The Art of Logistics Location Selection - "Listen and Lead"
30 Jun, 2006By: Kristian D. Bjorson
Last Year's Network Model and Location Recommendations May Already Be Old News!
Don’t just dust it off – do it over! Dynamic customer demands, global sourcing changes and capacity challenges across all transportation modes are forcing every distributor to continuously evaluate their distribution networks. From brand-name retailers to fast food giants to government agencies, today’s leading companies are leveraging “real-time” service and cost considerations to drive logistics location selection decisions. First and foremost, “world-class” distributors actively listen to all participants across their supply chain to collectively identify and seek agreement on the greatest opportunities to improve their bottom line, often including but not limited to changes in service, transportation, inventory, labor, tax and real estate. Second and equally as important, “world-class” distributors lead, not manage their location selection projects. Don’t pass up this unique opportunity to positively impact both customer satisfaction and corporate operating profitability. Use these practical and proven tips to help you “listen and lead” a logistics location selection process to achieve optimal results in less time.
Listen to Logistics
Your customers, suppliers and partners are facing similar complexity with today’s accelerated trends, supply chain integration-internationalization and increased volumes. Distributors must utilize not only logistics, but their distribution center (DC) locations, as a competitive advantage. Start by asking the right questions, listening to the participants in your supply chain and conducting regular check-ups on the viability of your distribution network.
What is the supply chain strategy to handle the new demand-change?
Is the current distribution network properly located to support the supply chain strategy?
Which DC locations have the flexibility, capacity and ability to meet the demand-change?
If a new DC is required, who should it serve, where should it be located, for what products and how big?
To maximize the ROI, are there opportunities to consolidate any other DCs?
Answer these questions by meticulously listening to the present situation and acutely understanding the anticipated changes in cycle times, product mix, supply sources and operating costs to meet new demand. Conduct an objective analysis of current distribution operations, identify challenges, suggest options for change, and establish the current benchmark for future comparison. This routine of benchmarking performance and developing metrics is not only a “survival of the fittest” tactic, but it also enables a process to efficiently assess the impact of changes and continuously determine how the operations and financials match up against top competitors and “world-class” distributors.
Look at the entire supply chain to develop a clear understanding of how the location selection process may help grow both top and bottom lines. Interview your top customers and lead suppliers for feedback regarding the service and cost components critical to any effective distribution network. Collect and analyze detailed supply chain information from a representative period in order to leverage network optimization and simulation software to understand the interdependence between all service and cost factors. Outline a location selection strategy to capture the maximum cost reduction or avoidance while being capable of handling the incremental demand and flexible enough to react to changes.
With transportation costs accounting for more than half of the logistics spend for distributors, the greatest sensitivity study today involves the analysis of multi-modal forms of transportation to offset the rising costs of fuel and customer demands. Over the past decade, ports have seen a ten-fold increase in imports from Asia-Pacific to meet unparalleled consumer demands-expectations for product quality, availability and responsiveness at an acceptable price point. Therefore, the supply points have shifted from manufacturing plants located in the southern United States and in Mexico to numerous ports along the west coast (4X more container traffic than the east coast). These continuing trends force distributors to optimize service and costs, not just for one targeted geographical area, but their entire distribution network.
For example, a distributor may best serve their customer base, proportionately located to the U.S. population, from 8 regional DCs (Los Angeles, Seattle, Denver, Chicago, Dallas, Orlando, Atlanta and Northern New Jersey) at an average transit lead time of just over 1day and an average distance of approximately 200 miles. However, an additional warehouse may be required at a west coast port, such as Los Angeles, Seattle or Oakland, to deconsolidate or redistribute product as well as an additional warehouse near a major freight airport, such as Memphis, Louisville or Chicago, to handle time-sensitive product to meet an upcoming launch. As each new demand-change happens within the supply chain, the distributor should analyze the customer service level and capacity of their existing distribution network to understand the financial trade-offs associated with transportation, inventory, labor, real estate and tax. This analysis may justify adding another DC through a network-wide reduction in transportation costs to offset the increases in inventory, fixed and variable costs for the new facility.
Lead the Location Selection Process
With geographical direction for the next DC location from the comprehensive network analysis, conduct internal working meetings to determine achievable goals-objectives and a practical implementation strategy. Develop a realistic timetable and a communications program for all team members to set the foundation for a successful project. Stretch the geographic parameters from the network analysis to set a foundation for shareholder and stakeholder support of critical project drivers and leverage savings opportunities. Determine three to five criteria essential to the success of the project, called threshold criteria that each city within the targeted area must meet. Utilize these criteria in a “high-level screen” to obtain consensus and eliminate those cities that do not meet the threshold criteria. For maximum impact, the high-level screen should produce a minimum of six cities in three states for consideration.
Lead a team approach in developing an objective decision model, which accounts for both quantitative and qualitative advantages and tradeoffs. Research and analyze specific criteria related to labor force, distribution climate, and operating costs-issues. Look beyond the “off-the-shelf” labor information to quickly focus on relevant correlations — such as the relationship between a diverse workforce and unionization, high school graduate population and warehouse worker density, or the relationship between a handicapped workforce and public transportation. Be an effective leader of a diverse, productive and cost-effective workforce. Regarding the distribution-climate criteria, account for changes in transportation infrastructure, competitor facilities, and relevant community acceptance attributes. The operating cost profile will be driven by the following major categories: transportation, labor, real estate, and tax structures. Tailor all of these data points (see sample ideas below) to your needs in a mathematical model that weights, ranks, and plots the data in a report format that is easy to read. A decision matrix of advantages and tradeoffs will provide additional life to the results as well as help build an educated decision-making consensus on relevant information to arrive at a short list of two or three cities in two states.
Unionization by county
Labor competition by SIC/NAICS code
Employee turnover by industry and position
Alternative labor (retired, handicapped, etc.)
Capacity of local transportation carriers (ocean, rail, TL, LTL, parcel, air, etc.)
Proximity to transportation terminals
Distance and drayage rates from ports
Sample municipal incentive formula
Electrical charge schedule by demand and consumption
Utility reliability / redundancy from dual power substations
Hazardous materials / environmental regulations
Prevent fatal and costly mistakes by taking city visits to gain firsthand experience of the primary economic and community criteria. Set up interviews with other retail DC operations to verify comparative labor data on hiring, turnover, wage scales and incentives as well as an overall comfort level for the distribution climate. Define all potential real estate scenarios to understand each city’s issues, weaknesses, and strengths, as well as windows of opportunity created by current real estate market conditions and expected changes. Develop a real estate spreadsheet to evaluate each city by the availability, cost, and accessibility of potential distribution centers. Prepare a business profile to help you solicit tax abatements and incentives from various economic development councils. Review recent tax abatement and incentive allocations of comparable DC projects prior to meeting with each location’s economic development groups to determine the overall incentive value for your project. At the conclusion of the city tour, you will be in a position to make a confident recommendation of the primary state / city / location and back-up, supported by a substantive summary of objective and subjective information.
Don’t just talk about the primary location decision; make it happen by converting recommendations into results. A detailed location selection process puts your team in a position to make a winning retail DC location decision. Simply locking and loading a long-term real estate deal is not the answer.
Aggressively take the lead to improve facility layout and productivity through better use of space and work scheduling. Constantly challenge yourself to find answers to critical questions regarding facility planning, design, and operations. Develop a detailed facility strategy that maximizes the ROI in labor, material-handling equipment and information systems. Quantify the benefit of each cost in terms of time, money and effort. Perform value engineering to ensure economic, safety, and flexibility issues are constantly being met. Working from the inside out will enable you to capture the greatest fixed (real estate) and variable (labor) operating savings.
Maintain competitive leverage in the real estate and tax process by evaluating multiple alternatives through a formal request for proposal process. From a real estate perspective, set the stage for flexibility inthe written request for proposal documentation with various options for contraction, termination, renewal, expansion, purchase, etc.
In working with the appropriate government officials at a state, county, city and local level, utilize all of the information outlined and captured above to effectively finalize any tax abatement and incentive negotiations. Use a third party negotiating position to work every angle of both deals until the ink is dry. Always execute the tax abatement and incentive agreement prior to the real estate contract. Prevent any profit erosion by controlling the balance of the implementation process with internal and external resources actively managing the real estate acquisition / disposition, facility design and construction, material handling and information systems procurement, real and personal property financing, integration / installation and third party logistics outsourcing (if applicable). Evaluate running the distribution operation through a third-party logistics service provider rather than yourself. Their experiences and advice may be worth more than you think. Keep leading by challenging yourself to improve your logistics location selection team and process.
True project success will be defined by carefully “Listening to Logistics” and “Leading Location Selection” through the framework outlined above with the appropriate compliment of internal and external resources to yield “world-class” results in less time.