Setting Your Sites

“Site selection is both a science and an art,” says John Boyd, president, The Boyd Group, a site selection firm in Princeton, N.J. “It’s a matter of balancing quantitative and qualitative factors to arrive at the best site to suit your needs.”

After a serious slump between 2000 and 2003, commercial real estate market statistics show a recovery in distribution center location activity last year—a recovery that’s expected to continue throughout 2005. More companies are in the market for new distribution sites.

The overall vacancy rate for the top 30 U.S. markets declined to 9.6 percent at year-end 2004 from 10 percent at midyear and 10.3 percent at year-end 2003, according to Leonard Sahling, first vice president, ProLogis Research Group.Market rents are beginning to stir, with modest rent increases occurring in a handful of the tighter markets.

“Demand surged during the closing months of last year,” Sahling says. “For all of 2004, net absorption totaled 111 million square feet (msf)—a respectable 2.7-percent increase in total occupied space. And, for all of 2004, newly started warehouse/distribution projects amounted to 95 msf, up 30 percent from the previous year.”

Seven of the 30 major markets appear to have recovered fully from the 2000-02 cyclical downturn—the L.A. Basin (including the Inland Empire), Las Vegas, South Florida, Reno, Phoenix, Seattle, and Northern/Central New Jersey.

Four of the 30 markets—Dallas, Eastern Pennsylvania, Denver, and Baltimore—continue to flounder and are slightly worse off today than they were at the bottom of the cyclical downturn.

Assess the Big Picture

Site selection involves a lot more than just shopping for an attractive real estate deal. Before jumping into the nitty gritty of the process, companies should step back and look at the big picture, advises Richard Sharpe, president and CEO, Competitive Logistics LLC, Atlanta.

“Tie any site selection questions back to your basic business questions,” he says. “What issues are you trying to address when choosing a site, and how does the site selection relate to your business strategy? Understand your business rules and constraints, then figure out where you want to be tomorrow.”

To do this, companies should develop a comprehensive blueprint of their existing logistics network and operations. They can plug this information into sophisticated computer modeling tools to assess ‘what-if’ scenarios with regard to changing distribution center networks and operational characteristics.

“Look at your options going forward and link them back to the financials,” Sharpe says. “You need to understand network decisions from the perspective of how they will affect the balance sheet and income statement.”

For example, if a company decides to open a new facility in the Southeast and consolidate two small DCs in the Midwest into one large one, the software can model exactly how these changes will affect the company’s financials. You can get at the economic value-add for each facility and give this information to your CFO in terms he or she understands.

After determining your overall distribution network strategy and ideal configuration, you are ready to move on to the specifics of site identification and evaluation.

There are seven primary factors to consider when undertaking site selection for a new DC, according to Edward Schreyer, senior vice president, CB Richard Ellis (CBRE) Global Corporate Services, Cincinnati. They are:

1. Real estate. With real estate, a company has four basic options:

• Acquire raw land and develop it.
• Find developed land with existing suitable infrastructure.
• Find an existing building and adapt it to a particular use.
• Build a new facility specifically for this project.

When evaluating these options, companies must look at zoning, property age and condition, property image (high-tech or run-down), site size and shape, easements, terrain and topography, proximity of amenities, and traffic flow.

2. Labor. The company must assess the make-up of the local labor pool—skilled, semi-skilled and unskilled—and labor costs. Does the location have access to technical or four-year colleges? “The availability of such educational institutions impacts the labor pool skill set,” Schreyer notes.

3. Raw materials. For companies that depend heavily on raw materials, the issue is proximity. What’s the average mileage and transit time for inbound shipments?

4. Utilities. Every company has slightly different requirements when it comes to utilities. Look at sanitary/sewer, storm water management, water supply, electrical power, natural gas, fuel oil, telephone and water disposal.

5. Transportation. What is the cost and availability of transportation service—air, water, rail, and highway? Port congestion also is a critical issue.

6. Government regulations. Government regulations and requirements include environmental, municipal/provincial/federal, labor laws, zoning, building permits, and land use rules.

“Regulations can be a significant delimiting factor,” Schreyer says. “Are there statutes or labor laws that prohibit you from running your facility the way you want?”

Also find out how long it takes to get building permits. “In Washington, D.C., for example, the permitting process is so difficult that companies have to hire consultants to push projects through planning and zoning,” he says. “And California has chased a lot of companies out of the state because of its environmental protection laws.”

7. Exit strategy. Finally, companies need to develop an exit strategy for a site.

“This consideration has only emerged in the last few years,” Schreyer says. “During the recent economic downturn, companies got burned. They found themselves saddled with DCs they didn’t need. In the past, companies selected sites based on criteria one through six. They never considered an exit strategy—never asked, ‘If this doesn’t go well, how do we get out of it?'”

Learning from recent experience, companies today are addressing all the elements that go into an exit strategy. “The exit strategy impacts the type of facility built or selected in the first place,” Schreyer explains.

Should a company lease or own? Should the building be generic or customized? The more generic the facility, the easier it is to get out of. Should the company locate in a major market or in an optimal location—60 miles outside a major market, for example?

“A building in a major market is easier to sell than one in the middle of nowhere,” Schreyer says. “If you build a DC in the middle of West Virginia, for example, no other company will want the facility unless its business is exactly what yours is. And if that’s the case, the company is probably in the same situation as you—needing to downsize its network.”

Does the site have expansion capability? “If not,” Schreyer says, “there’s no upside for anyone else to grow on it. That makes it less attractive.”

Finally, find out the duration of tax incentives or abatements on the building.

Help with Intangibles

Thanks to network analysis software and Internet resources, companies can go a long way toward identifying potential DC sites by themselves. They can also gather information on the variables listed above.

Where companies may need outside assistance is in ascertaining more intangible characteristics of a potential location. This is particularly true when assessing labor market resources, labor management relations/environment, and transportation infrastructure quality.

“Warehouses today require demanding labor skills sets,” notes John Boyd. “They no longer involve just forklift drivers moving around a facility. More sophisticated labor demands mean that, while a software program may identify a city as a viable candidate, it may fall short when it comes to providing the varied and sophisticated skill sets many warehouses require.”

Companies may need a labor pool that delivers people with other types of skill sets. Many companies co-locate other corporate functions, such as accounting and customer service, in the warehouse.

“Companies historically housed back-office functions at corporate headquarters, paying $20 to $35 per square foot,” Boyd says. “Firms are so cost conscious these days that they are shifting these corporate functions from headquarters to the DC where they pay $5 to $10 per square foot.

“This means that a candidate location has to offer a labor force with skill sets ranging from highly trained IT and software engineers down to maintenance and forklift drivers, with financial services, customer service skills, and call center personnel in between.”

Once a company narrows its search down to a handful of sites, it’s time to take the following three steps:

1. Calculate the one-time start-up costs. This includes land, site development costs, machinery and equipment.

2. Calculate annual operating expenses—transportation, labor, taxes, real estate, utilities.

3. Assign weighted scores to annual subjective items such as labor availability, highway access, access to amenities, and rural environment. “This is the hard part,” says Schreyer. “Ask everyone involved in the site selection process to rank on a score of one to 10 the relative importance of specific selection criteria.

“For instance, how important is the building’s image or appearance?” he says. “For a dot-com, image is probably very important, while a manufacturer may not care so much about appearances. Rank the categories on a scale of 1-10, then rank the site on a scale of 1-10.

Sophisticated companies will do the subjective items last, and have the first two cost groups be part of the weighted system. How important is the one-time hit out of the gate? Are the annual costs more important than the one-time hits?

“In a perfect world,” Schreyer says, “after going through this whole process, a company would come up with an unbiased solution. But, the world isn’t perfect, and companies frequently make decisions because other companies made decisions before them. Sometimes the deciding factor is as simple as three competitors are already located there.

“Making a decision on this basis means that either you’re following someone to the Promised Land or you’re following them off a cliff.”

For best results, companies should align corporate objectives with real estate strategy. “Lack of communication among corporate divisional layers can derail a good selection project,” he says.

For example, a business unit selects a location for a new regional DC, but doesn’t know that the parent company plans to acquire a company that has a DC just down the street. The deal goes through, and the company ends up acquiring a perfectly suitable DC right next to where they’re building a new one.

“Decentralized real estate decision-making hurts the site selection process and its outcome because you end up making decisions based on only a fraction of the full picture,” Schreyer says.

“Finally,” he adds, “in every corporation there are the protectors of capital and the consumers of capital. The protectors of capital—accounting, the CFO—care about the one-time hit and annual operating expenses. The consumers of capital care about the weighted system of subjective criteria—image, customer care, amenities. Companies need to find a balance between the two to achieve the optimum outcome.”

More Than Dots on a Map

Selecting the right site for a new DC is critical to business performance. It enables firms to serve customers effectively, manage inbound flows and costs appropriately, manage inventory turns and levels better, and keep distribution costs competitive.

The best approach is to view your supply chain as a competitive advantage, and make sure your site selection process is robust. Avoid just slamming a dot down on the map in the cheapest place you can find. Balance what is good for your customers with what is good for your business.

Staples: Fulfilling Customer Needs

Staples’ logistics network is broken up into two main operations: direct delivery to customers and retail. The delivery business has 28 fulfillment centers, while retail operates four regional DCs. The fulfillment centers vary in size based on the demographics of the market they serve.

“We operate many fulfillment centers that need to be close to the customer so we can respond to their requirements,” says David Rocco, director of logistics strategy, Staples. “We need to be precise about choosing locations that enable us to provide large concentrations of customers with next-business-day service.”

This is in sharp contrast to Staples’ retail operations, where the lack of a next- day delivery requirement drives a different network solution. Retail has a more traditional flow, where product moves from a vendor to one of Staples’ DCs, then on to the stores.

Staples starts the site selection process by examining the business requirements. “We determine what we need to support our business growth,” says Rocco. “We have a robust methodology for developing network strategy and use that to determine our distribution requirements.”

From there, Rocco and his team identify the general geographic areas where Staples needs to locate the new facility. “We apply our resident knowledge of real estate markets, supplemented by local field intelligence, to identify three or four main areas to consider,” he says.

Staples then looks at more specific features of these areas, including:

1. Cost of land: raw land cost per acre and site development costs.

2. Incentives: property tax abatements, wage tax credits, sales and use tax rebates, and education credits.

3. Inbound and outbound transportation costs and lane capacity constraints: “Shipping product to Florida may be optimal from an outbound cost standpoint,” notes Rocco. “Yet limited backhaul opportunities may present longer term cost and service issues.”

4. Utility access: ability to get to highways, rail, sewers, etc. Staples further refines its selection to arrive at a short list of specific site locations. At this point, the team begins more in-depth research on these sites, looking at such issues as permitting regulations, environmental and engineering constraints, and labor demographics.

The company also considers environmental and engineering issues. “We want to be fully aware of the land and the surrounding area before we buy,” Rocco says. “That involves understanding the soil, local detention and wetland restrictions, building-to-land requirements, expansion capability and any local variances that we might require.”

Staples conducts a labor demographic study on finalist sites. “We analyze the competition for labor resources,” he says. “Is there a big box retailer or large manufacturer nearby from which we would be competing with resources? We try to pick areas where the labor demographic is favorable—where there is an unemplyment level that’s not too high, not too low.”

“We also look for the type of employee who will fit into our customer-focused culture,” Rocco adds. “We want people who will be around for awhile, gain tenure, and grow in our organization. We look at an area’s educational amenities. Proximity to two- and four-year colleges indicates a certain education level of the workforce and gives us a better perspective on the promotion potential of the people in that area.”

The Staples site selection team visits the short list of sites, looks at all the factors at each location and does a trade-off analysis. For example, if a site is farther from the highway, transportation costs may be higher. But the attractiveness of the labor force might offset that cost.

After considering all these factors and reviewing the site study data, Staples makes its selection. “We don’t assume or guess that one item will tip the scale,” says Rocco. “The issues are different in every location.

“Staples views its supply chain as a competitive advantage,” Rocco says. “Consequently, our site selection process is very robust. We don’t just try to place a facility in the cheapest place we can. We try to balance what’s best for the customer with what’s best for our long-term business.”