Balance cost and location a LogisticsToday.com EXCLUSIVE

Avis used to say, when you’re number two, you try harder. But beware of people who try too hard when it comes to site selection.

Logistics Today’s Top 50 Logistics-Friendly Cities (www.logisticstoday.com/displayStory.asp?S=1&sNO=7495) provides a good perspective on where the logistics environment is most positive, but for many, the question is, can I get many of those same benefits without the high cost? In some cases, you can. Second-tier cities are often more aggressive in offering incentives to attract business because of the competition they face from the cities or regions that already have a strong reputation and some marketing muscle.

There is definitely a move to places like eastern Pennsylvania vs. New Jersey or Nevada vs. California, says Terry Harris, Chicago Consulting (www.chicago-consulting.com/). His group has been publishing “The 10 Best Warehouse Networks” for a number of years. Based on population, the guide suggests locations that would provide the shortest average lead time to customers for a network of one to 10 warehouses.

Strictly a geographic pointer based on population density, the Chicago Consulting guide measures one person in Montana as equal to one person in Manhattan. But, the guide doesn’t adjust for logistics capability in any of the cities. Based on population density, an average three-day lead time to reach customers across the U.S. places you in Bloomington, Ind. Bloomington appears in the 312th position (of 361) on the Logistics Today Site Selector.

Drawing a larger circle around the market you need to serve and locating a little further out can provide some benefits, but is also comes with a few caveats. “Some people are looking for a green-field site,” says Mike Brown of Prologis (http://www.prologis.com/), a major industrial property developer. Typically, those sites have lots of incentives attached to them, he continues. “Logistically, it may not be the best site for me.” One reason is that it can mean higher transportation costs. The added distance is one facet, but service is another.

The number and type of carriers serving a destination may drop as you move off the main traffic lanes. Brown points out being even 50 miles from a major market can be a challenge for frequency of service. A motor carrier who can pick up a backhaul in the major city may be less inclined to drive 50 miles empty to pick up your load. The recent rise in fuel prices has adjusted carrier planning in an effort to reduce out-of-route miles and empty miles even further.

Looking beyond immediate benefits, Brown cautions logistics mangers to examine what happens when incentives run out. In five years, you could be reevaluating the cost and saying to yourself, “I’m in the wrong place.” “If you have a town or municipality offering lots of incentives, you need to ask the question, ‘why’?” There are a number of reasons that could explain the incentives, but it’s important to know why, says Brown, so you aren’t surprised down the road. That doesn’t mean you won’t want to locate there, but you should know what you’re getting.

Assessing future costs is important for the logistics manager responsible for managing a distribution network. As incentives run out or other cost factors creep in, someone is bound to ask how you’re going to get those costs back out, Brown adds. The local municipality may need to come up with additional incentives, he says, or you may find the rent in the major market wasn’t that much higher and the lower transportation costs or higher service levels offset much of that.

“I don’t mean to overdramatize that, but it is a risk when you introduce something relatively artificial [like tax abatements and other incentives] into the equation,” Brown adds.

The particulars of the market or industry served also come into play when considering how far away a distribution center can be located, says Chicago Consulting’s Harris. “If you’re delivering to local restaurants, that’s very different from delivering to a customer’s warehouse which may, in turn, be on the outskirts of an urban area.”

Harris says his work tends to focus on the network rather than the finer points of site selection. (e.g., how many warehouses do you need?) Designing a distribution network often includes international manufacturing, he points out. The trend to outsource to Asia has important ramifications for the distribution network.

“When the plant in Cleveland moved to China, that plant is no longer relevant as a warehouse either,” he offers as an example. “The warehouse may have been there because the plant was there, and you have to rethink the network in the new context.

Harris also works transportation economics into his discussion. You aren’t just looking at where consumption is occurring – consumer or manufacturing – but also the source for goods and how they are moving. Goods inbound from Asia are likely to move inland by rail intermodal. The stack-train rates are extremely favorable, says Harris. A container from Los Angeles could move to Chicago for $1,200 via rail where that same load might cost twice as much to move by truck.

Shifting ports may also have little impact given favorable rail rates, he continues. Areas like Chicago, Atlanta, Dallas or Cleveland may still be favorable for distribution centers and don’t tie you geographically to a port. This is a factor for many shippers who are experiencing problems with congestion delays at West Coast ports or have had to route away from areas affected by hurricanes Katrina and Rita.

Returning to the issue of how far out to locate a distribution center, Harris notes investors and developers need security. They need to know the site is marketable if you pull out. That’s one part of the issue. “If you go off and develop a piece of property by itself, you have community issues to deal with – whether or not they want you there.”

While some communities have identified logistics and distribution sites as target industries to attract to their region, others are still looking for major manufacturing. One logistics executive offers a case where he approached a city that falls just outside the Logistics Today Top 50 Logistics Friendly Cities with a proposal to locate a distribution center there. The facility would employ roughly 200 people, he explains. But the city, with a population of 217,000, wanted more. It sits in a region with a population of over 2 million, and it wanted to attract manufacturing facilities that would employ many more people. While the city continued to search for that elusive manufacturing plant, the logistics executive was weighing the costs and benefits of two Top 50 Logistics Cities as a site for the facility.

In this case, the logistics executive had picked a community that fell in the middle of the three on costs. An analysis by The Boyd Company (www.theboydcompany.com/) of the cost of operating a single distribution center to serve the major consuming markets in the U.S. showed the preferred site was only 1% lower in total operating cost (roughly $100,000 per year) than the higher of the three but 9% higher than the lower-cost city. Because all three sites were relatively close geographically, the transportation costs in the Boyd BizCosts Report were in a narrow band. The more expensive city had transportation costs 1% higher and the lower-cost city was 4% lower.

The Boyd analysis, which looked at the 2004 Top 50 Logistics Sites, showed a dramatic range of costs to own or lease a facility in either of the 50 cities. New York ranked at the top of the list for expense at over 6.5 times the cost of low-priced Mobile, Ala. Even without the current effects of Hurricane Katrina, those two sites aren’t likely to compete for the same distribution center unless, as the Boyd analysis assumes, you’re using only one DC to serve the U.S.

A likely comparison, still using the Boyd cost analysis, demonstrates that shifting your attention from New York City to the Bergen/Passaic, N.J. area can save as much as $1.4 million per year in operating costs. Moving out a little further to the Albany/Schenectady, N.Y. area could save nearly $1 million more when compared with the New Jersey site.

Cost is a significant driver in a logistics site selection decision, but it is not the only factor. Weighing transportation costs and options against facility costs, labor availability and incentives and matching those capabilities to corporate and logistics goals will involve careful research.

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