10 things to consider when establishing a global distribution network

Sept. 16, 2005
Offshore outsourcing is a loaded topic when it involves U.S. manufacturing, but you are less likely to face controversy when outsourcing global warehousing

Offshore outsourcing is a loaded topic when it involves U.S. manufacturing, but you are less likely to face controversy when outsourcing global warehousing and distribution. When you're setting up a global distribution network, the decision on where to locate warehouses and how to operate them will be governed by the following 10 factors.

1. Capital investment strategy is at the top of the list of reasons to avoid owning foreign real estate. If it doesn't fit with the strategic goals of the company, a foreign warehouse is not a likely investment. The question you have to answer is, is this the best use of company capital? That said, many firms will consider the investment in a physical distribution network strategic to serving certain global markets.

Consumer products company Procter & Gamble Co. used to serve the Mexico City market from a number of small, inadequate facilities scattered around the region. AMB Properties developed a distribution operation to consolidate the P&G operations into a single, modern facility and, after contracting for the use of the facility for a few years, P&G purchased the operation, according to Steve Callaway, senior vice president with AMB Properties.

2. Market life cycle is another critical factor. At the early stages of market development, flexibility can be crucial. Markets can develop faster or slower than expected, and scalability can become an issue. Property-developers and third-party providers often have multiple facilities and can expand or contract distribution resources to meet changing needs.

On the flip side, many companies in a more mature market situation will want to control their assets/inventory more closely. Combining issues of how company capital is committed in a country or region and meeting customer service demands may dictate ownership over a contract relationship.

3. Speed to market takes two forms — entering the market and serving the market. Contracting for an existing facility with at least the minimum systems and a workforce can accelerate market entry or expansion.-Here, entrenched infrastructure is a plus. Operations in port areas, near airports or in "distribution hot spots" may promise logistics capabilities and access to developed transportation infrastructure. Those properties may be difficult or expensive to own because the area is already built up. Many ports and airports may also restrict land ownership.

Carriers and forwarders with operations on-site at ports and airports often expand to include distribution services. Schenker recently announced a European Logistics Center in Germany that provides a logistics warehouse for value-added services adjacent to its central hub.

Property on port grounds may be impossible to own. The only way to have property in some ports, confirms Edgar Kasteel, vice president of Holland International Distribution Council, is to rent it from the port. Those highly desirable locations may be difficult to secure, but they do offer proximity to transportation infrastructure.

4. Local infrastructure is an important factor in transportation efficiency, but service frequency and lane balance also come into play. Some operation bases, though centrally located, may not provide adequate transportation service into the destination market, or the lane balance can be so skewed it drives high rates. Beyond the presence of good highways, rail or inland waterway infrastructure, it is important to model the actual or anticipated distribution patterns down to city pairs or lanes.

Pan-national distribution may not work from an existing national distribution center. Lane balances and frequency of service come into play, but licensing may also be a factor.

5. Obtaining proper bonds and licenses to receive and store goods and certifying processes that subsequently move goods into another country can be a complex process. Being an established, registered company with ongoing operations in the country is a plus.

Entering a market for the first time, you may need to establish close relationships with Customs and other officials until they become comfortable with your operation. The process will flow more easily for established companies, says Kasteel.

6. Local knowledge is critical to success in each of these areas. Labor laws can differ significantly, as can local culture and customs. This isn't always negative — it can provide more flexibility as with the Netherlands-where flex workers are common. The market for temporary logistics workers has built up around the numerous transportation and distribution operations in the region, providing a ready supply of experienced, seasonal workers to handle peak demand.

7. Destination knowledge can be another local resource. Establishing pannational operations demands some knowledge of the complexities of the various destination markets, along with their infrastructure and rules. Finding the right manager with knowledge in all the proper end markets can be a challenge. Key global hubs often have experienced managers working in the industry and certainly attract third-party logistics providers (3PLs) and allied services which offer this same capability.

8. Handling systems are another important consideration. Ownership may be the preferred strategy for highly automated or proprietary systems. When the size of the investment inside the facility rivals or exceedsthe cost of the building itself, the risk may be too great for a property developer or 3PL. The expertise required to manage and operate the facility may also be so specialized that the combined effect suggests ownership of the staff and the site. Shoe manufacturer Reebok Ltd. made the decision to own its facility near the port of Rotterdam in large part because it had invested more in the handling systems than the building itself.

Property developers and third parties want a risk-based return on their investment. A versatile layout with adequate ceiling height and column spacing to accommodate various storage layouts, plenty of dock doors and provisions for cross docking are lower risk. Dedicated, highly automated systems are expensive to install and operate and may be tenant-specific.

Many developing markets have inadequate distribution facilities. Initial development may be focused on manufacturing, and those goods may initially move into export markets. Companies entering those markets may accept sub-par distribution facilities because that's all that is available.

Many distribution centers or logistics parks are built on speculation, explains AMB's Callaway. Without a specific tenant or strong local demand, infrastructure may be slow to develop and it can be more desirable to allow for flexibility to move out of an available facility and into a more modern, secure logistics park or consolidate smaller operations as new distribution centers are built.

9. Risk management for property developers means diversifying into multiple markets. In areas like China, there has been little speculative development, and existing facilities are poorly designed. China restricts property ownership, and developers wishing to enter the market can own a building but not the land. Instead, they hold a ground lease.

With demand for distribution facilities on the rise, more developers and third parties are building in China. But they must also weigh the risk that those companies that rushed to the area to take advantage of low-cost labor might pull out if their cost of distribution rises, lead times remain long and service fails to improve. Add currency risks and questions about political stability in developing areas like China and Eastern Europe, and you may be more than willing to let them shoulder that risk.

10. Unvoiced preference may be the most difficult factor to consider in global operations (as in domestic site selection). The root cause can be a bias that doesn't want to be spoken or it can be a preference that is not apparent. Offer a location consultant the example of a CEO who fought to keep a plant open in the city where his daughter went to college and they'll respond with tales of the CEO who influenced a siting decision because wife likes to shop in Paris, the executive who honeymooned in London or a host of negative experiences that color the decision process.

How a company enters a market may be as important as where it goes. The answers aren't necessarily found on a map. Flexibility to change a decision clearly indicates caution and may support being a tenant over becoming a landlord, at least in the beginning.


AMB Property Corp.
Holland International Distribution Council
Port of Rotterdam
Procter & Gamble Co.
Reebok Ltd.

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