Change a source. Open a new market. Close a manufacturing plant. Before you know it your distribution network is out of synch.
Reevaluating distribution center site locations and their impact on network optimization is a complex task. Let the bean counters drive the process and you could end up with a logistics nightmare.
Take the case of a global logistics manager who complained about a plant located far from the port in a low-cost country, where the infrastructure and operations at that port forced him to use air services almost exclusively to get product out of the manufacturing plant and into the supply chain.
These types of stories, unfortunately, aren't limited to global sourcing nor to third-world countries, and mistakes and oversights planning your distribution network can be costly.
Logistics site selection appears to be less about balance and more about how you leverage imbalances. The difference is where you place the fulcrum to do your heavy lifting. Driving those decisions are cost, time and service. Underlying those are infrastructure issues, human factors, politics and a host of other issues. The result is an unequal weighting that shifts focus back and forth between the three main factors.
Recently compiled data on site costs, combined with some current evaluations of time and service factors, can help with the process.
Chicago Consulting (www.chicagoconsulting.com), for instance, develops an annual model for the 10 best warehouse locations, based on the shortest transit time to reach the U.S. population. An admittedly broad tool, it is biased to consumption vs. production and suggests a single warehouse serving the U.S. would be best located in Bloomington, Ind.
In its most recent 10 Best Warehouse Networks study, Chicago Consulting suggests that the shortest transit time for a three-warehouse network would come from having facilities in Allentown, Pa.,
Palmdale, Calif., and McKenzie, Tenn. A more likely five-warehouse network is optimized by using Summit, N.J., Palmdale, Calif., Chicago, Ill., Dallas, Tex., and Macon, Ga., to reach consumers. Transit times for these networks average 2.28 days for one warehouse, 1.29 days for three, and 1.13 days for five using truckload transportation.
Logistics professionals earn their money by taking these broad models and turning them into targeted strategies that fit specific company goals.
Based on the experience of the last five years compiling data, the Site Selector of the most logistics-friendly cities, developed by Expansion Management and Logistics Today, digs into 10 categories that are important to logistics and ranks 362 major U.S. metropolitan areas on their logistics capabilities. For the last two years, The Boyd Company (www.bizcosts.com) has taken our ranking of the Top 50 Logistics-Friendly Cities and developed a cost model for each city.
Examining the interplay between these three tools — Chicago Consulting's Top 10 warehouse network list, Logistics Today's Top 50 Cities and Boyd Company's BizCosts Report — offers an interesting take on logistics site selection.
At a broad level, the Chicago Consulting model helps establish the value of a multi-regional strategy. Based on customer service needs, sourcing arrangements, cost constraints and other strategic issues, one of the first steps in evaluating a logistics network is determining how many distribution centers are needed and roughly what regions they will serve. The importance of being close to production facilities will pull the pointer in Chicago Consulting's "consumption" model across the map, fine tuning where the East, West, Midwest, Southwest and Southeast warehouses might be in a fivewarehouse network. Then the real work begins.
Typically, distribution workers will be plentiful in hubs of logistics activity. At the top of Logistics Today's list of transportation and distribution industry operations are Chicago, Los Angeles, New York, Houston, Miami and Atlanta. These commercial and trade centers are well entrenched in the U.S. economy and in the business psyche. They are also some of the most expensive labor markets for a typical warehouse.
The BizCosts model looks at the cost of a full workforce of 150 non-exempt workers needed to operate a 350,000 square-foot warehouse. It applies the same assumptions in each market and compiles wage and benefit data to provide a labor cost. From a labor perspective, the most expensive workers are in the major markets, namely, Boston, the greater New York/New Jersey area, Los Angeles/Long Beach, and Oakland/San Francisco.
The best workforce/labor climates for logistics, based on labor availability, skill level, cost and other factors, are often outside the major hubs. Top of the list for labor and workforce in the Logistics Today Top 50 are St. Louis, Mo., Louisville, Ky., Miami/Ft. Lauderdale, Fla., San Diego, Calif., the greater Kansas City area and Savannah, Ga. Overlaying the Logistics Today workforce findings and the BizCosts list of low-cost labor yields matches on three cities: Tampa, Fla., Savannah, Ga., and Charleston, S.C.
With the recent surge in fuel prices, energy costs have moved center stage for many companies. Petroleum and natural gas supply chains became very visible following disruptions caused by last year's hurricanes along the U.S. Gulf Coast. Distribution channels emanating from New Orleans showed their face in the form of a pathway of higher fuel prices that reached as far as the Midwest and to Atlanta in the Southeast.
Absent these extremes, gas and electric costs to operate a distribution center run highest in the Northeast, according to the BizCosts data. Sites in New York and New Jersey top the list for utility costs. Low utility costs are more spread out. The five lowest utility costs reported by The Boyd Company were in Little Rock, Ark., Salt Lake City, Utah, Denver, Colo., Portland, Ore., and Tulsa, Okla.
Another general area that gets pretty emotional in the boardroom is taxes. Directly or indirectly, distribution centers carry a price in the form of property taxes and other local and state taxes related to equipment and inventory. In addition, operations that support logistics are subject to a variety of transportation-related taxes and fees, such as state fuel taxes.
Before negotiators swing into action to win tax abatements and other concessions to bring your facility to a particular community, the BizCosts list shows Norfolk, Va., Youngstown, Ohio, Akron, Ohio, Portland, Ore., and Richmond Va. are the low-cost centers from among the top 50 cities. Top of that price list are Newark, N.J., New Orleans, La., Denver, Colo., Detroit, Mi., and Buffalo, N.Y. There are some differences when transportation-related fees and taxes are included. Logistics Today's Site Selector offers Atlanta, Ga., Savannah, Ga., Tulsa, Okla., Charleston, S.C., and Chattanooga, Tenn. as the best tax climates.
Labor cost and workforce availability, taxes and fees, and utility costs may be general areas that could easily apply to a corporate office, manufacturing or assembly plant or a distribution center. They tell only half the story for logistics.
To demonstrate the kind of impact shipping costs have on a distribution center site decision, The Boyd Company set up a hypothetical distribution channel using each city in the Logistics Today Top 50 as a single-point distribution network to reach the top consumer markets in the U.S. Using specified truckload volumes at a fixed rate per mile, the BizCosts model pushed a year's worth of goods out to consumers from each city in turn. (In its second year of analysis, the Biz-Cost model actually looked at a total of 61 cities because of shifts in the Logistics Today Top 50).
While this type of distribution network is not likely to reflect most companies' direct experience, it does demonstrate that despite population density in many major coastal cities, a distribution strategy focused in the Midwest is less costly — at least if you have only one distribution center. The important point this makes is proximity to consumption appears to be the more sound strategy.
Major metro areas like Boston, San Francisco, Miami, Los Angeles and New York offer large consuming markets, but reaching the rest of the U.S. is costly, putting each of these cities in the top 20 on shipping costs for the single distribution center model.
Going back to the Chicago Consulting model, Bloomington, Ind., was the ideal location for a single warehouse based on time-to-market using truckload transportation. How does it stack up on cost? The closest Logistics Today Top 50 metro areas evaluated in the BizCosts model are Indianapolis, Ind., and Louisville, Ky. Both are among the 10 low-cost points for a single-warehouse distribution model.
Sticking with motor carriage as a prime mover in site selection, other factors besides cost will interest logistics professionals — specifically, road infrastructure, and condition and congestion.
When it comes to road and highway infrastructure, the Northeast, the Southeast and Southern California dominate the top 10 metros in the Logistics Today Top 50. But having roads is only part of the story — maintaining them is also important. Add road condition, and the Southeast begins to gain on the other regions. Layer in density, congestion and safety and the Southeast and some Midwest cities take a serious hit. Miami, Tampa and Atlanta in the Southeast are joined by Indianapolis, Detroit and Chicago in the lower ranks of the Logistics Today Top 50 because of their congestion problems.
Logistics planning in the U.S. is notably skewed towards motor carriage. It accounts for an estimated 80% of U.S. transportation spending or about 50% of total logistics costs, according to the Council of Supply Chain Management Professionals' annual State of Logistics Report. However, some businesses will also be interested in other modes, especially if much of their sourcing comes from offshore.
Based on volumes and access to ocean ports and inland waterways, Logistics Today's Top 50 ranking shows New Orleans, Houston, New York, Los Angeles and Philadelphia at the top of the list. (The figures were compiled before hurricanes Katrina and Rita pummeled New Orleans.) It is also important to point out that these rankings include bulk commodities as well as containerized shipments. Some ports, notably New Orleans, handle predominantly bulk shipments.
Rail access and service appear to be best in the East and Midwest. Chicago, New York, Philadelphia, Pittsburgh and St. Louis rank at the top of the list for rail.
Top air cargo hubs include New York, Los Angeles, Chicago, Washington, D.C., and Miami. Rounding out the top ten are other major passenger airline hubs of Houston, Boston, Atlanta, Dallas and Pittsburgh.
The bottom line for distribution center site selection is that there is no single bottom line. Decisions are distinctly regional, based on the size of the network and the number of facilities included. Within the regions, optimizing a location is a balancing act that involves a variety of cost factors and service elements. And, in the end, the optimal network is a moving target.
Since most companies will take a phased approach rather than plan their network from a blank sheet of paper, there are legacy sites to be considered. The role of logistics will be to demonstrate the importance and impact of factors other operations and management disciplines may not have considered.
See the complete list of the most logistics-friendly cities in the U.S. at: www.logisticstoday.com/siteselection.
Most Logistics-Friendly Cities
- New York, NY
- Houston, TX
- Chicago, IL
- Cleveland, OH
- Detroit, MI
- St. Louis, MO
- Minneapolis-St.Paul, MN
- San Francisco-Oakland, CA
- Kansas City, MO
- Jacksonville, FL
Source: Logistics Today's Site Selector
Lowest Labor Costs
- Mobile, AL
- San Antonio, TX
- Little Rock, AR
- Chattanooga, TN
- Birmingham, AL
- Jacksonville, FL
- Norfolk, VA
- Tampa, FL
- Savannah, GA
- Charleston, SC
Source: The Boyd Company
Highest Labor Costs
- Boston, MA
- Middlesex/Somerset, NJ
- Seattle, WA
- Bergen/Passaic, NJ
- Oakland, CA
- Los Angeles/Long Beach, CA
- Newark, NJ
- New York, NY
- Nassau/Suffolk, NY
- San Francisco, CA
Source: The Boyd Company
Workforce/Labor Top 10
- St. Louis, MO
- Louisville, KY
- Miami/Ft. Lauderdale, FL
- San Diego, CA
- Kansas City, MO
- Savannah, GA
- Charleston, SC
- Buffalo, NY
- Tampa/St. Petersburg, FL
- Washington, DC
Source: Logistics Today's Site Selector
Worst Traffic Density/ Congestion/Safety Record
- Indianapolis, IN
- Salt Lake City, UT
- Milwaukee, WI
- Memphis, TN
- Phoenix, AZ
- Chicago, IL
- Atlanta, GA
- Detroit, MI
- Miami/Ft. Lauderdale, FL
- Tampa/St. Petersburg, FL
Source: Logistics Today's Site Selector
High Cost of Ownership
Expect to pay more to own a distribution center in the following cities:
- New York, NY ............................$18.2 million
- San Francisco, CA......................$17.4 million
- Los Angeles/Long Beach, CA....$17.4 million
- Nassau/Suffolk, NY ..................$17.2 million
- San Diego, CA............................$17.1 million
- Boston, MA................................$17.0 million
- Oakland, CA ..............................$16.9 million
- Bergen/Passaic, NJ ..................$16.6 million
- Newark, NJ................................$16.3 million
- Seattle, WA ..............................$16.1 million
Source: The Boyd Company
Lower Cost of Leasing
Leasing reduces costs an average of 15%, but only slightly re-orders the list of most expensive markets:
- San Francisco, Calif. ....................$15.6 million
- New York, N.Y. ............................$15.6 million
- Nassau/Suffolk, N.Y. ..................$14.8 million
- Boston, Mass. ..............................$14.7 million
- San Diego, Calif. ..........................$14.5 million
- Newark, N.J.................................$14.2 million
- Bergen/Passaic, N.J. ..................$14.1 million
- Oakland, Calif...............................$14.0 million
- Seattle, Wash. ............................$13.9 million
- Los Angeles/Long Beach, CA ....$13.8 million
Source: The Boyd Company
Least Expensive Sites to Own a Warehouse
- Little Rock, AR..............................$11.5 million
- Mobile, AL....................................$11.9 million
- Birmingham, AL............................$12.1 million
- Chattanooga, TN..........................$12.1 million
- Tulsa, OK ......................................$12.2 million
- Louisville, KY................................$12.3 million
- Memphis, TN ..............................$12.3 million
- San Antonio, TX ..........................$12.4 million
- Savannah, GA ..............................$12.4 million
- Gary, IN ......................................$12.5 million
Source: The Boyd Company
