The return of the regional warehouse
Local DCs are back in favor, especially for consumer goods manufacturers. Here's why.
By John Paul Quinn -- Logistics Management, 10/1/2003
Regional distribution centers appear to be making a comeback.
The first surge in regional warehousing resulted from the Motor Carrier Act of 1980, which freed truckers to serve whichever regions they chose without government interference. Instead of having 15 or more local warehouses scattered across the country, companies could hold materials in fewer regional warehouses, confident that the newly available trucking services would deliver orders whenever and wherever they were needed.
But in the decade that followed deregulation, many shippers moved away from regional warehousing and toward more centralized distribution facilities, which seemed to fit more squarely into the premise of global supply chains. One or two locations, the thinking went, could serve an entire country as long as high-quality carriers were at the shipper's beck and call.
Now it seems that the pendulum is swinging back to regional warehousing. Although there's no statistical evidence of a massive shift in that direction, there are signs that more companies are decentralizing their distribution these days. That may be one reason why warehousing space in the United States has continued to grow. Real estate developer CB Richard Ellis estimates that there are more than 5.5 billion square feet of warehousing space in this country, up a half-billion square feet in the last five years.
For some veteran observers, this renewed interest in regional warehousing simply represents the latest spin of the cyclical logistics wheel. "It appears to be an old solution become new again," says Dr. Dale Rogers, professor of supply chain management at the University of Nevada, Reno. "Industry and business go through a variety of iterations. A few years ago, everybody was consolidating their warehouses; now there are signs of adding locations, or at least adopting a regional approach."
'Not All Inventory Is Bad'
Industry observers say there are several reasons why shippers are using more regional warehouses. For one thing, they may be reacting to recent events that disrupted many global supply chains, says Ted Scherck, president of Atlanta-based market analysts The Colography Group. He believes that many businesses "overbought" the concept of extended global supply chains, which promised more efficient inventory management. But they underestimated the risks associated with disruptions caused by weather, labor disputes, tariffs and quotas, and terrorist acts.
The experiences of the last two years taught shippers that lesson. "Over the past couple of years, many of the companies that originally bought into the extended supply chain concept are now saying, 'Wait a minute, not all inventory is bad'," Scherck observes.
Changing transportation patterns provide more evidence of the growing popularity of regional distribution. "The resurgence of this type of location has enormously benefited regional trucking companies," Scherck says. "The fastest-growing segment of the transportation market today is regional short-haul traffic moving goods less than 600 miles."
Rethinking the global supply chain concept isn't the only factor behind the return of regional warehousing. John Giangrande, president of design/build systems integrator Fortna in W. Reading, Pa., sees three factors driving this resurgence. First, there is the potential to reduce inbound transportation costs. Second, there is minimization of risk. "We work with a couple of companies that definitely have the capability of servicing 100 percent of their client base in the U.S. out of a single massive distribution center, but they elect not to do so to avoid the risks involved in having all of their eggs in one warehouse, so to speak," he says. And third, companies may need to stock region-specific products. "The regional warehouse model allows them to virtually customize their service to any given marketplace," he says.
The growing emphasis on inventory velocity also is playing an important role in raising regional warehousing's profile. "The basic reason for regional warehousing is our economy's continual and pervasive drive to reduce lead times," suggests Terry Harris, managing partner at Chicago Consulting in Chicago. "It's all about getting closer to the customer to provide instant gratification service." That's why many of the products being handled in the current generation of regional warehouses consist of rapidly moving inventory. Rapid turnover means that regional DCs are likely to be cross-docking operations.
"The function of the particular warehouse is dictated by the time element and the cost of carrying inventory," Harris explains. "Also, as supply chain managers have widened the scope of their responsibility to include both traffic and warehousing, excess inventory has become their problem. Regional warehousing with the cross-docking option is a 'have-your-cake-and-eat-it' solution for them."
Close to Consumers
Consumer products manufacturers are particularly focused on inventory turns. A typical regional warehouse network in the consumer products sector today consists of five to seven locations, says Robert V. Delaney, a vice president with St. Louis-based Cass Information Systems. Each DC usually covers about a million square feet, stocks the company's entire product line, and can deliver products to customers within a day, he says.
Unilever's Home and Personal Care Division, which established a network of five regional warehouses, exemplifies this approach, Delaney says. According to a recent study by Cass and ProLogis, the Aurora, Colo.-based developer of distribution properties, Unilever's new network has resulted in a 15-percent improvement in customer service quality.
Consumer goods manufacturing will continue to witness the most dramatic growth in regional warehousing activity, predicts Dr. Thomas W. Speh, a warehousing expert at Miami University in Oxford, Ohio. "I've seen some of these companies going to three or four regional warehouses. Some have a dual setup sending out full truckloads to the mass merchandisers and mixed truckloads to the rest of the trade," he says. "They may serve both customer bases out of a single regional warehouse, or have certain regional locations dedicated to one or the other. They have to rationalize the cost and logistics of serving both."
Customers Call the Shots
Clearly, many factors are nudging companies towards a greater reliance on regional warehousing. More and more, though, shippers use a variety of approaches to meet their customers' needs, says Rita Coleman, acting executive director of the Warehousing Education and Research Council (WERC) in Oak Brook, Ill. "What we're seeing today are more and more combinations of strategies," she reports. "Regional warehousing is one; JIT (Just-in-Time) and direct store delivery are others. If a regional warehouse is part of the strategy, then it may involve buffer inventory, cross-docking, or serve as a mixing center for assembling single shipments of diverse products. It can involve a combination of all three."
Coleman also notes that in member surveys the association conducted in 1993, 1998, and 2002, the majority of respondents said they would be decreasing the number of warehouses in their networks, but the average size of any new facilities would be larger. Industry sources generally concur that this pattern of fewer but bigger DCs typifies the shift to more regional warehousing.
The need for customized solutions has also provided a boost for regional warehousing, says Ann Christopher, vice president and general counsel for the International Warehouse Logistics Association in Park Ridge, Ill. "All sorts of creative ventures and partnerships are coming about," she says.
Regional warehouses play a prominent role in those types of arrangements, which may involve agreements between real estate brokers, third-party logistics providers, and other service providers. But customer demand may be the most decisive factor in shaping the future of regional DCs, she believes. Increasingly, customers expect response-time flexibility, the lowest possible cost, and in some cases, a short product shelf life and quick inventory turnover. In short, she sums up, "What is driving all of this, including regional warehousing, is that customers are more sophisticated, and they have more expectations."
John Paul Quinn contributes to journals in the United States and Europe on a variety of business and industry topics.
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