have taken most of the emotional element out of the process. Most of all, you have documented the steps and results so you can repeat them in the future should the environment change, requiring a "re-do."
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