U.S. Site Selection: Building for the Future

When Reser’s Fine Foods, which makes and distributes potato salad, began looking for a new location to expand its U.S. production line it naturally set its sights on Topeka. After all, the city’s name originates from a native Shawnee word for “a good place to grow potatoes.”

But the Beaverton, Ore.-based manufacturer didn’t have to take the Shawnee’s word for it. In 1991, Reser’s began planting its own roots in the area by constructing a 50,000-square-foot distribution facility. Situated 60 miles west of Kansas City, Topeka offered Reser’s a viable location to grow its manufacturing presence thanks in large part to its highly developed road network and geocentric location for U.S. distribution.

Throughout the decade, the company’s operation in the city grew to four facilities and more than 220,000 square feet of production space. In 2005, it opened a 160,000-square-foot production plant, making Topeka the largest producer and distributor within the company.

Topeka’s rising prominence as a manufacturing and distribution nexus is far from an anomaly. Increasingly, smaller cities and rural regions across the United States are investing in the physical infrastructure and multimodal transportation capabilities necessary to attract logistics and distribution activities. U.S. businesses such as Reser’s have been quick to follow—and for good reason.

As transportation prices continue to escalate, cost-conscious companies are rethinking how they strategically locate and operate distribution facilities within their networks.

A company’s approach to distribution often hinges on specific industry demands, says Kris Bjorson, managing principal of the logistics practice group for The Staubach Company, a real estate advisory firm based in Dallas.

“Industry A might consolidate distribution and warehousing locations so it can move more truckload shipments and cut transport costs. Industry B, by contrast, might reduce costs by adding more distribution points to its network to move product closer to demand.”

In both scenarios, though, the common denominator is finding a location with transportation accessibility that meets specific shipment demands—be it LTL, TL, rail, or even air.

While labor availability and costs have traditionally been primary considerations for businesses on the move, more critical today is making sure prospective sites have the resources and infrastructure to move product quickly and efficiently in and out of their facilities.

Not surprisingly, transportation accessibility ranks high among Staubach’s customers, according to its REALogistics index. The index ranks five specific site selection criteria according to client feedback.

What is interesting about the REALogistics index is that it contrasts current customer priorities with a December 2002 economic development survey commissioned by the U.S. Bureau of Labor & Statistics. Availability of skilled labor, labor costs, tax exemptions, and state and local incentives were all graded higher than any transportation criterion, according to the government’s analysis.

This incongruity is clearly a sign of the times, but perhaps even more overtly, a sign that businesses must look at site selection through a much different prism than four years ago.

While transportation concerns and costs weigh heavily on U.S. consignees looking to expedite the flow of inbound product to market, many cities and communities around the United States are paradoxically struggling to find a new economic identity as manufacturing and agriculture business wane.

The reality for economic development cooperatives is that logistics has become “the new manufacturing,” says Barry Hibbard, vice president for commercial and industrial marketing, Tejon Ranch, a 270,000-acre tract of undeveloped ranchland in Kern County, Calif.

“The traditional manufacturing ideal is skewed,” he says. “Taking its place is a new definition of manufacturing that has become a combination of logistics activities and the technology necessary to support them.”

Logistics: The Manufacturing Alternative

Given the pace of global trade and the demands of consumers, distribution and logistics offers communities a viable and sometimes preferable alternative to manufacturing. In particular, emphasis is increasingly placed on quick turnaround, high-throughput facilities.

Hibbard attributes this to two factors. “First, as we migrate from a push to pull economy, we bring in goods faster to match supply to demand,” he says. “Second, the just-in-time retail environment pushes product direct to shelves, with little room for excess inventory.”

These factors, further exacerbated by the loss of manufacturing in the United States, have created a market for areas that cater specifically to warehousing and distribution. Rural regions and second- and third-tier cities with transportation infrastructure already in place are prime spots for development.

Topeka’s economy, by example, has traditionally focused on the agricultural and food processing business. Much of the transportation infrastructure that exists in the city and in the surrounding region today, particularly the railroad, evolved to support these industries.

As a satellite community of Kansas City, which has the second largest rail hub in the country, Topeka has been able to leverage its location and low real estate prices to lure industrial development. Aside from Reser’s, the city has attracted major U.S. brands such as U.S. Foods, Del Monte Foods, Target, Coca Cola, Goodyear, and Payless Shoes—a homegrown success.

In Tejon Ranch, Calif., farming and ranching have been long-established industries in the rural area. In the late 1990s, however, the ranch’s holding company recognized the growing need for land availability in central California and subsequently annexed a 1,500-acre parcel for industrial development.

The Tejon Industrial Complex, situated one hour from Los Angeles along Interstate 5, has already landed retailers IKEA and Oneida as its tenants.

“Central California has always had a strong farming pedigree, and the agribusiness environment transitions well to light industrial activities such as distribution and logistics,” adds Hibbard.

Aside from making efficient use of existing infrastructure, the challenge for upstart areas such as Tejon Ranch and Topeka is luring transportation carriers and third-party logistics providers to give businesses additional resources and incentive to move.

A Model Market

Memphis, Tenn., is arguably the United States’ leading distribution and logistics hub. Located along the Mississippi River at the intersection of two major interstates, and home to the world’s busiest air cargo hub, the city has capitalized on its intermodal capabilities to lure logistics-savvy businesses.

Medtronic, the world’s leading spinal instrument company, with headquarters in Minneapolis, operates several facilities in Memphis.

“Our distribution and warehouse facility, adjacent to the Memphis International Airport, measures 96,000 square feet and features 50,000 products used in spine and orthopedic surgery,” says Medtronic spokesperson Bert Kelley. “We also have a small facility in suburban Memphis that makes surgical tools. In total, we employ more than 1,200 people in the Memphis area.”

Equally important to Medtronic’s growing global business is the presence of the FedEx cargo hub at Memphis International Airport, which the expediter has called home since 1992.

“Being in such close proximity to FedEx has been an important part of our operation,” Kelley adds. “We are a FedEx preferred customer and work with them to ensure our products are delivered accurately and on time.”

Medtronic does business in all 50 states and in countries around the world, and getting products to hospitals and doctors is easy from Memphis. Given its location and FedEx’s cargo transportation capabilities, the manufacturer can move shipments to virtually anywhere in the United States in two days or less.

More importantly, as businesses such as Medtronic can attest, the success and growth of FedEx has helped Memphis evolve other transportation resources.

“Memphis prides itself on being the distribution capital of the world,” says Kelley. “FedEx is the primary reason, but UPS, DHL, and other overnight shipping companies also are located here. So are all the major Class 1 railroads and many leading motor freight carriers. And, the Mississippi River is a major artery for goods going inland from the ports along the Gulf Coast.”

In fact, Memphis is home to the fourth-largest inland port and third-largest rail hub in the country. All these factors combine to make the city a prime location for distribution and warehousing activities, a reality that is borne out in the number of mega-warehouse facilities situated in the area.

Twelve companies in Memphis operate warehouses of one million square feet. FedEx, Sears Logistics Services, Hewlett-Packard, Nike, Williams-Sonoma, and Technicolor Home Entertainment each operate facilities exceeding two million square feet.

As time-to-market demands continue to accelerate and transportation costs swell, businesses will continue to migrate to cities such as Memphis that have an established logistics pedigree. Medtronic has begun initial planning on an expansion that will add office space, an upgraded manufacturing and distribution facility, and another 600 jobs to its business over the next five years.

While Memphis’ transportation capabilities and distribution architecture have had years to evolve, smaller cities and less-developed regions are just beginning to tap the logistics market. One way they can expedite growth is by attracting logistics companies to their respective areas. In so doing they are able to add some cachet to their economic development portfolio.

One trend Bjorson sees occurring more frequently is transportation service providers making investments in second- and third-tier distribution markets. Accordingly, businesses are following their carrier and logistics partners into these areas and essentially leveraging their assets and investments to create a foothold, in much the same way manufacturers and retailers use global 3PLs to make inroads into foreign markets.

Bjorson also points to capacity constraints on the highways and railroads as another emerging factor. BNSF Railway, for example, is experiencing unprecedented volume on its Southern California-to-Chicago corridor, compelling it to expand and revamp installations and railyards in places such as Kansas City.

Not by coincidence, FedEx Ground recently began construction of a new $76-million regional distribution facility in Kansas City to capitalize on the area’s efficient transportation network. The first phase of the project will create a 215,000-square-foot facility that will expand to 387,000 square feet by 2010. The new facility complements an existing distribution center in the greater Kansas City area as well as a facility in Shawnee, Kansas.

As a result of this growing volume, Kansas City, which Bjorson characterizes as a traditional second-tier distribution and warehousing market, is attracting more 500,000-square-foot warehousing projects. For a satellite city such as Topeka, this growth can have considerable trickle-down impact on its own economic development opportunities.

Luring Manufacturers

An added benefit of targeting distribution and logistics business is the hope that manufacturing business will follow. Increasing dialog in the fashion and apparel industry—where speed to market is a competitive differentiator—focuses on locating more manufacturing centers closer to point of demand. European apparel companies have achieved considerable success implementing this strategy.

The key factor in stimulating this type of economic activity, especially given rising fuel costs, tightening capacity, and increasing congestion, is making sure businesses have convenient access to multiple transport modes.

Just as leading companies use logistics and supply chain management to create strategic advantage, economic development companies across the United States must take a similar approach in evolving transportation capabilities to drive economic growth. If they invest in and build infrastructure, businesses will come.

The critical factor for enterprises looking at new distribution and warehousing sites is making sure they can match their current service requirements.

“As long as a new location doesn’t incur an extra day in cycle time and compromise customer service, businesses are up to the challenge and opportunity,” says Bjorson.

For Bjorson, the reality of today’s burgeoning logistics and distribution climate is clear: “We see large warehouses in places where there have never been warehouses before,” he says.

Up and Comers

Anchorage, Alaska

Anchorage businesses pride themselves on being nine hours by air from 95 percent of the industrial world. FedEx and UPS have established transshipment operations at Ted Stephens International Airport, which in 2005 ranked third globally in terms of total landed cargo. While air cargo continues to attract the lion share of economic development interest, the Port of Anchorage is growing its global presence with a $350-million redevelopment project. The port handles 90 percent of all consumer goods trade in Alaska, moving more than four million tons of cargo annually, and has become a key intermodal complement to the airport.

Airport: Ted Stephens International Airport

Port: Port of Anchorage

Rail carriers: Alaska Railroad

Truckers: Carlile Transportation Systems, Lynden, Sourdough Express

Workforce: 149,490. Unemployment: 5.9 percent

Wages: #18 (2005 state rank)

Major Companies: Atlas Air, FedEx, Northwest Cargo, UPS, U.S. Postal Service, Commodity Forwarders, Lynden International, Fred Meyer Stores, Univar USA

Louisville, Kentucky

Located 600 miles from two-thirds of the U.S. population in the heart of the country, Louisville is slugging it out among the best cities in the United States for distribution and logistics activities. Louisville International Airport is the 10th-largest cargo airport in the world. Central to its growing global importance as a major air cargo hub is UPS’ Worldport, a $1.1-billion facility completed in 2002 that offers local companies a strategic advantage in e-commerce and supply chain management. Situated near interstates 64, 65, and 71, Louisville provides convenient over-the-road access to Southeast and Midwest markets.

Airport: Louisville International Airport

Rail carriers: CSX, Norfolk Southern

Truckers: Summitt Trucking, National Distributors, Carnes Trucking, Pegasus Transportation

Workforce: 353,075. Unemployment: 6.9 percent

Wages: #35 (2005 state rank)

Major Companies: Ford Motor Company, FedEx, UPS, GE Consumer Products, Brown-Forman Co., Swift & Co., Dixie Warehouse Services

Indianapolis, Indiana

Traditionally an agricultural hotbed, Indiana’s economy has become considerably more diversified in recent times, and distribution and logistics is one area of strength. In terms of location, 75 percent of the U.S. and Canadian population can be reached within a one-day truck drive from the Indianapolis region, where four interstate highways converge—the most of any metro area in the country. The second-largest FedEx hub in the world is located at Indianapolis International Airport, and a $1-billion project to build a new terminal and renovate existing facilities, set for completion in 2008, will accommodate growing freight volume.

Airport: Indianapolis International Airport

Ports: Burns Harbor on Lake Michigan; Clark Maritime Center on the Ohio River; Southwinds Maritime Center also on the Ohio River

Rail carriers: CSX, Norfolk Southern, Indiana Railroad, Indiana Southern Railroad, and the Louisville and Indiana Railroad

Truckers: ABF, Estes Express, Yellow/Roadway, Old Dominion

Workforce: 1,067,930. Unemployment: 5.1 percent

Wages: #30 (2005 state rank)

major companies: FedEx, Ozburn-Hessey Logistics, Caterpillar Logistics Services, United Natural Foods, Ditan Distribution, Formica Corporation

Savannah, Georgia

Thanks to container growth at its port and evolving intermodal capabilities, Savannah has cemented itself as one of the eastern United States’ best distribution locations. Ranked among the five largest container ports in the country and the largest single terminal container facility on the East and Gulf coasts, companies can move product by rail overnight to Atlanta and to key inland hubs, including Charlotte, Chicago, Dallas, and Memphis in less than three days. Situated near I-95 and I-16, and in close proximity to the burgeoning Florida market, businesses are realizing the efficacy of locating DC facilities near a major inbound point of entry.

Airport: Savannah/Hilton Head International Airport

Port: Port of Savannah

Rail carriers: CSX, Norfolk Southern, Georgia Central Railway

Truckers: ABF, Yellow/Roadway, Watkins, FedEx Freight, Estes Express, Averitt Express

Workforce: 294,680. Unemployment: 4.1 percent

Wages: #19 (2005 state rank)

Major Companies: FedEx, UPS, International Paper, Georgia Pacific, The Home Depot, Pier 1 Imports, Dollar Tree Stores, CalCartage, Merck Pharmaceutical, Michaels Stores