Bullseye! Finding the Right Site
The economic development stars are aligned. As U.S. companies reassess their distribution networks to combat rising transportation costs and meet customer demands, business development entities now realize the logistics and transportation industry offers an opportunity to add jobs and vitality to local economies, expand and develop transportation infrastructure, and create a new economic livelihood for the future of U.S. industry. The result is a renewed focus on site selection.
As U.S. industry shifts its moorings to keep pace with the tide of global growth, many cities and regions are following the trade winds, and discovering a new and viable economic calling: logistics and distribution.
Businesses today may be more inclined to stay close to safe harbors, the dream may be as easily attainable as locating a DC within 10 miles of a port, and most would prefer a return on investment measured in quarterly growth rather than 20 years time.
But the impetus for change today is compelling. Declining agricultural industries and the trend toward offshore manufacturing have left some areas of the United States with high unemployment rates, underutilized facilities and infrastructure, and a growing need for economic stimulus.
From small towns such as South Boston, Va., and Pekin, Ill., to burgeoning cities such as Savannah, Ga., economic development corporations are eager to lure distribution and warehousing activities to their respective economies to drive growth. As they do, businesses are following in their wake.
Shifting trade dynamics have precipitated stateside retailers, manufacturers, and wholesalers to alter their course for the future and reconsider how they coordinate and navigate domestic distribution networks. Swelling transportation costs, contingency planning requirements, and customer demands continue to complicate their dilemma, forcing businesses to rethink where they locate DCs so they can economically, reliably, and quickly serve their customers.
The Cup is Half Full
"Different businesses have different needs," says Craig Lesser, commissioner of the Georgia Department of Economic Development. "But most are concerned with finding a location close to their customer base."
Locating close to customers was a concern when Solo Cup Company, based in Highland Park, Ill., decided to build a 1.3-million-square-foot distribution center in Social Circle, Ga. The company expects the new facility, planned to be complete by September 2006, to bring 155 employees to the area.
Solo is the world's largest manufacturer and distributor of disposable units for consumer/retail, food service, packaging, and international markets, with annual sales of more than $2 billion.
"We are transforming our manufacturing plants into multiple-technology facilities, where we can create products from paper, plastic, and foam in one location. We're also switching to a hub distribution strategy to shorten the supply chain for our customers," says Tom Pasqualini, executive vice president supply chain, Solo Cup Company. "The Social Circle distribution center provides the space and flexibility to meet our current and future needs."
This new distribution center, together with its expanding manufacturing presence in nearby Conyers, Ga., reinforces the importance of the Atlanta area in Solo's strategic long-term plan to more efficiently serve customers.
"Our priority in locating our facilities near important customers is to shorten the supply chain and improve service," says Pasqualini. "We considered other sites in the Southeast, but Social Circle—located three miles off I-20 and 14 miles from our Conyers facility—is well-situated for our transportation and logistics needs, and convenient for employees," he adds.
For Solo Cup, the motivation is clear: "This new distribution center, coupled with our current plant expansion, will enable us to expand as we support the growth of our customers' businesses around the world," concludes Pasqualini.
A similar trend is occurring all along the East Coast, as businesses look to expand distribution facilities closer to inbound ports and growing consumer markets, says Garrett Scott, director of industrial developments for Johnson Development, a Spartanburg, S.C.-headquartered industrial real estate company.
Johnson Development, which is building a 329,000-square-foot warehousing spec facility in Windsor, Va., is leveraging its geographic proximity to Virginia ports to engage businesses that need port access to bring product into the United States.
"An increase in development opportunities is occuring along the East Coast, particularly for industrial warehousing. A decentralized approach to distribution, especially in regions such as the Southeast where demand is growing, allows businesses and ports to mitigate risks and react effectively to unforeseen circumstances," Scott says.
Market research also supports the need for distribution facilities that can store containers onsite as well as improve velocity to ensure quick turnaround times.
Distribution Hat Trick
Locating a facility on the East Coast presented Pacific Headwear, a Eugene, Ore., wholesale distributor of baseball caps, an opportunity to more effectively meet customer demand and streamline transportation costs.
After a diligent search, the company selected a 20,000-square-foot production and warehouse facility located on 3.5 acres in South Boston, Va., to complement its existing facility in Oregon. The Virginia facility has been operational since October 2005.
With 55 percent of its sales in the eastern United States, Pacific Headwear—which customizes and sells baseball caps to Little League and high school sports teams—needed a site that was closer to its consumer base.
"We wanted to locate in an area where we could ship to our customers as quickly as possible, and have a positive impact on the community," says Tim Davis, general manager, Pacific Headwear East.
The company's Oregon facility sources caps from three different manufacturing facilities in Asia through the ports of Portland and Seattle. Since locating in South Boston, Pacific Headwear has brought five containers through the Port of Norfolk, and expects to import 24 to 30 containers in 2006.
Creating a facility on the East Coast has enabled the company to more effectively meet its customers' needs for timely delivery, cost, and flexibility. The new location has also helped Pacific Headwear drive down transportation costs—a savings it passes along to customers.
"Our location in South Boston puts us in a strategic position to ship over-the-road anywhere east of the Mississippi in two days or less," says Davis. "Out of Eugene, we had to ship second-day air to make sure product got to East Coast customers on time.
"It used to cost $40 to ship a case of caps via air freight; now we can ship a case for $11.50 using second-day ground service. We've been able to reduce our costs, and help customers save money."
In addition, Pacific Headwear has recouped considerable fuel expenses by locating in South Boston. The company knew it needed to set up a second DC when gas prices increased and UPS, its exclusive carrier, began raising rates.
"The price for moving a shipment rose about $1 a day. We send out 350 shipments daily, so that is a significant increase," Davis adds.
Home is Where the Port Is
For large retailers, access to major container ports is vital for matching supply to demand. Swedish home furnishings retailer IKEA, for example, recently announced plans to build a new distribution facility on 115 acres at the Savannah River International Trade Park in Savannah, Ga.
The 1.7-million-square-foot DC project, located four miles from The Port of Savannah's Garden City Terminal, is expected to create 150 new jobs upon completion. The first phase of the project consists of a 785,000-square-foot facility, which IKEA anticipates will be operational by summer 2007.
Transportation cost is an important consideration in the home furnishings industry, and employing a regional distribution network offers a strategic advantage for meeting customer needs.
"It's becoming more common for companies such as IKEA to locate distribution hubs in Savannah. The Savannah River International Trade Park is in close proximity to the port, and we have room to grow at the terminal," says Robert Morris, director of external affairs, Georgia Ports Authority.
IKEA evaluated opportunities throughout the country and settled on Georgia because of the region's expected growth potential. "We're looking to establish a presence in the Southeast and we prefer a location close to a port because our product comes in via ocean," notes Joe Roth, IKEA's public affairs director.
Each IKEA store sells nearly 10,000 different products, sourced and manufactured by more than 1,500 suppliers in 55 countries. Because IKEA manufactures a sizable amount of product in Scandinavia and other European countries, and has two-thirds of its stores on the East Coast and in the Midwest, locating a DC in Savannah makes perfect sense, explains Roth.
Currently, the company operates four U.S. distribution centers located in Bristol, Pa.; Perryville, Md.; Tejon, Calif.; and Westhamton, N.J. It also operates facilities in Brossard, Quebec, and Vancouver, British Columbia, all situated near major ports.
"We have multiple suppliers for each product to ensure inventory flow and guard against unforeseen obstacles. Establishing a presence near multiple ports helps us build contingencies into our distribution network," explains Roth. "We are trying to diversify the mechanisms for transporting product inbound and around the country."
When completed, the Savannah DC will serve IKEA stores in Atlanta, Ga.; Frisco, and Houston, Texas; and a future store under construction in Round Rock, Texas.
"We aim to have four or five stores in one area to justify building a new distribution facility," says Roth. "The challenge, however, is to balance DC locations with stores and regional growth initiatives. We are strategically planning for the future with our new Savannah center."
As the retailer continues to open three to five new stores annually, and with growing consumer demand in areas such as Florida, the new DC is primed to support further retail store expansion in the region and around the country.
"IKEA hopes to extend its reach from the new DC into the Gulf Coast and up to the Middle Atlantic region. IKEA, and other such companies, can realize cost savings by building hub DCs within miles of major, growing ports," adds Morris.
Inland to Demand
Given current trade dynamics, coastal ports such as Virginia and Savannah are ideally situated for businesses that bring product inbound to the United States. They are also located in regions where consumer demand is strong, making them prime targets for DC expansion.
But as fuel prices and congestion issues become more apparent, especially in heavily populated areas, some businesses are moving to inland port facilities to set up distribution centers.
Aventine Renewable Energy Inc., the second-largest producer and marketer of ethanol fuel in the United States, recently announced plans to build a new $62.5-million facility at its existing complex in Pekin, Ill.
The company processes nearly 38 million bushels of corn yearly to produce fuel-grade ethanol, corn gluten feed and meal, corn germ, corn condensed distillers solubles, and brewers yeast—all of which are distributed throughout the United States and the world. Aventine expects the new facility, which will employ 20 operators and one manager, to be operational by December 2006.
Because Aventine's business relies on processing corn to make ethanol, its options for locating a new distribution facility are limited. "We need to be centrally located where the majority of corn is grown," says Jim Redding, vice president of business development at Aventine. This made expanding its current plant in Pekin a logical move.
Aventine's Pekin facility is situated on the Illinois River in the middle of an enterprising new port system called TransPORT. Still under development, the six-county port district is putting Central Illinois on the map as a logistics and distribution hotspot.
TransPORT covers 100 miles of the Illinois River from Marshall County in the north to Mason County in the south, encompassing Fulton, Marshall, Mason, Peoria, Tazewell, and Woodford counties. The project's goal is to create industrial and transportation employment for the region, and stimulate the growth of intermodal logistics and industrial maritime development throughout the state.
"With our location on the Illinois River, we can capture barge service moving southbound toward New Orleans and the Gulf Coast. We also have customers that move gas north to Chicago, and they take advantage of empty barges on the backhaul to move product back to their facilities," says Redding.
In central Illinois, where agricultural industries and coal production are waning, the promise of an ethanol cash crop has local development officials optimistic about future growth initiatives in the region.
"Our country currently uses 150 billion gallons of gasoline per year. By contrast, we consume four billion gallons of ethanol. A huge potential for growth exists within this industry," Redding adds.
Jim McConoughey, interim executive director of TransPORT, and a licensed pilot, recalls flying over the area several years ago and wondering why the existing infrastructure wasn't better utilized. "We realized we needed to create a port district facility to take advantage of the area and the facilities already in place," he says.
In 2003, local economic development officials created the Heart of Illinois Regional Port District to promote developing the region's transportation and industrial employment opportunities, and TransPORT in particular.
"We're currently looking at 14 target sites that we can adapt for warehousing and distribution purposes," says McConoughey. While the area still ships a considerable amount of grain outbound, TransPORT is targeting distribution growth for inbound movement.
"Logistics companies are looking at TransPORT as a crossroads for their stateside distribution networks," he says.
Businesses such as Aventine recognize the value in locating near an inland waterway where barges can reach New Orleans via the Illinois and Mississippi rivers in 10 days, or the East Coast via the St. Lawrence Seaway in eight days.
Nearly 10 million tons of freight move along the TransPORT waterway yearly and that number is expected to grow, specifically as container-on-barge volume increases, says McConoughey. With increasing congestion at both East and West Coast ports, the Midwest inland waterway system is quickly making a name for itself as an alternate route for shippers.
Many companies that look into the area have an "a-ha" moment, according to McConoughey.
"Because of the volume moving through the West Coast, companies have to wait 12 to 14 days before their containers are offloaded and redistributed. Realizing this, companies see the advantage in having an inland distribution system where they can warehouse product on moving barges," he says.
In addition to its Pekin facility, Aventine is developing a fuel ethanol plant further north near Hennepin, Ill. The site, which has eastbound railroad and barge shipping capabilities, will similarly serve Aventine's emerging East Coast and U.S. Gulf Coast ethanol demand.
Hoisting Their Sails
Similar economic development trends are occurring elsewhere in the United States. For some regions, luring distribution and warehousing business is only part of their long-term plan.
In Southern California, for example, Mag Instrument is building a 700,000-square-foot manufacturing facility on a 30-acre parcel in Ontario that will consolidate more than 800 jobs, create 1,600 new jobs, and generate more than $1 billion per year in economic stimulus. The flashlight maker's mission is to keep manufacturing in the United States, and provide the local economy with a sustainable job source for the future.
Multimodal airport facilities such as Southern California Logistics Airport (SCLA) also loom large in efforts to offer U.S. businesses inland ports of entry. Establishing SCLA was an economic development lesson for the Inland Empire region.
When George Air Force base closed in 1992, it created a major economic void for the City of Victorville and the surrounding region. At the same time, it created an opportunity for the public and private sectors to work together to capitalize on existing infrastructure and demand for airfreight capacity, and create a viable economic bridge for the future.
To date, the 5,000-acre multimodal complex has attracted more than 100 companies—including such notable names as ConAgra Foods, Goodyear Tire and Rubber Company, M&M/Mars, and Wal-Mart—with its direct access to global markets.
Contrary to other regional distribution trends, businesses are consolidating existing western DCs into bigger facilities in or near SCLA, says Keith Metzler, the City of Victorville's director of economic development. He cites M&M/Mars and Goodyear as two examples. "They now operate out of a larger DC and serve a larger geographic area," he notes.
The marriage of existing air cargo capabilities with rail/intermodal holds the greatest growth potential for SCLA, Victorville, and the greater Inland Empire region, according to Metzler. "Businesses looking to locate in this area always ask about land availability and entitlements, and whether the railroad will make necessary investments in intermodal facilities," he says.
The importance of having multiple transportation options and the mechanisms to support them cannot be understated. "Infrastructure is the foundation of economic development," says Lesser.
Shippers are equally aware of making sure they locate facilities in areas that offer ample opportunities to identify and coordinate transportation to meet market demand.
"Having access to an inland waterway is an important consideration, but perhaps even more critical is having multiple transportation options and channels," says Aventine's Redding. "Companies limit themselves if they move product mostly by water, by truck, or through one port, especially in a commodity business."
The recent devastation caused by Hurricane Katrina and its impact on the Gulf Coast ports' transportation capacity and throughput is a good example of why businesses need to create multiple channels for moving cargo. Proper site selection can go a long way toward driving better risk management and containing transportation costs, says Redding.
These converging tides present U.S. enterprises and business development entities mutual opportunities to develop and grow partnerships that add jobs and vitality to local economies, expand and develop transportation infrastructure, and create a new economic livelihood for the future of U.S. industry.