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

Automotive Site Guide 2006
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.

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