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How is E-commerce Changing Distribution Center Site Selection?

Retailers and supply chain and logistics experts explore the challenges brought about by new consumer markets and their demands for quick product delivery.

March 2013
As e-commerce sales march ahead of in-store sales, the major issue discussed at the Retail Industry Leaders Association’s (RILA) Retail Supply Chain Conference: Logistics 2013 was best practices for developing and executing an omni-channel distribution strategy. And real estate — particularly distribution centers (DCs) — is a significant part of the process. At the conference, which was held in late February, retailers and supply chain and logistics experts were exploring the following questions and trends:

What is the biggest challenge for retailers this year?
Retailers are evolving their multichannel strategy — from outsourcing fulfillment operations to third parties as a short-term solution to taking it “in-house” by building DCs that can handle both individual and store orders in the same facility. However, there is still work to be done. At the conference, we heard that only 6 percent of retailers are implementing fully agreed upon integrated multichannel strategy.

How does a multichannel strategy change retailers’ site selection needs?
As evidenced by last year’s shopping season, same-day delivery from major e-commerce and multichannel retailers introduced e-commerce as a viable option for last-minute shoppers — and mitigated competition from traditional brick and mortar stores. Therefore, retailers are considering how they can differentiate themselves to customers using the retail supply chain, especially when the bar has been raised with delivery models like same-day and next-day delivery.

Retailers are using real estate to build efficient multichannel networks and to compete in a brave new world dominated by ecommerce.

One solution gaining traction among retail supply chain executives is locating fulfillment facilities closer to their customer base in order to meet service commitment goals such as aggressive delivery schedules. Based on JLL’s Big Box Outlook report,demand for “big box” space (warehouse and DCs that exceed 250,000 square feet) is also growing in secondary major distribution and population hubs such as Indianapolis, Memphis, Phoenix, and Houston as traditional tier-one markets such as Chicago, Atlanta, and New Jersey have become more congested and their supply scarce.

What does a multichannel facility look like?

The building criteria for a multichannel facility is limiting the search for big box space to only a few existing opportunities. It is also driving retailers towards customized build-to-suit developments. Multichannel big box facilities require a unique specification:

  • Mezzanine areas are multiplying. E-commerce companies need larger mezzanine areas on multiple levels – requiring higher clearance from 36’ to 40’. New buildings can typically accommodate two or even three levels of mezzanine for picking, packaging, gift wrapping, returns and other back-office tasks.

  • More parking for more employees. Many e-commerce companies employ labor-intensive picking and packing strategies to fill online orders, thus requiring larger sites to accommodate employee parking.

  • Consumer-driven location selection. Demand plays a larger role in site selection when goods must arrive via a quick turnaround. There must be an available and affordable labor force to staff distribution centers, as well as access to rail, highways and air transportation.

  • Life system and HVAC requirements increase. With an increased warehouse workforce, other upgrades are necessary to building life systems, such as better lighting and ESFR fire protection. Formerly driven by inventory, now heating and cooling systems must be employee-driven.

What is on the horizon that site selection executives should be aware of?
Based on what we heard at RILA’s annual supply chain conference, as well as figuring out multichannel strategy in the U.S., retailers are looking to overseas markets for growth. This means creating ever more complex distribution strategies that cross borders. To meet service commitments for local customers, U.S. retailers will be looking to build multichannel facilities on foreign shores, and foreign retailers will be expanding here. They will also have to consider the emergence of m-commerce (mobile), international logistics and sourcing, as well as global procurement and transportation. All will factor into the brave new world of retail distribution site selection.

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