As a general rule of thumb, savings
opportunities associated with network analysis range from 5 percent to
15 percent of those logistics costs that the analysis can influence.
The size of the opportunity will vary from case to case and assumes
that the current network is suboptimal. In addition to cost savings,
companies can run scenarios to define the impact of alternative service
level strategies and/or growth strategies.
Because there are so
many variables to consider during the network modeling process, it is
not feasible to evaluate locations down to the municipality level.
Network modeling typically compares locations, down to a 50- to
100-mile radius, based on transportation and expected facility costs.
Once the quantity and general locations of the distribution center(s)
have been defined, the next stage of due diligence known as site
selection is required.
Site Selection
Site
selection has historically been a real estate function. While the real
estate transaction is still part of the process, it is actually the
last stage. Choosing the proper site for a distribution center has
developed into a specialized, scientific process. Business process
drivers, cost and non-cost factors such as efficient customer access,
infrastructure availability, proximity to qualified labor, variable
operating costs, available real estate opportunities, incentive
availability, and overall industry and business climate compatibility
are all part of the scientific equation. As a company begins the site
selection process, it is important that they understand two important
areas:
1. What are the factors that will control a company's decision?
2. What are the steps to properly select a site?
While
we could consider dozens of factors for selecting a site, only a few
are important enough to impact the decision-making process.
Transportation,
which is usually the largest location-dependent cost factor, is
addressed during the network modeling process. After transportation,
labor has traditionally been the next highest cost element. However,
available or developable land, power needs, water and wastewater supply
and capacity, and building costs are beginning to rival labor.
In
recent years, the critical factor associated with labor has shifted
from cost to productivity, quality, work ethic, and, most importantly,
supply. Moreover, as basic energy costs have continued to rise, utility
costs have become a more important element in the site selection
process. This is definitely a more critical component for manufacturing
operations than distribution centers.
Taxes are a much less
important but more complex site selection factor than is commonly
recognized. Because business models vary tremendously, no single "best
tax climate" exists. Some states and communities tax real property
heavily, while others tax corporate income heavily. Inventory taxes and
a host of others also influence different firms differently.
Training
is typically the most overlooked yet one of the most valuable elements
in supply chain planning. There is typically a shortage of funds and
time in starting up a facility, so those in charge generally cut
adequate training from the planning process when there may be money
available to companies for training in the form of state training
incentives.
In
addition to training incentives, there are a host of other potential
incentives that can be identified for a company through the thorough
site selection process. They include ad valorem tax abatements,
corporate income tax credits, sales/use tax exemptions, land
acquisition, site improvements, facility financing, relocation
assistance, infrastructure assistance, hiring assistance, power
reliability, and several others.
This
article was excerpted from a recently published book, Supply Chain
& Real Estate: Where Universes Collide, by Ned Bauhof, Vice
President of Precision Distribution Consulting, Inc., York, Pa. For
more information, contact the author at 717-718-3234, Ext. 105.
