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Supply Chain Optimization Impacts Site Selection Decision

Getting logistics right isn't just important for business. Booming global population will test infrastructure in unprecedented ways.

September 2010
In today's difficult operating environment, companies are responding to the global economy by proactively positioning their business for competitiveness, or trying simply to keep pace with higher operating costs, financing, and uncertainty by cutting costs and improving productivity. Both responses have their risks. In either case, executives need a more sophisticated view of their company's overall business to successfully compete - or even survive. Virtually every company - from suppliers to manufacturers and logistics providers to retailers - is now operating in a complex, fast-changing system. The result: businesses are affected by a new set of factors from their supply chains.

For most companies, owning or leasing manufacturing, warehousing, transportation, and retail facilities represents the largest fixed-cost element of their businesses. Despite this financial and competitive importance, too few companies have a strategy to continually assess and optimize their supply chain networks to ensure they are meeting their business needs. Companies don't usually design logistics networks; they inherit them as a result of earlier mergers or acquisitions, or simply evolve them piecemeal as operations expand.

Supply Chain and Site Decisions
The forces driving this change are complex. They include typical considerations such as new markets, social and political issues, shifts in investment and trade patterns, changing competitive landscapes, regulatory requirements, infrastructure, consumer demand expectations, labor skills and supplies, and availability and cost of resources. Other forces at work include shortened product lifecycles, demand and availability of product variety, rising energy costs, sustainability issues, increased congestion at ports and on highways, natural disasters, and terrorism. Add to these factors uncertainties about economic recovery and rising debt, and companies find it difficult to even plan for the future, curtailing capital investment.

Take another look at these factors and notice that by adding "location" to each factor, each facet can be either positive or negative to supply chain. Today, industrial and retail site selection must consider the entire supply chain. Missing the dynamic cost and efficiency effects that location plays on their supply chain are crucial mistakes for an expanding company or one reviewing its portfolio. The question is, where are the optimum locations for your supply chain in terms of the four typical influences on competitiveness (cost, time, quality, and risk), and also competition, demand, supply, and service, and by cluster, sector, or industry.

Over the years, location factors have had various degrees of project-specific weighting. However, the top site selection factors have changed. In the past, it was safe to assume that the most important factors regarding cost were labor, real estate, and logistics, in that order. Labor remains a top consideration, especially regarding skill. Real estate, which was typically the second highest cost, is now abundant and affordable. The rising cost of transportation and the growing focus on sustainability has resulted in logistics becoming a top priority. But of all of the location factors to consider, logistics has always been the most complex and difficult to analyze properly. Logistics and supply chain optimization are so important to manufacturers that a logistics analysis is often conducted up front in the manufacturing location decision process to immediately determine the actual search area boundaries.

Most logistics analyses in an industrial site selection project are basic at best. They tend to be high-level analyses where simple transportation costs are compared to various points on a truckload (TL) or container (20-foot or 40-foot) basis, supplemented by an average transportation time frame. This basic information can be easily obtained from shipping companies, but anything more complex is difficult to obtain without an in-depth logistics analysis.

Beware: analyzing the optimal mode, multiple shipping configurations, or conducting network optimization is beyond the capabilities of most site selectors. Brokers and site selection consultants too often claim to be logistics experts, but have only performed basic logistics analyses. Real network optimization requires a professional logistics analysis by trained experts using sophisticated logistics modeling typically requiring GIS capabilities - all of which are major investments. Companies should verify the actual abilities of site selectors and brokers to perform such analyses, including in-depth analysis of the costs of current and planned networks, routing and scheduling, delivery times, mode analysis, and an understanding of points of integration (customs, ports, and regulations).GIS Becoming Necessary
GIS analysis is a great tool to analyze network optimization and cluster analysis. Network optimization can include centroid analysis, which can be conducted and integrated to determine the precise location for maximum efficiencies, minimal costs, optimum time savings, and the best supplier and market access. This can be performed with historical data to determine the optimum present location, or with sales forecasts to determine optimum future locations. Clusters consist of multiple, geographically close and interconnected industries, companies, and associated institutions that have common and complementary goals. Clusters tend to enhance productivity and competitiveness by encouraging best practices, stimulating innovation, and creating new business opportunities. Cluster analysis measures the extent and sophistication of a cluster formation.

Companies seeking location decision assistance should ask service providers for examples of past analyses, and tools - including models, GIS methodologies, and maps - used to reach logistics conclusions. The cost savings and improved efficiencies of a sophisticated logistics analysis can be significant.

Location and Logistics Networks
Analyze the entire supply chain to maximize competitiveness. This includes not only the proposed manufacturing/warehouse distribution location, but supplier locations, distributor locations, retail locations, export terminals, and various transportation terminals or infrastructure (intermodal, airports, ports, highways). Linking digital and physical infrastructure is a growing trend. This super infrastructure will be more important to site selection in the future. Additionally, analysis should not be limited to just forward logistics, but should also include reverse logistics analysis such as product returns and back-hauling.

By dynamically evaluating networks with sophisticated solutions, companies can avoid the pitfalls of making minor adjustments to networks that are ill-suited to their business needs. This is best accomplished during a site selection or portfolio analysis, as it is the best time to implement changes. In many cases, the gains of efficient manufacturing and distribution are actually negated by being in the wrong location, where a company's assets or capacity to produce, transport, and store inventory as demand changes is not optimized. Long-term profitability and competitiveness depends on the right capacity and location of physical assets.

Global Implications
The quantity and quality of goods needed to satisfy the global population will increase over the next 40 years. The U.S. population is projected to grow from more than 300 million today to over 400 million, and the global population to 9 billion, by 2050. Nearly all population growth will occur in developing countries. Logistics and the infrastructure - charged now with moving goods while sustaining the environment - will become critical. But the World Bank estimates that infrastructure is very unlikely to meet demand during this period, creating a direct investment bottleneck. Transport infrastructure will likely be concentrated in developed countries and a handful of emerging economies, particularly in urban, metro areas. Only stable economies will be able to afford and maintain this infrastructure.

Getting logistics right will be critical for any company's future competitiveness. Globalization, regionalization, and near-shoring require supply chain flexibility and the presence of an optimized logistics network to facilitate a flexible, efficient supply chain. Today and in the future, a sophisticated logistics network could be the difference between success and survival. Proper logistics analysis as part of location decision has reached a point beyond basic analysis to a new level of sophistication - and urgency.

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