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Retail Distribution Center Site Selection

30 Sep, 2005

By: Kristian D. Bjorson
Ask Your Q's and Mind Your P's: Proximity to People, Ports and Profits, Please!

Consumer demands, global sourcing challenges and limited capacity across multiple transportation modes force every retailer to take continuous looks at their distribution network. The opportunity to leverage proximity to people, ports and profits are driving retail distribution center (DC) site selection decisions. A unique opportunity to positively impact the customer experience, product availability, operating profitability and a retailer’s future growth exists in each site selection project. Site selection may be used as a strategic weapon to deliver profit enhancement.

Retailers are counting on supply chain contributions to improve the bottom line while constantly searching for tangible results to highlight successes to deliver customer and shareholder value. Jump on these real-life tips and practical ideas which help to organize and manage a retail DC site selection process to achieve optimal results in the shortest possible time frame.

Ask Your Q’s

The complexity of today’s retail supply chain with accelerated fashion trends, supplier integration-internationalization and increased volume has forced retailers to utilize not only logistics, but their DC locations, as a competitive advantage. The best way to accomplish this is by asking the right questions, listening and conducting regular check-ups on the viability of the 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 of the other DCs?

Answer these questions by meticulously surveying the present situation and anticipated needs to understand the changes in cycle times, product mix, supply sources, as well as increases in operating costs to meet new demand. Provide 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 globally against top competitors and “best of class” performers.

From an entire supply chain perspective, develop a clear understanding of how the site selection process may help maintain and grow both top and bottom lines. Seek access to interview the top retail stores (the retail DC customers) and lead suppliers for feedback regarding the service and cost components critical to any effective distribution network. Collect and analyze the overall supply chain costs from a representative period in order to leverage network optimization and simulation software to understand the interdependence between all cost and service factors. Outline a site selection strategy to capture the cost reduction or avoidance while being capable of handling the incremental demand and flexible enough to react to changes.

Proximity to People and Ports

With transportation costs accounting for more than half of the distribution spend for retailers, the greatest sensitivity study of the modern supply chain has revolved around the proximity to people and ports. The past decade has been driven by meeting unparalleled consumer demands-expectations for product quality, availability and responsiveness at an acceptable price point with a ten-fold increase in imports from Asia-Pacific. Therefore, the supply points have shifted from manufacturing plants located east of the Mississippi and in Mexico to numerous ports along the west coast (4X more container traffic than the east coast). These continuing trends force retailers to optimize service and costs for not just one targeted geographical area, but their entire distribution network.

For example, a retailer may best serve their store 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 1 day 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 retailer 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 retail DC through a network-wide reduction in transportation costs to offset the increases in inventory, fixed and variable costs for the new facility.

With direction to commence the site selection process, conduct working meetings to determine strategy and location objectives within the targeted area. 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.

Develop 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. 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 to your needs to develop a quantitative and qualitative analysis 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.

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 / site and back-up, supported by a substantive summary of objective and subjective information.

Profits, Please!

Don’t just talk about the primary location decision; make it happen by converting recommendations into results. A detailed site 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 in the 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 facility design / construction, material handling and information systems procurement.

True project success will be defined by carefully “Asking Your Q’s and Minding Your P’s” through the framework of this retail DC site selection process with the appropriate compliment of internal and external resources to yield world-class results.

 

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