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Inbound-Outbound Logistics Cost Determines Location Decisions

The majority of respondents to Area Development's 24th Annual Corporate Survey said inbound-outbound shipping costs were important to selecting a site. Consider these factors before your next move.

June/July 10
Before you locate your next distribution center or warehouse, you will examine various site selection criteria. Area Development's 24th Annual Corporate Survey ranks site selection factors that corporate managers say are important or very important in their location analyses. This year more than 81 percent of respondents said inbound-outbound shipping costs were very important or important in their decisions (Figure 1), making those costs the tenth most influential site selection factor in 2009.

Future implications of inbound-outbound shipping costs on distribution networks should concern corporate managers. The volatility of fuel costs, accessibility of other modes of transportation, and major legislation currently being debated have given corporate managers a new list of worries. But building a robust distribution network can alleviate future problems.



The Big Picture
Before corporate throws a dart at a map to select a site, executives should pause to consider the implications of a new site on the company's overall network and go-to-market strategy. Today supply chains are no longer local, but global. Consumers are fluid, market shifts are the norm, and third-party-logistics providers (3PLs) are more plentiful and capable than ever. To be responsive, companies need a robust distribution network, not a perfect site. Even if the dart lands in California, the best site to modify in your distribution network may be Washington, Oregon, or even Georgia when the company reviews transportation flows, fuel costs, lease terms, facility size, growth projections, and customer expectations.

Successful site selection relies on more than a single factor. Managers should ask how a potential site will fit into the company's overall network flow, how it will respond to changes in the market, and what the total network cost to the company will be. Site selection begins with network design, and as companies reconsider their networks they should make sure they align with their go-to-market strategies, and that they fit into its strategic supply chain.

Ask Area Development
Planning a move that centers on logistics? Submit your business questions at the end of the article to Ask Area Development and the authors will respond.
Finding a Site
Oscillating fuel costs, new laws and regulations, fewer state and local incentives due to the recession, and aging infrastructure have corporate managers rethinking their site selection strategies. While corporate management has no control over cost of fuel, laws and regulations, incentives, or overall infrastructure, it can control the design of its distribution network. A flexible, robust distribution network that takes a long-term view can forestall potential problems.

To create a robust distribution network, first examine individual distribution centers and determine whether those sites fit into the company's overall network flow and go-to-market strategy. Before adding to or moving a site to create a network that is more robust, ask yourself:
• What markets will the new site serve?
• Should the site be a larger facility that supports multiple regions or should we build more distribution centers that are smaller and closer to customers?
• What are our transportation options at those new sites, especially if our customers decide to change their strategies?
• What is our service to the market strategy likely to be in the future: three-day, two-day, the same day, or the next day?
• Will clients change their order patterns to more frequent and smaller shipments to reduce inventory at their ends of the supply chain?
To figure out what markets you will serve can be as easy as looking at a map or as complicated as hiring a site selection consultant to conduct a service area study. The easy route involves taking the time to call and discuss issues that other distribution facilities in the area have. Ask them why they are there, about the transportation infrastructure, and if they are meeting cost and service targets set before they located to the area.

Don't worry about reaching out to other distribution facilities in the area. There are plenty of opportunities to speak with representatives from those sites. Begin a discussion on a social networking platform like LinkedIn. Attend local professional meetings hosted by the Society of Industrial and Office Realtors (SIOR), the Warehousing Education and Research Council (WERC), Commercial Real Estate Development Association (NAIOP), or the Council of Supply Chain Management Professionals (CSCMP). One reason to attend local meetings and conferences, especially in the logistics and supply chain field, is to discover best practices or issues and concerns that could affect your distribution facility. You can also measure your company against competitors, an opportunity to snoop around without really snooping.

Transportation
Keep your transportation options open. Look for sites that provide a mix of options, from air and rail to truck and ocean shipping. Customer business strategies change as fast as teenage trends. If your customer changes plans a year after you begin operations and expects you to deliver to another region in the country or to another country altogether, can you receive and send shipments using a combination of shipping methods? And don't forget about expediting orders. While FedEx and UPS can support your strategy, your total cost analysis must reflect the cost of those services. Being located near a combined heavy weight and small package air hub can make a difference.

Evaluate any long-term plans that could alter the mix of products and how that will affect shipping methods and service delivery. And remember that transportation typically comprises more than 50 percent of a company's supply chain costs. Labor costs consume around 17 percent, while rent, taxes, and maintenance typically encompass less than 10 percent of supply chain costs (Figure 2).

Ask Area Development
Planning a move that centers on logistics? Submit your business questions below to Ask Area Development and the article authors will respond.
Future Projections
Consider your company's growth potential, as well as which customers will grow with the company. Will the business grow or decline over the next five years? Will it expand or reduce overseas operations? Having several small distribution facilities will speed delivery to customers and lower fuel and trucking costs, but it will be harder to manage inventory and consolidate deliveries if something changes.

At the same time, don't succumb to the one-size-fits-all approach. If your company provides a range of products and services, locating a large cold storage facility in a central location to support many customers may make sense. The larger facility will have higher costs associated with transportation - longer routes, slower delivery, and higher fuel usage - but lower costs when considering other factors such as work force training, lower inventory levels, and ability to consolidate orders. Be sure to examine total cost when analyzing your network cost.
"Logistics Cost, Labor, and Love"
Your distribution network must be flexible enough to improvise, adapt, and overcome changes in this brave new world of constant flux. Understanding that site selection decisions are based on cost service trade-offs and how those trade-offs affect your overall network flow and total cost, will help you make smarter decisions.

There is no holy grail in site selection. However, careful consideration of the total network cost, energy availability, incentives, and infrastructure needs, along with overall network design, will enhance your search for the right site for your next distribution facility.

"Location, location, location" used to determine the quality of a commercial real estate site. Today the three L's - "logistics cost, labor, and love" - are key factors. Logistics cost and labor are major elements in the total cost of your network. The love comes from local and state communities that must embrace your company's investment in the community. Without a genuine desire for your investment, the local market may make operating your facility difficult, or more expensive if there are no incentives.

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