Site Selection: How to Optimize Your Distribution Network
In the search to map out the best location for your next distribution center, anticipating what lies on the road ahead is as vital as understanding your company’s immediate priorities and needs.
New York? Los Angeles? Atlanta? Chicago? Columbus? Memphis? Miami?
The lineup of cities that traditionally appear on popular lists of “best” logistics sites is finite and predictable. But the actual list of ideal locations for your next distribution center (DC) is by no means consistent for every company—including companies that share the same classification code.
At a time when the nature of supply chain economics is rapidly evolving, the process of selecting a DC site is by no means a one-size-fits-all analysis. Nor can companies find the correct answer through website searches.
“It all depends on the grocery list for your house versus my house,” says Adam Roth, executive vice president of Chicago-based NAI Hiffman, an independent real estate services firm. “We might go to different grocery stores, but we all buy groceries.”
The checklist of viable DC site possibilities is affected not only by the specific distribution needs and financial drivers of individual companies but also by such “soft” assessment factors as company history and lifestyle preferences.
Sometimes for soft reasons alone, companies will choose to grow in the same place where they were first planted—even if the location is no longer financially optimum.
“There are all kinds of reasons why companies keep certain locations,” says Marc Wulfraat, founder and president of MWPVL International, a supply chain and logistics consulting firm headquartered in Montreal.
“More often than not, companies want to keep a certain building for historical reasons—for instance, that’s where the president who started the company lives,” he says. “There’s no such thing as a blank sheet of paper. There are always some constraints or sacred cows.”
Sacred cows notwithstanding, data still reigns supreme for any company committed to optimizing its distribution network.
DC site-selection teams must apply a “tremendously robust” algorithm to their search analysis, Roth says. Companies may use different versions of the algorithm, but they all include key variables such as property value and assets, real estate taxes, transportation access, and labor estimates, as well as supplier and customer wants and needs, financial incentives, and service requirements.
Traveling the road ahead
The variables are just that—variables, dependent on both the subjective and objective considerations of individual companies.
“If a site selection team can control for the top three variables, they could save a lot of time by calling on some experts who are familiar with the regional market,” says Terry Coyne, vice chairman in the Cleveland office of Newmark, a global commercial real estate advisory and services firm.
While Coyne relies on up-to-the-minute data, trends, and forecasts to inform his site-selection analyses, he says his core passion is people. But it is for reasons more practical than passion that he puts labor at the top of the list of DC site-selection priorities.
A generation ago, a regional utility company adopted the slogan “Best Location in the Nation” to brand Coyne’s hometown of Cleveland. Depending on a company’s labor needs and other considerations, Cleveland may yet be the best location for your DC. But so too might be any of the locales that rank in the Top 10—or 25 or 50—cities on your favorite list of “best” logistics sites.
So how does a company move from a “robust algorithm” to finding its own hotspot on North America’s DC heat map?
By definition, companies must look to transportation in their quest to find the right region in the logistics landscape—and the right dot inside the regional circle—for their DC. And as part of that study, site-selection teams are well advised to apply what Roth refers to as “the rule of 1.5.”
“Whatever happens in transportation impacts industrial real estate a year and a half later,” he explains.
For example, Roth cites the dramatic changes in transportation that occurred when new regulations and policies were implemented in the railroad and trucking industries in 2017.
The widespread adoption of precision scheduled railroading (PSR), an economics-driven initiative to reduce the number of geographical points that railroads serve, drove trucking companies to alter and increase their own traffic volumes and patterns.
All well and good but just some three years later a federal mandate requiring truckers to replace manual logbooks with electronic logging devices (ELDs) was put in place. The mandate had the effect of reducing the ranks of truck drivers by about 10%.
Ahead of the Curve
Companies that were ahead of the curve on these changes and how they would affect individual sites were likely to make better decisions on where to place their DCs than those that did not anticipate what was coming around the corner.
Risk assessment requires similar foresight. “Because of the pandemic, corporations are assessing risk differently,” Roth says. “International supply chains were not as resilient as was thought.
“For the past 20-plus years, everything has been based on efficiency,” he adds. “What we learned over the past two years is that if you lose a sale, that wipes out the efficiency, so it’s difficult to rely on the historical supply chain.”
As a result, forward-thinking companies are now establishing not only a single supply chain path but alternatives as well.
“We can’t change our China integration overnight,” Roth says, “but we want to have at least one other alternative—China plus one, maybe plus two. Where product allows, companies need to start to migrate away from China.”
An alternative supply chain solution may, for example, include Taiwan, Malaysia, or Mexico. Whatever alternative path is chosen will impact the list of potential DC sites.
“Network strategy is all about the big picture,” says Wulfraat. “Figure out how many circles to put on the map and how big each circle should be. Should you have three, four, five, or six buildings? Once you figure out where you need to be geographically, then look at the circles and finally the dot within the circle.”
Choosing a DC site to optimize your distribution network also depends on whether your company needs—and can afford—numerous DCs serving multiple markets or a solo location to serve as a national portal.
“If you were to draw a straight line from Memphis to Louisville, along that extended line you would see Columbus, Ohio,” says Wulfraat, who adds that all three cities qualify as major logistics hotspots.
“Louisville qualifies because it’s the UPS worldwide hub,” he says. “Memphis qualifies because it’s the FedEx hub, and Columbus because it’s one of the strongest LTL/FTL trucking points in the country.
“So if you had a single DC to service the entire country, if you want the optimum case to access the entire market out of one place, that corridor is where you would position yourself,” Wulfraat says.
Whether the geographical circles under consideration are limited to regions providing direct access to the Port of Los Angeles—the nation’s number one container port—or the numerous seaports of Florida, or perhaps a more centralized or inland location, the final choice of the precise spot for your DC requires more granular analysis.
That’s where regional expertise comes in. “If a company tells me they want to be in Cleveland or Columbus, and cites their top three motivational factors, I can tell them in 10 minutes and within 5% where they are going to go,” says Newmark’s Coyne, who adds that the regional labor market must always be among a company’s most important motivational factors in choosing a DC site.
Brokers will narrow the field quickly, Coyne says, because they know and understand the size and scope of the local labor market. That’s why, while recognizing the importance of every department’s input, he prefers to have the HR representative on the company’s site-selection team serve as his primary contact.
Creating a supply web
Each member of the site selection team needs to approach the task with an open mind. It’s also important to ask the right questions: “If we have a building that’s running out of capacity and has a labor problem in that market, do we want to consider automation as an alternative to having a labor-intensive operation?” Wulfraat says.
In the end, appropriately enough, transportation will take companies to their final DC destination.
“By far the biggest determining factor in this whole algorithm is transportation,” Roth says. “Part of it is construction and part of it is that transportation is the biggest spend for network design.”
Looking ahead, companies will need to confront the challenges of physical distance in their distribution strategy. “They will need to shorten their length of haul,” Roth says. “Reshoring and nearshoring are definitely more prevailing than they had been in the past.”
The process of decoupling from China will alter international trade agreements. “There will be more bilateral trade agreements where democracies are going to trade with democracies,” Roth says, adding that planning for this eventuality will impact distribution networks.
“Companies that can, and where product allows, need to be regional in nature,” he says. “I like to call it ‘international regionalization.’ Supply chain will become a less common term; instead it will be called ‘supply web.’ We will have multi-state replenishment locations with access to intermodal transportation options.”
Haste makes waste
The evaluation process necessary to identify the right DC location is neither simple nor fast. Most companies will not make the determination alone, but rather will engage a qualified and experienced consulting firm to coordinate the effort with the company’s internal team.
When Wulfraat engages in a dialogue with a company, they usually want to figure out the site selection process in the next eight weeks.
However, doing the job properly will take considerably longer—and it should.
“Imagine a company that sells billions of dollars of merchandise,” Wulfraat says. “They’re a well-known brand name, they’ve got existing facilities, they’ve got thousands of people whose jobs are on the line. They want to blow it up and look at the map totally fresh. That’s not done over six, seven, or eight weeks. That takes months.”
It is neither credible nor diligent to expect otherwise. “If you’re going to be responsible about the business, the workers, and the customers, you owe them the decency of doing a good job of site selection,” Wulfraat says. “You can’t rush. It takes time to gather and cleanse the data. Then you’ve got to develop economic models where you’re moving the levers.”
Minimizing or, worse, skipping any of these critical steps is likely to lead to a negative outcome.
“Imagine if you were a kid and you had 100 Lego blocks but the sizes don’t fit together,” Wulfraat says. “You need Lego blocks where the dimensions all make sense.”
How well or how poorly you assemble the various pieces will either construct an expressway to a DC destination you can depend on for years to come—or an outdated road filled with potholes that will impede your company’s progress at some point along the way.