The Science Behind Site Selection
Industry leaders test their theories about new distribution and fulfillment center locations, and—Eureka!—discover the elements of successful site selection decisions.
When it's time to choose new distribution, fulfillment, and e-fulfillment center locations and expansions, there is no magic formula. Whether their organizations are looking to decrease drayage and transportation costs, gain access to multiple transportation nodes and modes, lower drivers' total mileage, or boost labor forces, site selectors must experiment with a variety of elements before purchasing new facilities or further developing current operations.
Site selection—and expansion—is truly a science, no matter what the company's primary goal. What are industry leaders doing to ensure their new sites and expansions improve their supply chains, resulting in long-term growth and success? And, how should logistics professionals respond in 2016 and beyond?
To understand the reasoning behind their site location and expansion decisions, and to solicit a broad spectrum of ideas and opinions, Inbound Logistics spoke to four companies in three separate industries: two industrial real estate developers, an automotive parts manufacturer, and a globally renowned, upscale fashion retailer. Each organization reveals the factors influencing their site selection processes, as well as the results achieved with their new locations or expansions.
E-commerce and Omni-channel Retailing impact site selection decisions
In 2014, e-commerce drove approximately 30 percent of U.S. demand for industrial real estate, according to CBRE, a Los Angeles-based commercial real estate services firm. To compare, e-commerce transactions made up only 7.5 percent of the nation's retail sales during that same timeframe.
"The 30 percent also includes omni-channel companies that are responding to competitive pressures and, as a result, are re-thinking and re-working their supply chains to remain competitive," says Douglas A. Kiersey Jr., president of Dermody Properties, an industrial real estate developer headquartered in Reno, Nev.
The combination of e-commerce and omni-channel retailing has significantly impacted the industrial real estate industry, especially in recent years, leading to considerable growth in distribution markets.
"To serve this growing segment, we had to rethink the design of our facilities to meet the significant differences in what companies need today compared to five years ago," Kiersey says. "Many companies have specific requirements, and they cannot choose a distribution or e-fulfillment center that does not quite fit those needs simply because it is available."
E-commerce and omni-channel company requirements are diverse, ranging from distribution centers with higher electrical power capacity to additional automobile and trailer parking. In fact, e-commerce and omni-channel companies need at least one parking spot for every 1,000 square feet of warehouse space, whereas traditional distribution companies require only one parking spot per 3,000 to 4,000 square feet of warehouse space, according to Kiersey.
In addition to needing higher electrical power capacity, e-commerce and omni-channel companies favor facilities that are fully air conditioned because they tend to have more employees than traditional distributors. They also often prefer more clear height in their buildings, along with greater weight capacity on their roofs. They may even require double inbound lanes with controlled access into secure truck docks to meet security requirements.
"We have to anticipate where these companies will need space—and what features their distribution centers must have—so that the facility is there when they are ready," says Kiersey. "There is often not enough time for a true build-to-suit." Dermody Properties builds on a speculative basis in addition to build-to-suit, so that distribution centers are available when and where their customers need them.
Build-to-suit, however, is the only option for some companies. For them, Dermody Properties finds a site, and then designs and constructs a facility that meets their exact needs.
"The cost of the real estate itself is secondary to other supply chain costs, such as labor and transportation—the top costs companies consider when choosing a site," Kiersey explains. "They want locations that place a high percentage of their U.S. customers within a 500-mile radius—a one-day truck drive—of their facilities."
In the past two years, Dermody Properties has developed industrial facilities in Chicago, the Cincinnati/northern Kentucky market, Las Vegas, Louisville, Ky., New Jersey, central Pennsylvania, Pennsylvania's Lehigh Valley, Portland, and Reno, Nev.—locations from which companies can quickly reach major population centers.
Beyond e-commerce and omni-channel companies, Dermody Properties also serves traditional distribution companies. After all, traditional distribution is expected to grow at approximately the same rate as the national GDP for years to come, according to Kiersey.
To stand out from the competition, Dermody Properties focuses on in-fill properties—areas that have extremely high barriers to entry for development, such as when land is scarce enough that existing dysfunctional buildings must be torn down and replaced with new ones—in major markets.
"We have done a fair amount of redevelopment work by repurposing sites to build new projects," Kiersey says. "As we do, we ensure we are investing in markets with sustainable demand drivers, which are different in each market.
"For example, Louisville's UPS Worldport hub offers a massive infrastructure that is attractive to companies that use air freight to transport their goods," he adds. "Reno, in comparison, is ideal for ground transportation, as it sits right in the middle of 11 western states."
Close Proximity to Major Transport Nodes MAKES A DIFFERENCE
As an industrial real estate developer based in Oak Brook, Ill., CenterPoint Properties acquires, develops, and manages distribution and manufacturing facilities near transportation nodes, focusing on port and rail infrastructure assets.
In 2001, the company opened an inland port in Elwood, Ill., a village located about 50 miles southwest of Chicago. Eight years later, it opened another port in nearby Joliet. When combined, the two ports—known as the CenterPoint Intermodal Center-Joliet/Elwood—are situated on 6,400 acres of industrial-zoned land, forming the largest inland port in North America.
In addition to its size, the CenterPoint Intermodal Center-Joliet/Elwood offers immediate access to the I-55/I-80 interchange, one of Illinois's busiest highway intersections; Elwood's BNSF Logistics Park Chicago, a 770-acre intermodal facility; the 785-acre Union Pacific-Joliet Intermodal Terminal; and the Des Plaines River, which runs through northern Illinois and southern Wisconsin.
At full build out, likely by 2025, the CenterPoint Intermodal Center-Joliet/Elwood's total dimension will measure roughly 36 million square feet. On average, the site is expanding by approximately 2 million square feet each year. To date, about 15 million square feet have been completed, and companies including Bissell, Home Depot, and Walmart have become tenants.
"Although the CenterPoint Intermodal Center-Joliet/Elwood is our primary focus of development, we have also expanded development of other CenterPoint Intermodal Centers to locations such as Suffolk, Va., a town renowned for its large port, and Savannah, Ga., a beneficial rail location," says Michael Murphy, chief development officer at CenterPoint Properties. "In the past 18 months, CenterPoint Properties has also acquired more than 6.5 million square feet of industrial facilities in Houston, helping to boost our national portfolio of owned and managed industrial properties to nearly 54 million square feet."
CenterPoint Properties helps shippers and logistics companies create profitable supply chains by locating near major transportation nodes, which reduces drayage expenses considerably.
"If logistics companies are within close proximity of a transportation node, they generally save upwards of $150 per container in dray costs alone because their employees, rather than third parties, are able to pick up all their containers," Murphy explains. "The transportation nodes also shorten shipment arrival times, so that logistics companies receive them more quickly."
Last-mile shipments, in particular, highlight the ease of shipping, as products can be delivered directly to a warehouse's intermodal facilities, and then shipped short distances to final destinations. In comparison, when containers are not shipped to transportation nodes, they need to be driven several—if not hundreds of—miles to reach their final destinations.
"Our cost advantages are heavily weighted on reducing tenants' drayage expenses, as rent is only a fraction of the dray costs they typically incur when they move high volumes of products every day," Murphy adds.
As CenterPoint Properties prepares to expand even further, it will continue to focus on other transportation nodes, including Oakland, Calif., Charleston, S.C., and Savannah, Ga. And, like Dermody Properties, the company intends to develop e-commerce distribution centers, while seeking locations that are close to its customer base as well as transportation nodes that ensure the timely and cost-effective shipment of goods.
"With e-commerce, brokerage groups and site consultants are looking at more variables than they were years ago, from expansion opportunities and population density to LEED attributes such as bus access, car parking with changing stations, and environmentally responsible building materials," Murphy says. "As the analysis of land availability and costs becomes more sophisticated, the popularity of major transportation nodes will only continue to increase."
Access to Multiple Transportation Modes
American Showa's lease on its primary warehouse facility, which it had occupied for more than six years, was due to expire at the end of December 2014. In preparation, the Sunbury, Ohio-based shock absorber and power steering developer and manufacturer began to look for alternate warehouse facilities in early 2013.
Columbus, Ohio, was one of the company's underlying choices for relocation. Not only is it within one day's drive of half the U.S. and Canadian populations, but it is also home to the 1,576-acre Rickenbacker Global Logistics Park, which features an international air cargo airport, a rail intermodal facility, a distribution hub, and 28 million square feet of potential development.
"Rickenbacker is also a U.S. Foreign Trade Zone, so companies can import certain merchandise without having to follow typical customs entry procedures, including import payments," says Art Makris, vice president of leasing and development for commercial real estate company Duke Realty's Columbus office. "Logistics professionals are also able to monitor and record their boundaries so that they can analyze internal and external traffic patterns, schedule shipments, and improve overall operations."
Furthermore, the park offers tenants 15-year, 100-percent real property tax abatements, the ability to receive containers that are loaded to capacity, and access to five major freeways: I-270, I-71, I-70, Highway 23, and Highway 33.
In April 2014, American Showa began construction on its new facility at Rickenbacker. Eight months later, the facility—totaling 305,000 square feet with a clear height of 33 feet—was completed and opened for business. Designed to receive ocean and domestic truckloads, it has 30 dock doors, 15 of which are capable of handling ocean containers that weigh 25 tons or less, among other amenities.
As the facility was designed, American Showa considered a variety of factors, including building, inventory, and transportation costs. The company also reviewed how receiving, putaway, retrieval, and shipping would impact operating costs.
"We wanted a facility that could minimize truck drivers' idle or waiting time, and reduce their route miles and hours," says Ron Reynolds, general manager of trade compliance and logistics for American Showa.
At the company's prior location, ocean container delivery generally transpired two to nine days after it arrived at the railyard as carriers could deliver only one to two containers per day. Today, container deliveries occur within 1.5 days, on average, as American Showa employees are able to pick up containers themselves and return them to Rickenbacker's rail intermodal facility.
As a result, American Showa's suppliers' routes and pickup times have changed considerably since the end of 2014, ultimately leading to a 15-percent reduction in total mileage in 2015. After achieving such a steady decline in mileage, the company is now focused on improving other aspects of its supply chain as well, as it prepares for its second year of operation at the Rickenbacker facility.
"As we continue to lower our transportation costs, we will also begin to work on improving our inventory controls and stocking levels, as well as operational lead times and production consistency," Reynolds adds. "By identifying where our constraints exist, American Showa will be better prepared to achieve a more optimal operation in the future."
In addition to its potential to decrease drivers' hours and mileage, Rickenbacker's easy access to multiple transportation modes is also significant, especially in the midst of constant changes in the global economy.
"As conditions change, locations that have truck, rail, and international air capabilities, as well as access to port facilities, should be highly valued because each mode allows the same location to be served in different ways," says Kenny McDonald, president and CEO of Columbus 2020, an economic development organization. "If a location is dependent on a singular model based on current oil prices and business conditions, then it is at a higher risk of being unstable, even under slight changes.
"In this dynamic global economy, we can be certain of change," he says. "Capable, flexible locations that allow logistics professionals to serve their clients or enterprise as conditions change are not only rare—they are also positioned to save the day when the sands shift."
Online Purchases Require Tighter Fulfillment Network
As one of the largest retailers in the United States, Nordstrom had only two fulfillment centers prior to 2014; one on the West Coast (San Bernardino, Calif., dedicated to Nordstromrack.com and HauteLook) and another in the central region of the country (Cedar Rapids, Iowa, which supports Nordstrom.com).
But, as online customer demand continued to increase, particularly on the East Coast, the company began to search for property for a potential third fulfillment center location. Throughout 2013, Nordstrom executives focused on four cities, all in Pennsylvania—Greencastle, Fredericksburg, York, and Elizabethtown.
"Almost half our customers are located within two-day ground delivery of Pennsylvania," says Erik Nordstrom, co-president of Seattle, Wash.-based Nordstrom and head of Nordstrom.com. "We now deliver a big chunk of orders for those customers one to three days faster than they had previously been delivered."
Ultimately, Nordstrom chose Elizabethtown as the site for its third fulfillment center. Construction began in late 2014 and was completed in June 2015. To date, the retailer has hired more than 600 employees, with total employment surging to nearly 1,000 during the 2015 holiday season.
"As we looked at each site, we considered a number of factors and many moving parts that needed to work together," explains Dan Evans, director of Nordstrom's business public relations. "We believed Elizabethtown, with its available and skilled workforce, will meet our hiring needs for years to come, while its flexibility and space allowed us to design the large fulfillment center we desired."
Currently measuring more than 1.1 million square feet, the fulfillment center is also located near several East Coast shipping hubs, ensuring that merchandise is successfully transferred to customers faster than ever before.
"Although we are closer to a large portion of our customers now, we will still continue to ship some orders from our Cedar Rapids fulfillment center to the Northeast, as perfect allocation is never guaranteed," Nordstrom adds. "Our long-term strategy, however, is to have a fulfillment network that reaches at least more than 90 percent of our U.S. customers within a two-day ground delivery."
Retailers such as Nordstrom, along with automotive manufacturers and major industrial real estate developers, have site selection down to a science.