Rising fuel and shipping costs, coupled with a weak economy, have companies searching for distribution sites that will help cut operating costs. They're finding some attractive opportunities.
In today's uncertain domestic economy and with increasing global cost pressures, many companies are finding that the best way to improve the bottom line for their warehouses and distribution centers is to focus on the cost side of the ledger, not on the revenue side.
With fuel and shipping rates projected to rise significantly in 2012 and beyond, comparative costs in areas like labor, property taxes, energy, and real estate are under the site selection microscope like never before. With the exception of shipping rates, which are often negotiable, most operating costs facing the distribution warehouse planner are fixed. For many, a less-than-optimum operating cost structure for their warehouses can compromise their competitive position for years.
Article Figures
[Figure 1] Comparative cost rankings for operating a warehouseEnlarge this image
That's one reason why many companies are considering relocating warehouses and distribution centers right now. Those that are searching for sites that will help cut operating costs now and in the future are finding attractive opportunities.
Location matters
Figure 1 shows the annual BizCosts.com comparative cost ranking of U.S. cities based on their housing a hypothetical 150worker distribution center occupying 450,000 square feet and serving a national market with over-the-road truckload shipments. 1 Total costs include labor, land, construction, taxes, utilities, and shipping. They can range from a high of US $24.5 million per year in San Francisco, California, to a low of $13.1 million in the Greenville/Spartanburg area, South Carolina.
These costs are expected to rise throughout the next year. Despite continued advancements in warehouse automation technologies, overall operating costs for distribution warehousing are expected to increase by 14 to 16 percent in 2012 due to a rise in diesel fuel costs, above-average utility rate increases, and recovering real estate markets in most locales. These costs will be up from an estimated 13percent increase for 2011. Labor costs, however, will continue on the flat-toweak trajectory they have followed since 2009, with a projected increase of 2.1 percent in 2012 for nonexempt warehouse personnel.
There are many other variables that can affect the attractiveness of one location compared to another. One of the newest is cap-and-trade legislation designed to reduce carbon emissions and improve the environment. New Jersey, for example, recently opted out of the Northeast Regional Greenhouse Gas Initiative in a move to improve its competitiveness versus neighboring Pennsylvania, which is not a member. New Jersey authorities may be right to worry: Industry insiders believe the fruit and juice company Ocean Spray's recent decision to relocate its Bordentown, New Jersey, distribution facility to Pennsylvania's Lehigh Valley was in response to concerns about New Jersey's carbon program and escalating utility prices.
Another business climate variable that companies continue to monitor is the relative strength of unions in each state. "Right-to-work" status continues to be a hot-button issue for many companies involved in distribution. Right-to-work legislation restricts the power of organized labor by barring practices such as requiring union membership to work in a warehouse or factory. This can be very important for some projects, as labor costs can account for as much as 50 percent of overall warehouse operating expenses. Lower labor costs and more favorable labor/management relations tend to be found in the 22 states that have right-to-work legislation, mostly in the South and West.
Nowhere is the strength of the unions more of an issue for the supply chain field than in California, where California Bill AB 950 could effectively keep the now-dominant independent drayage trucks from working at California's major ports, including Los Angeles/Long Beach. That measure could lead to larger, possibly unionized trucking organizations controlling drayage operations between the ports and regional warehouses.
The likely result of the California legislation would be a further increase in distribution costs in that state. The rise in costs could then drive distribution projects to other markets along the I-15 and I-10 corridors, including North Las Vegas and Mesquite, Nevada; St. George, Utah; and Phoenix, Kingman, and Casa Grande, Arizona. All of these locations are in right-to-work states where land costs and industrial space are also at historic lows due to the real estate collapse in those markets.
Expanding trade attracts warehousing
Not just the domestic economy but also the global economy is having a profound effect on the location of distribution centers. The cities that are especially well-positioned to attract new distribution projects are those that link to the global economy through ports, airports, and access to NAFTA (North American Free Trade Agreement) trade corridors like the Canamex Corridor in the U.S. West and the I-35 NAFTA Superhighway, which extends from Mexico to Canada in our nation's Heartland region.
Booming north-south NAFTA trade in the manufacturing sector and a resurgent agricultural economy led by corn and ethanol are driving the logistics economies of Heartland cities along the I-35 trade route, including Omaha, Nebraska; Kansas City, Missouri; and Oklahoma City, Oklahoma. Northsouth trade, up 15 percent from last year, is expected to continue to grow as the Canadian economy outpaces that of the United States and the Canadian dollar reaches parity with its U.S. counterpart.
As the Canadian economy grows, some Canadian companies are developing a keen interest in establishing U.S.-based distribution facilities. Due to the strength of the Canadian dollar, and with U.S. real estate prices at all-time lows, the economics are very attractive for Canadian companies that are looking to set up shop in the States for the first time.
Additionally, the expansion of the Panama Canal, set for completion in 2014, is already affecting distribution warehouse site selection. Container shipments are projected to increase tremendously at U.S. East Coast ports, creating inland warehouse opportunities (not unlike California's Inland Empire) for communities situated within a few hours' drive by truck from deepwater ports in Miami and Jacksonville, Florida; Savannah, Georgia; Charleston, South Carolina; Norfolk, Virginia; Baltimore, Maryland; Wilmington, Delaware; Newark/Elizabeth, New Jersey; and Boston, Massachusetts.
Airfreight growth also has been a positive force for a number of distribution projects, especially those close to major hubs operated by UPS in Louisville, Kentucky, and FedEx in Memphis, Tennessee. In addition, Minneapolis, Minnesota; Chicago, Illinois; and St. Louis, Missouri, have strong air cargo service to and from China, a huge plus for a growing number of companies in those areas.
A warm welcome
While the weak economic recovery and rising costs have had some negative effects on the warehousing market, they have also resulted in at least one positive consequence. It used to be that many communities were resistant to new warehousing projects and viewed them with skepticism. Now, however, communities are actively courting logistics industries because the economic benefits are clear and compelling. Indeed, for cash-strapped municipalities warehouses are a significant source of new jobs. Large warehouses on extensive acreages translate into huge property tax revenue. Other coveted revenue streams generated by a new warehouse or distribution center for the host municipality and state include sales taxes, personal property taxes, utility taxes, fuel taxes, telecommunications taxes, and personal and corporate income taxes.
As a result, state and local economic development organizations have been providing warehouse operators with access to millions of dollars in financial incentives, and communities have been warmly welcoming them. Additionally, residents of local communities are beginning to see distribution and warehouse facilities as an employer of choice. In years past, the typical warehouse labor force was dominated by lower-skilled and lower-paid material handling workers and a small clerical pool. Today's highly automated and computer-driven warehouses, however, depend on a wide range of both blue-collar employees and well-compensated white-collar employees who manage such sophisticated technologies as radio-frequency identification technology (RFID), automated storage and retrieval systems (AS/RS), mobile robotics, inventory tracking, and softwaredriven pick-and-pack systems.
Warehouses and distribution centers should continue to be seen as employers of choice, in part because an increasing number of them are opting to relocate other value-added functions to the lower-cost warehouse environment. These functions typically include final assembly and quality control, customer service, accounting, call center operations, regional sales, information technology, and other "back office" functions that traditionally are carried out at the more expensive head office or regional office location.
Endnote: 1. BizCosts is a registered trademark of The Boyd Company Inc.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.