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Logistics Distribution & Warehousing 2006: Supply Chain Network Optimization

Real estate decisions cannot be made in the absence of supply chain planning and vice versa.

Ned Bauhof, Vice President, Precision Distribution Consulting, Inc. (Logistics Distribution Warehousing 2006)
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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.
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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.2

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.

1Site Selection: Corporate Perspective and Community Response, Phillip D. Phillips, Ph.D.
2List provided by Cushman & Wakefield
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