Site selection for a new distribution center has always been influenced by local costs and constraints. Now companies also need to consider global trends.
John H. Boyd (jhb@theboydcompany.com) is founder and principal of The Boyd Co., Inc. Founded in 1975 in Princeton, New Jersey, and now based in Boca Raton, Florida, the firm provides independent site selection counsel to leading U.S. and overseas corporations. Organizations served by John over the years are many and varied and include The World Bank, The Council of Supply Chain Management Professionals (CSCMP), The Aerospace Industries Association (AIA), MIT’s groundbreaking Work of the Future Project, UPS, Canada's Privy Council and most recently, the President’s National Economic Council providing insights on policies to reduce supply chain bottlenecks.
Where to locate a new distribution center (DC) is one of the most demanding and far-reaching decisions that a logistics executive will ever make. A less-than-optimum location will result in higher costs and put the company at a competitive disadvantage that could persist for years. To choose the best location and avoid these risks, companies must consider not only local but also global factors that will affect the cost of getting their goods to their customers.
When situating a DC in the United States, not all locations are equal in terms of cost. A 2012 BizCosts.com study shows significant cost variances among surveyed DC sites (see Figure 1). These figures are based on a hypothetical 150-worker distribution center occupying 450,000 square feet and serving a national market. A comparison of a Meadowlands/Northern New Jersey DC site vis-à-vis an Indianapolis location, for example, shows a total annual cost differential of 29 percent, favoring Indianapolis. Costs in the BizCosts.com analysis include labor, construction, taxes, utilities, and over-the-road shipping in truckload lots.
One factor that has a major impact on a DC's operating cost is over-the-road shipping. Shipping currently represents the largest single cost factor in the supply chain, far outdistancing real estate and rent costs, and these costs do not look like they will go down anytime soon. Our site selection firm is projecting trucking costs will rise 5.0 to 5.5 percent this year. Carrier margins are under intense pressure from rising driver wages and health insurance premiums, increased fuel cost, and required environmental equipment upgrades. These factors will force carriers to raise rates just to stay afloat.
Transportation costs are particularly steep in California, a key state for many companies' distribution networks. A study commissioned by the California Trucking Association found that the state's new Low Carbon Fuel Standard will likely raise the retail price of diesel fuel in California by up to 50 percent—to a projected US $6.69 per gallon by 2020.
With escalating fuel and trucking costs, astute DC site-seekers are finding important savings in inland distribution center locations close to rail hubs. We are counseling our clients to locate their inland distribution facilities as close to rail ramps as possible, as they provide opportunities to reduce dependence on over-the-road transport and to achieve a greater utilization of lower-cost, environmentally friendly rail. Some of these rail ramps are located in smaller, less-congested, and less-costly cities, and some also have free trade zone (FTZ) status.
One example of an intermodal development that is attracting DCs is in Quincy, Washington, USA. Quincy is located on the Seattle-Chicago main line of the Burlington Northern Santa Fe (BNSF) Railway in central Washington state and is close to Interstate 90 and the ports of Seattle and Tacoma. The intermodal terminal at Quincy includes more than 10,000 feet of track and can provide shippers with distribution, cross-dock, and storage capacity. Quincy is also home to the Pacific Northwest-Chicagoland Express "Cold Train," which carries fresh and frozen foods direct to Midwest markets. DCs with large power requirements can also take advantage of Quincy's green, hydro-generated power at rates that are among the lowest in the country.
Global matters
As our firm enters its fifth decade of providing location counsel, never have our DC site-selection projects been so affected by what is happening overseas. Consider this list of variables: political uncertainty in the Middle East and North Africa, the expansion of the Panama Canal, inflationary wage pressures in China, the return of manufacturing jobs to the United States, hyperextended and overly risky global supply chains, Asia's insatiable demand for coal, the European debt crisis, the "greening" of corporate investment decisions, the new free trade pact with South Korea, parity of the U.S. and Canadian dollars, and Japan's nuclear meltdown and tsunami. These and other global events are influencing investment and location decisions for new distribution and warehousing operations in the United States.
One development that is projected to have a big impact on the location of new warehouses in the United States is the revamped Panama Canal, scheduled for completion in 2014. The expansion project includes a new set of locks that will allow increased traffic and wider ships. These new ships, dubbed the Super Post-Panamax Class, will have a capacity of 13,000-plus 20-foot equivalent units (TEUs), nearly three times the capacity of today's ships. These ships will cost approximately 25 percent less to operate on a per-slot basis, providing a significant incentive for carriers to move containers directly to East Coast ports rather than overland from West Coast ports.
With an eye to the increased traffic and new super ships, East Coast ports have been upgrading, dredging, and expanding their facilities. In tandem, a wave of regional distribution warehouses is being built nearby. These new distribution hubs will be similar to the "big box" warehouses that were constructed in California's Inland Empire to serve the ports of Los Angeles and Long Beach. Among the new hubs we see developing are: Cranbury/Robbinsville, New Jersey, just south of Port Newark/Elizabeth; York, Pennsylvania, a short dray north from the Port of Baltimore; Pooler, Georgia, near the Port of Savannah; and Doral and Miramar, Florida, both close to the Port of Miami.
This construction is being further encouraged by historically low industrial land costs and multiple sources of funding for port-related projects. The Boyd Company is projecting overall demand for new warehousing space linked to the East Coast's emerging Inland Empire to be very substantial, upwards of 500 million square feet during 2012-2013.
Another global factor influencing DC growth in the United States is parity between the Canadian and U.S. dollars. Never has it been so inexpensive for Canadian companies to establish a brick-and-mortar presence in the United States, especially considering the unprecedented real estate bargains in markets throughout the country. South Florida; Phoenix, Arizona; Las Vegas, Nevada; and Albuquerque, New Mexico, are among the cities on our Canadian clients' short lists. Additionally, as the U.S. housing market shows signs of long-term improvement, the Canadian forest products sector is beginning to recover. We expect this development to fuel interest in Pacific Northwest sites like Seattle and Quincy, Washington, and Portland and Medford, Oregon.
Next year and beyond
Even with a sluggish overall economy, we are optimistic that the distribution sector will experience a sustained economic recovery in 2013, as we see some needed relief on the global stress meter and put election uncertainties behind us. If the economy does pick up, we expect no change in the overall trend of smaller distribution centers being built in "green buildings" near rail hubs and site-selection decisions influenced by global events and changes in the global economy.
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.