Site Selection: Follow the Signs to Competitive Advantage

Tags: Site Selection, Transportation Infrastructure, Manufacturing

Road sign with directions to an ideal DC site

The ideal combination of logistics and business assets points manufacturing and distribution site selection decisions in the right direction.

Every company prioritizes different factors when choosing the best location for a distribution center, or configuring the perfect logistics alignment between supplier, manufacturer, retailer, and consumer. It's all about finding the right combination of geography, labor availability, financial incentives, and supply chain partner access. And in today's demand-sensitive environment, identifying a strategy that embraces supply chain impulses while allowing room for change also plays a big role.

Companies have more options than ever when choosing a site. They can lease, buy, build-to-suit lease, and partner with third-party logistics (3PL) providers to manage dedicated operations or as part of multi-tenant arrangements.

The variety of facilities businesses seek has evolved, too. Shifts in consumerism and commerce have transformed warehouses into hubs of opportunity, equipped with cloud technology, mobility applications, and automated materials handling equipment; and purposed for operations such as value-added manufacturing, packaging postponement, and crossdocking.

Here's a look at some factors businesses weigh when selecting a new manufacturing or distribution site.

Primed to Serve Online Shoppers

The explosion of e-commerce continues to challenge convention, especially when it comes to how retailers deliver products to customers.

"Omni-channel is the widely used term to describe the need for balancing in-store sales with e-commerce," explains Chris Gutierrez, president of KC SmartPort, an economic development organization in Kansas City. "The real estate needs for a true e-commerce fulfillment center are much different than a traditional distribution facility. Fulfillment centers need more workers and employee parking—compared to trailer parking—as well as higher cube, and an emphasis on materials handling. These facilities generally are built to suit the tenants' unique needs."

The required IT and materials handling sophistication often requires online retailers to start from scratch. While most are looking for DC operations in the same general locations as brick-and-mortar retailer warehouses, facilities are tasked differently—which is changing some real estate requirements.

"E-commerce slows growth in overall demand for logistics facilities: retailers tend to store less inventory at intermediate points between manufacturers and customers, hurting secondary and tertiary locations," states 2013 Emerging Trends in Real Estate, a report by PWC and the Urban Land Institute. "Demand for specialized space tailored to distributor needs forces more old product into obsolescence in key mid-country gateways such as Dallas, Chicago, and Atlanta."

This statement suggests an abundance of obsolete capacity, which will likely continue. Today's fixed-cost aversion provides even more reason for e-tailers to outsource these requirements to 3PLs, and drive location decisions based on their own needs, as well as 3PL capabilities.

One such retailer is Salt Lake City-based Overstock.com. In October 2013, the company debuted a new distribution operation in Jonestown, Pa. The online retailer is leasing dedicated space within a 900,000-square-foot, 650-person staffed facility operated by Santa Ana, Calif.-based Ingram Micro Logistics.

One reason the DC made sense for Overstock.com is its highway access. The complex is a few miles north of where I-81 and I-78 diverge outside Harrisburg—150 miles due west from New York City. Pennsylvania's I-81/I-78 distribution corridor is fast becoming a popular destination for industrial real estate. Circumventing the congested I-95 artery, the area provides access to New York City, Philadelphia, Baltimore, and Washington.

Real estate prices are another benefit of the location. Warehouse lease rates in central Pennsylvania are well below the U.S. average—$4.75 per square foot in 2013—and $1.50 less than in northern New Jersey.

Overstock.com's decision to settle in Jonestown, however, runs much deeper than transportation accessibility and lease rates. The retailer wanted to procure dedicated space in a multi-tenant facility. Apart from a failed DC experiment in Indiana several years ago, the company has distributed all products from its primary Salt Lake City location since its startup in 1999.

"We were looking for an East Coast location to speed deliveries to consumers," explains Stormy Simon, co-president, Overstock.com. "We also needed a location that would be flexible to our various catalog categories.

"We ship everything from furniture to jewelry, so we require a range of handling capabilities," he adds. "We were looking for a facility that could adapt as we added more inventory."

Multi-tenant DCs provide that level of flexibility. Just as inventory turns over, the operation is continuously changing.

"We're always re-evaluating racking to find the optimal setup," says Curtis Matchett, senior operations manager, Ingram Micro Logistics. "The configuration depends on the number of SKUs, pick faces, and customer requirements."

Recently, the facility has received an increase in mixed truckload shipments, which Matchett attributes to more just-in-time deliveries as shippers pool freight with others to max out loads, rationalize asset requirements, and reduce costs.

"Shippers aren't waiting to build full truckloads," he explains. "They are shipping breakbulk with consolidated carriers more frequently."

Industry pressure is forcing online retailers such as Overstock.com to reconsider their distribution networks. Competition from sites such as Amazon requires them to deliver to market faster and more efficiently.

Opening the Jonestown distribution location helps get Overstock.com closer to its customers. And its vendors get an added bonus—as DC volume builds, they will be able to leverage greater scale on outbound orders, thereby reducing transport costs.

Keeping Suppliers Close

While omni-channel growth has shaped site selection priorities for consumer goods manufacturers and retailers, other sectors place more emphasis on supplier and just-in-time production factors.

The automotive industry, for example, has always paid careful attention to facility location, valuing port and intermodal accessibility, as well as Foreign Trade Zones. A recent trend among suppliers is to locate closer to manufacturer production centers, which suits just-in-time assembly operations.

Spanish parts manufacturer Grupo Antolin is investing nearly $16 million in a 150,000-square-foot automotive manufacturing facility to supply Ford's Kansas City assembly plant in Claycomo, Mo.

The move follows General Motors' announcement in fall 2013 that it was re-locating a $200-million parts plant from Michigan to Arlington, Texas. By positioning the new stamping facility next to the production complex, GM expects to save $40 million in logistics costs annually.

Cost savings were a key consideration in Grupo Antolin's decision to locate in Kansas City, as well. "Many suppliers are required to operate a sequencing or manufacturing facility within a 10- to 15-mile radius of the plant," explains Gutierrez. "Kansas City continues to see more of this supplier base locate manufacturing operations, which brings more jobs and higher pay."

Complex, just-in-time manufacturing operations have long benefitted from having suppliers located nearby, but transportation will always be one competency companies contemplate as they shop around for new sites. But even those requirements are changing.

As intermodal adoption grows, companies want DCs positioned on or near intermodal ramps. That's becoming a premium in today's market.

"The transportation cost savings outweigh the real estate, local, and state incentives," Gutierrez says. "Those savings generally are more than half the cost for a new facility."

Welcome to the Neighborhood

Another top concern for site selection decision-makers is public support for economic development. Communities that go the extra mile by pre-permitting sites or pre-committing to incentives allow tenants to hit the ground running when they consummate a deal.

Companies often fixate on the upfront incentives without much thought to recurring costs 10 to 20 years down the road, notes Suzanne Clark, spokesperson for the Virginia Economic Development Partnership (VEDP), based in Richmond.

The way the economy is trending, some businesses find it difficult to take a longer view of future considerations. For example, Virginia's flat six-percent corporate tax rate has remained unchanged for 42 years. Compare that to a neighboring state such as Maryland, where the same tax burden has grown from seven percent in 2003 to 8.25 percent in 2013, and it's an important distinction—if you're in it for the long haul.

Virginia has a lot going for it beyond the ledger. In addition to its central East Coast location, the state offers an extensive system of highways, railroads, airports, and seaports. Virginia is also a right-to-work state. But when it comes down to "dollars and sense," incentives can make all the difference.

"Manufacturers receive broad sales tax exemptions for purchases of machinery, tools, replacement parts, and raw materials used in the production process," says Clark. "Virginia does not tax accounts receivable, inventory, computer software, or other intangibles."

These types of concessions recruit and retain business. Digital Realty Trust, a New York City-based data center and co-location solutions provider, plans to invest as much as $150 million by 2015 in its Loudon, Va., operation because of the state's data center sales and use tax exemption.

More telling, in 2012, Virginia beat out North Carolina to secure nearly $40 million in direct and indirect investment from North Bergen, N.J.-based health products retailer The Vitamin Shoppe to set up a new DC north of Richmond. Virginia Governor Bob McDonnell approved a $200,000 grant from the Governor's Opportunity Fund to assist Hanover County with the project. Through its Virginia Jobs Investment Program, the Virginia Department of Business Assistance provided additional funding and services to support the company's recruitment, training, and retraining activities.

While not all site selection teams will find such benefits in their ideal location, many will reap great rewards from working with local economic development organizations. For others, finding the right skilled labor pool, outsourced logistics partner, or supplier base will drive site selection decisions.

This is the essence of site selection in today's new economy: It relies as much on supply chain strategy as location.