Logistics Distribution & Warehousing 2006: Supply Chain Network Optimization

"Large industrial users have become more sophisticated. They are no longer just looking for a big box to store product for distribution. They want a comprehensive logistics strategy. While important, real estate is only a component of such a strategy." - Thomas R. Carragher, Studley.

The worlds of real estate and supply chain are colliding. Today's progressive supply chain and real estate executives recognize that there is an inevitable connection between supply chain and real estate. This connection offers possibilities of integration and improving processes in both areas. This can influence a company's ability to operate efficiently on a day-to-day basis and, even more significantly, have an impact on potential profit.

The bottom line is that real estate and supply chain have a symbiotic relationship. A real estate decision in the absence of supply chain planning is as suboptimal as a supply chain strategy without consideration to real estate planning. The latter comes in many forms, whether it is the wrong location (which can result in lower incentives, higher taxes, unsuitable labor, increased transportation, etc.), the wrong cost structure (10 year vs. 5 year lease), or an inappropriate platform on which to operate (including building size, site flow, dock requirements, etc.).

Use a Step-by-Step Approach
Having participated in various levels of supply chain planning for more than 14 years, I have come to understand one undeniable fact: Distribution planning is not easy. The difficulty compounds if you consider this collision of supply chain and real estate planning. Considering these complexities, it is imperative for companies to utilize a methodical step-by-step approach to analyzing their distribution infrastructure.
Fortunately, there are tools and methodologies available that afford companies the opportunity to not only evaluate their current conditions, but also to evaluate alternative operating strategies and the associated impact. As companies embark on such a performance improvement journey, it is critical to understand the objectives of the journey. In most cases, when companies implement any type of supply chain improvement strategy, they are trying to accomplish one or more of the following:

    1. Reduce cost;
    2. Improve service; and/or
    3. Position the company for growth.

Strategies
As members of a company evaluate the objectives of their strategy, it is also important to understand that there are multiple levels of strategy in any organization. At the highest level is the business strategy. Business strategies help to shape what the company is and what it wants to become. With a business strategy defined, companies must then define, or their customer will define for them, the customer service strategies.

Supply chain strategies then represent the operating platform that must be put in place to achieve the customer service strategy, and ultimately the business strategy, at the lowest possible cost. The real estate strategy is then the platform upon which the supply chain strategy resides, acting as a key enabler of success - hence, the symbiotic relationship of supply chain and real estate.

Although the overall roadmap to supply chain planning is a long one, there are two critical touch points of supply chain and real estate planning: distribution network rationalization and site selection. Although different in their methodologies, network optimization and site selection work hand in glove relative to defining a company's optimal distribution infrastructure.

Distribution Network Rationalization
Distribution network rationalization is the process of determining the appropriate facility infrastructure to support a given supply chain strategy. No matter how well distribution centers operate, if a company has the wrong number of distribution centers, distribution centers in the wrong locations, and/or distribution centers serving the wrong purpose, the supply chain will have a suboptimal cost structure. Before a company invests capital in a new distribution center, someone should ask the following questions:

• How many distribution centers should we have?
• Are there opportunities to consolidate distribution centers?
• What is the role of each distribution center?
• Have we properly sized the distribution centers?
• Which products should we inventory in each distribution center?
• Which customers should each distribution center service?
• Do we have enough flexibility to accommodate future customer demands?

How do companies answer these questions? As previously mentioned, there are tools available to help. One such tool set is network-modeling software. A well-designed network model will assist a company in answering all of these questions and define what distribution centers are required, where they should be located, and how they operate to support a company's overall supply chain strategy.

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.1

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