Setting Sites On Tomorrow

Third-parties and economic development interests can help businesses look beyond the basics to find sites fit for today and tomorrow.

When Restoration Hardware recently decided to restructure its domestic distribution network to coordinate increasing online sales with a new foreign procurement strategy, it began looking for a location to set up a new DC.

Following a profitable year, the Corte Madera, Calif.-based home furnishings and hardware specialty retailer wanted to move fast, integrating the new facility with existing distribution installations in Hayward and Tracy, Calif., and Baltimore, Md., while phasing out a third-party-operated DC in Nashville, Tenn.

Restoration Hardware turned to CB Richard Ellis (CBRE), a global leader in real estate services, to manage the site search and vet potential locations.

Because most businesses invariably have a regional sense of where they want to be, “we generally begin the process by evaluating states; then pitting them against each other,” says Robert D. Hutson Jr., first vice president, CBRE global supply chain practice, Los Angeles, Calif.

The goal, Hutson adds, is to create the ultimate competitive environment with a minimum of two to three states, two to three counties within each state, two power companies if possible, and a minimum of three specific sites within each locale.

Most site selection projects require a minimum of two years to identify a location, build the facility, negotiate the lease, and take care of other administrative details.

But Restoration Hardware wanted to push the deadline forward. CBRE began doing site analysis and identified three locations—Memphis, Tenn., Savannah and Atlanta, Ga.—and began sending out RFPs in these respective markets.

At the same time, Restoration Hardware was conducting its own internal audit of transportation costs and impacts. In May 2007, the company decided it needed to look farther north to best match its global growth initiative with domestic demand. CBRE rolled with the new requisition, found an appropriate site, then brokered the lease arrangement.

In August, Restoration Hardware signed a 15-year lease for a new 800,000-square-foot distribution center in West Jefferson, Ohio. Construction will begin this fall and the facility should be up and running by next summer. The DC will be used primarily for fulfillment to the company’s East Coast retail stores and its non-furniture direct-to-customer business.

“The decision to locate outside Columbus, Ohio, is a significant step in the planned transformation of our supply chain and infrastructure,” says Ken Dunaj, chief operating officer of Restoration Hardware.

“Over the next three years, we’ll be executing a sequenced plan to drive greater service and productivity in our supply chain and build a network that can support our long-term growth objectives.”

Looking Past the Present

Increasingly, companies such as Restoration Hardware look at investments in new DCs with an eye toward designing stateside distribution channels flexible and responsive to shifting sourcing strategies and emerging consumer markets.

Businesses large and small need to consider the flexibility of their U.S. distribution networks, and this begins with individual sites.

For retailers such as Restoration Hardware, the stakes are greater because product fads and lifecycles are highly variable and unpredictable. Therefore, consumer drivers dictate where and how they locate warehouse sites.

But given the high cost of transportation, companies need to consider their best options for bringing product inbound to the United States, then outbound to customers: whether they want a DC facility located near a major inbound port, or a warehouse farther inland, closer to demand.

While demand may dictate distribution strategy, companies need to be equally judicious scrutinizing locations through specific site selection filters. They need to consider “a balanced evaluation of transportation network cost—both inbound and outbound—and the effect location has on service levels and speed to market,” says Hutson.

Aside from location and transportation infrastructure, acquiring minds should also consider the labor market and its fit with the company ethos; tax incentives; and whether to lease, buy, or outsource, among other factors.

Given these challenges, businesses often engage commercial real estate companies such as CBRE, 3PLs, economic development corporations, and even regional utilities to assist in navigating risk and cost assessment.

In Nebraska, for example, prospective companies can tap Nebraska Public Power District’s (NPPD) economic development team to research available properties, energy and labor costs, community information, and industry profitability studies, says Dennis G. Hall, economic development manager, Nebraska Public Power District.

The utility’s economic development consultants can key businesses in to the state’s myriad tax incentives. NPPD also hosts a free, interactive, online database that provides community profiles featuring basic economic and demographic data for every incorporated town in Nebraska.

Creating Contingency Options

But one criterion that often slips through the cracks in site selection is contingency planning.

“For example, what role will the new DC play in different disaster scenarios? How flexible is the overall network? Is there room for expansion on the site? What if the company’s foreign procurement strategy changes—will this new facility still be useful and efficient in that scenario?” asks Hutson.

Especially today, businesses need to be particularly aware of how their DCs can respond to contingency sourcing strategies in case of a supply chain exception or unexpected spikes in demand.

Transportation flexibility and accessibility then become important considerations.

Mid-America St. Louis Airport has made it a point to sell prospective customers on this account. Having intermodal transportation access is becoming more important for shippers, notes Tim Cantwell, director of the Mid-America St. Louis Airport.

“People listen to multi-modal discussions,” he says.

With four Class 1 railroads, immediate access to I-64, I-44, I-55, and I-70, and an emerging air cargo business, the St. Louis region offers shippers and consignees multiple options to move product domestically and globally.

Given its central U.S. location, St. Louis has always been advantageous for businesses moving product in and out of the Midwest and contiguous markets in the East.

Now it has the capabilities to be an international transshipment point for air cargo as well. The debut of a 3,600-acre foreign trade zone (FTZ 31) and an on-site U.S. Customs Service make global air cargo transfer more efficient by reducing time on the ground and cost of operations.

Currently, shippers are chartering cargo flights into Mid-America St. Louis Airport to serve as a backup for more congested air cargo hubs. The value proposition for alternative airports capable of handling international freight as well as facilitating domestic distribution is considerable, and ultimately part of Mid-America St. Louis Airport’s long-term growth strategy.

Shippers are equally eager to find these sites. “Companies are looking for a central distribution point with transportation capabilities in place so they can come in and saddle up to the existing infrastructure,” observes Cantwell.

But as Restoration Hardware can attest, maximizing the future potential of a DC yet to be seen requires a concrete understanding of an enterprise’s long-term vision and, often, third-party expertise to provide objective due diligence. Even then, plans can change.

“Ultimately, you can’t cookie-cut site selection,” says Hutson.

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