Choosing a Warehouse Location: Look for More than Just Price
The pressure on corporate supply chains has never been greater. Major supply chain glitches can impact a company's shareholder value by as much as 20 percent or more within six months—regardless of who is at fault—according to industry estimates.
Companies feel increasing pressure to reduce inventories and increase inventory turns. And, in a post-Sept. 11 world, there are several capacity-driven chokepoints, such as retail demand for goods.
Ships are lined up outside the ports of Los Angeles and Long Beach, due to lack of longshoreman capacity. That's hard to understand because members of the longshoreman's union earn more than $100,000 per year for positions that are moderately skilled, and clerks routinely earn more than $150,000 per year.
Southern California faces continuing environmental pressure from citizens and politicians regarding the huge amount of truck traffic on streets and freeways. It seems inevitable that a collision will occur between state and federal lawmakers and the longshoreman's union over operating the ports 24/7.
It is in this environment that companies must work to find the best locations for their warehousing centers. Corporate supply chains are organic in nature, and must ebb and flow with fluctuating demand and inventory levels.
Consequently, it has always been imperative that companies size and design their warehouses correctly. Placing warehouses, DCs, and other distribution facilities correctly, however, has grown increasingly more complex.
Going Beyond Price
While price is a mantra chanted by most real estate brokers—and price is important—the most critical elements for selecting a warehouse location are not price-sensitive. Additional critical characteristics to consider include:
- Cubic capacity
- Ability to integrate materials handling equipment
- Truck access
- Trailer storage
- Turning lanes
- Freeway access
- General location
Companies deciding where to locate a warehouse must often turn to outside experts to help them make an effective choice. Perceptions about where to locate are often incorrect, so companies may choose to rely on a broker who knows an individual submarket, and can guide them in the right direction.
A pertinent example is what takes place in the Los Angeles marketplace. Most businesses that plan to operate a warehouse for goods distribution in Southern California assume that it makes sense to locate near the ports. After all, if you minimize drayage costs, then overall costs of processing goods should be lower. But that is not necessarily the case.
In a market such as Los Angeles, the questions that companies should ask themselves—but often don't—include:
- How much space do we need?
- Where do we need the space?
- How many containers per week, month, or year will we ship through this facility?
Businesses looking to locate in the Los Angeles market may find that one submarket works better than another, assuming other location factors don't skew the determination one way or another.
Let's use Company X as an example. It needs 200,000 square feet of warehouse space and wants to locate in the Los Angeles Basin. The company expects to receive 250 40-foot containers per month. Drayage rates in the port area are approximately $132 per container; drayage 50 miles from the port area costs $220 per container.
The company is represented by a national brokerage firm, and is working on an exclusive basis with a lead agent in the market where it wants to locate the warehouse. Because the leading brokerage companies are located in major markets such as Los Angeles, this formula works well.
The lead agent has worked with Company X for years and has its utmost confidence. But because Company X has already stated a preference for a port location, and because major brokerage companies require agents to refer business internally, the lead agent refers the business to a credible agent who works the port area for the company.
The port agent gets a slightly better-than-market deal for Company X—about $7.20 per square foot per year. The client is pleased with the transaction because of the excellent price, and the brokerage team is pleased because they completed a transaction effectively and demonstrated their credibility to the client.
Compare Total Costs
So what is wrong with this picture?
When deciding where to locate a warehouse—outside of labor, utilities, taxes, economic incentives, and other factors that have a minor effect on a transaction—it is imperative for a company to compare the total real estate and drayage costs for various areas at required velocity levels.
In the general Los Angeles market, for example, a Class-A, port-area building leases for about $7.20 per square foot per year, although rents in Southern California are quoted monthly. A similar building in the Ontario, Calif., submarket leases for $4.80 per square foot per year on the same basis.
The container velocity break-even point for a company considering a location in the Los Angeles port area is approximately 455 containers per month at today's pricing.
Consequently, if a company has container velocity greater than 455 containers per month, it clearly needs to be located near the port, and will require a substantially different building design and land area to facilitate that throughput.
Company X could have saved $216,000 a year in combined rent and drayage by locating in the Ontario submarket. Clearly, the company left a large amount of money on the table.
Choosing the Right Agent
Because of the way many major brokerage firms are structured, lead agents rarely suggest that clients consider another market because that means turning the business over to another agent. For this reason, companies looking for a warehouse location should not automatically assume that using a major brokerage firm—though they offer a cadre of well-trained agents—is the best solution.
Ultimately, a company must be sure the agent it selects has the right knowledge—not only of the real estate market, but also of the company's business, how its supply chain functions, and how this impacts its warehouse location choices.
When looking for a real estate agent for a warehouse transaction, companies should consider the three P's: performance, profitability, and partnership.
Agents should function as if they are part of the client's internal team, and act as an actual partner in the process and outcome. The agent's approach should be consultative in nature.
Many companies bargain hunt when choosing a warehouse location. But, given the risk and increased exposure from a bad warehousing site decision, such as capacity and environmental problems, if you source your DC solely based on price, you could get less—a lot less—than you pay for.
Here's the question to ask when choosing a warehouse location: are you in the business of getting the cheapest square-foot cost, or moving your products to customers most efficiently and cost-effectively?