Warehouse Networks Keep You Close to Customers

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Both new trends and familiar old factors are driving the development of American supply chains and warehouse networks.

These trends and factors include:

Time sensitivity. Our comprehensive, pervasive sensitivity to time stands as the single most important trend driving supply chain development today.

We are a connected society. Wireless connections, e-mail, voice mail, pagers, PDAs, PCs, web sites, Blackberries—the list goes on. We have no time in our professional lives and little time in our personal lives.

Indeed, whole segments of the economy are based on our need to compress time. Fast-food chains, mass merchandisers, convenience stores, and virtually all distributors are perfect examples.

Distributors, in particular, don't add value to the products they buy and sell; they just make them available faster.

This time sensitivity flows upstream in the supply chain. Customers "need it now," so retailers want high availability and very responsive suppliers. When inventory is out of stock, retailers buy from responsive distributors, wholesalers, and manufacturers. Just-in-time and lean logistics operations are direct results of our aversion to delays.

The supply chain implications of this intense clock-watching are clear. Businesses strive to increase speed and responsiveness; to be able to say to customers, "Yes, we have that, and yes, we'll ship it to you immediately."

Part of this responsiveness means having the inventory and processing orders quickly. But what really drives warehouse development is being close—physically—to customers. Positioning inventory close to customers can greatly reduce delivery time. As such, strategic warehouse location is key.

Supply chain management. First it was called traffic, then distribution, then logistics. Now it's called supply chain management. Though the change is, in part, good wordsmithing, an important business shift has occurred.

Companies now realize that supply chains are complex, with myriad components—procurement, warehouse networks and operations, inventory, transportation, order processing, and customer service, plus the systems necessary for these operations. Successful interaction among these components is critical to the organization.

Smart companies have expanded the responsibilities of traffic, distribution, and logistics managers, with titles of supply chain vice president and chief supply chain officer popping up frequently.

Such centralization generally means that infrastructure development takes place within a company's supply chain department, or at least originates there. This department would lead any effort to restructure a warehouse network. Once a company specifies the essence of any new warehouse development, a real estate function may become involved. But the leading issues in restructuring a warehouse network are supply chain issues, and so are driven by that part of the organization.

Among other things, restructuring a warehouse network means more ways to "get close to customers." Rather than put up a new warehouse, why not process orders more quickly through your existing one? Why not have more inventory, and therefore more availability? Or maybe it's time to implement that new order processing system?

There are numerous ways to skin the supply chain cat and companies are addressing those concerns with increasingly centralized, comprehensive supply chain management executives.

E-commerce. The rapid growth of e-commerce confirms our time intolerance. Now we can sit at our PCs and order much of what we need, or want. Just knowing a book is on its way seems more gratifying than going to Borders to buy it.

E-commerce is another way of saving time without having to put up new warehouses. For high-value products that justify air shipments—pharmaceuticals come to mind—one warehouse will suffice because overnight air shipments mean next-day delivery country-wide.

International trade and offshore manufacturing. It's certainly a hot topic in an election year. But regardless of the season, the trend is clear: relocation of domestic manufacturing continues—to China, Mexico, India—chasing the latest low labor cost country.

Placed end to end, the containers that come into the ports of Long Beach and Los Angeles stretch a staggering 100 miles per day. Interestingly, this flow has revitalized rail traffic. We routinely see 100-car stacker trains moving offshore material from ports on our shoreline to interior locations.

Two trends are operative here: offshore production, and the efficient use of rails for transporting material to interior locations. This translates into warehouses that are even closer to customers.

No longer is the plant location relevant, it went away—and any inventory it held is now, functionally speaking, "on the water." Efficient stacker trains make it inexpensive to get the material to Dallas, Chicago, and Atlanta from a port.

Interesting too are industrial parks being developed at intermodal ramps to attract warehousing. Some companies establish single-warehouse networks at these parks to supply the entire country.

Labor cost. Any cost component in a supply chain is looked at (or should be looked at) in the context of other costs. After all, it's just money. Labor costs are merely part of the total.

Viewed this way, many companies have a tendency to locate warehouse facilities in low-cost areas. But this tendency typically counteracts the need to be close to customers because labor costs are generally higher in more densely populated areas. Fortunately, most regions have developable sites that are reasonably close to customers, yet rural enough that they offer lower labor costs.

This drives the development of new warehousing on the periphery of population centers. Indeed, as the sensitivity to warehouse labor costs grows, companies will establish their facilities in even more rural places.

New retail formats. The robust American economy can develop a new retail concept virtually overnight. Take Home Depot, Target, and Restoration Hardware as examples. As these new formats take hold and succeed at the retail level, they generate the need for new warehouses.

Often the retail experiment succeeds in a limited region, and is then rolled out to other markets. What follows is the need for a comprehensive warehouse network to serve the expanded outlets.

For consumer products businesses and many others, it's good practice for their demand pattern to approximate the U.S. population pattern.

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