WDC Site Selection: 5 trends for the new economy
Site selection experts from both real estate and supply chain think tanks have identified a handful of trends that are affecting how and where DCs are now being located. By proactively responding to these trends, companies can better position themselves for the next wave of economic recovery.
By Maida Napolitano, Contributing Editor -- Logistics Management, 9/1/2009
These days, hardly anybody in charge of warehouse/DC site selection is spending money or looking to expand a distribution network. In fact, almost everyone's playing defense—looking for ways to reduce costs.
A more likely site-selection scenario today is one where managers are closely studying supply chains that may have become bloated from years of continued growth. They're checking for redundant facilities and considering whether consolidation makes more sense. They're not necessarily expanding their distribution network footprint, instead they're closing DCs and opening new ones at sites that make the most business and economic sense—perhaps near ports or closer to customers.
In the next few pages, site selection experts from both real estate and supply chain think tanks identify five trends that are affecting how and where DCs are being located in the new economy. By proactively responding to these trends, companies can better position themselves for the next wave of economic recovery. So, if you're one of those managers choosing to stay ahead of the curve, you should start taking notes.
Handful of Trends
1. Growing demand in emerging global markets. Despite a slow global economy, Steve Ellet, a principal with Chainalytics, an Atlanta-based supply chain consulting firm, sees emerging markets around the world still growing at a faster pace than traditional established markets. Many experts point to emerging markets in Asia and Eastern Europe as leading the way, with China and India as the most dominant growth markets because of their large populations and growing upper and middle class.
According to Ellet, global companies will need to build networks and open sites to fulfill the demand in these markets—the catch is that they're doing it in unfamiliar geographies. Working closely with local political representatives can help overcome this hurdle.
2. Emerging logistics hubs and the expansion of the Panama Canal. It stands to reason that because certain markets are emerging, so too are the logistics hubs supporting them. Adam Bruns, managing editor for Site Selection magazine, points out how port expansion activities are in full swing in areas such as Novorossiysk (Russia), Laem Chabang (Thailand), and Manzanillo (Panama). He cites the "Russian energy market, Asian imports, and the increasingly interdependent economic heft of emerging economies" as examples of key drivers for these expansions.
But perhaps the biggest trend that Bruns says will be affecting site selection decisions for years to come will be the completion of the Panama Canal expansion in 2014. "Because of that project, big shifts are expected to occur in the distribution and transportation of cargo," he says.
The expansion is expected to allow super-cargo container vessels carrying 14,000 containers (which is triple the capacity of the largest ships crossing the canal today) to traverse the 50-mile waterway. The number of DCs in close proximity to the Gulf Coast and East Coast ports, and away from overcrowded West Coast ports, are expected to grow dramatically. How much will depend on whether these ports can make the necessary changes in time to accommodate the larger ships.
3. Navigating more stringent financing hurdles. Three years ago, financing a new DC or plant was almost a given. Today, Tony Kepano, senior vice president of corporate services for CB Richard Ellis, observes that just because you have a need doesn't necessarily mean that it's going to be easily financed.
Commercial sites are typically assessed as Tier 1, Tier 2, or Tier 3 based on how financial markets are viewing these sites. The deeper the market—as in New Jersey which is considered Tier 1—the less risk for banks to finance it. Adding a Tier 3 site may seem attractive in terms of reducing transportation costs, but these savings may be erased by the much higher cost of capital that banks are associating with that Tier 3 location. Because of this, Kepano emphasizes how it's now more critical than ever to integrate the financing piece into the site selection decision-making process.
4. Opting for more flexibility with 3PLs. Companies that are wary about the economy are shying away from building their own facilities and running their own DCs. Chainalytics' Ellet describes how some that are lucky enough to be expanding prefer to contract with third-party logistics providers (3PLs) when opening a new distribution point. According to Ellet, 3PLs give companies the flexibility to penetrate a specific geographic region without spending much-needed capital; yet they allow the company to take advantage of the reduced freight rates that come by entering the region.
5. Downward pressure on rents and a "flight-to-quality." Jules Nissim, senior director for Cushman & Wakefield of New Jersey Inc., notes how certain submarkets are overbuilt with so many speculative buildings that the situation is putting downward pressure on rents. Where rents have dropped off dramatically from two to three years ago, companies that are doing well are certainly taking advantage.
"They want to become more efficient," says Nissim, "It's a flight-to-quality and they're leaving their older facilities and relocating to state-of-the-art facilities." Nissim points out that most are looking for 32-foot to 36-foot clear buildings to maximize cube for storage, plenty of trailer parking, along with eco-friendly T5 or T8 lighting to save utility costs.
Convatec Rethinks the Network
Keeping these five trends in mind, let's now examine a recent network site selection project undertaken by ConvaTec, the Princeton, N.J.-based medical device manufacturer that's now in the midst of rebuilding its European distribution network closer to customers, with the help of Chainalytics.
Specializing in ostomy and wound care products, ConvaTec used to be a division of Bristol Myers Squibb (BMS). But in August 2008, this well-performing business unit, with sales of more than $1.5 billion dollars, was sold to a private equity firm and became a stand-alone company.
It had previously shared distribution services with two other BMS divisions. But for ConvaTec to now succeed on its own, Todd Smith, the firm's vice president of global supply chain, knew he needed to move quickly to put the company's own distribution network in place. This was particularly apparent in Europe where products were stored and distributed from 14 DCs across 14 countries using 14 different 3PLs.
Another twist kept matters interesting: A month after being sold, ConvaTec was merged with a smaller European-based medical device company called Unomedical that specialized in catheters and medical tubing devices. The merger added seven more DCs to the network for a total of 21. "Not only did we have to figure out what to do with our own network, but we had to combine theirs as well," explains Smith. "And right off the bat we knew, based on our level of sales and volumes, that we could not possibly sustain that amount of infrastructure."
So, in July 2008, even before any deal had closed, wheels were already set in motion to strategize a plan for the company's rebirth. ConvaTec hired Chainalytics to create an optimized European distribution network and answer two critical questions: How many distribution centers did the company need? Where should it put them?
Chainalytics gathered inbound and outbound freight rates and routes and contracted pricing from existing 3PL providers to build a model of ConvaTec's existing distribution network that the team validated against actual costs—and then used it to test different scenarios. Tim Brown, a Chainalytics' principal who helped develop the model, adds that all the scenarios were compared using the same criteria, with cost and service performance being the most critical (See Figure 2).
Fewer DCs meant that they were farther away from customers creating higher outbound costs. However, more DCs meant higher warehousing and inventory costs but lower outbound costs. After numerous iterations, the team agreed that an eight-DC solution would meet their needs.
From the very beginning, it was clear that they would continue to use 3PLs. "We had no desire to make the capital investments necessary to open our own DCs," explains Smith. Thus, with this ideal network in place, the team put together an RFP and sent it to 3PL players that had a major presence across Europe.
Chainalytics then re-ran the model with the actual pricing provided by each bidder. After much deliberation, ConvaTec selected Movianto, a 3PL provider based in Stuttgart, Germany, to operate all but two of the eight DCs. ConvaTec decided to stay with its existing providers in Italy and Russia, while Movianto already operated their Germany DC. The team then selected five new sites in France, Spain, the U.K., Denmark, and Eastern Europe.
In France, DC operations were moved from a southwest region to one located in Paris in the midst of major customers. In Spain, they relocated from Barcelona to Madrid, allowing the company to also serve customers in nearby Portugal with reasonable transit times. ConvaTec plans to complete migration to the remaining three sites by the first quarter of 2010.
By using multiple facilities with one 3PL, the company achieved some leverage from a contracting standpoint. Once in place, the new network is estimated to save 10 percent in total logistics costs. But perhaps the biggest side benefit from this reconfiguration, according to Smith, is that eight DCs are clearly more manageable than 21.
| Figure 1 lists Site Selection magazine's 2008 top 10 metropolitan area rankings based on corporate facility projects for Tier 1, Tier 2, and Tier 3 population groupings (March 2009). | |||
| Tier 1: Metros with population over 1 million | |||
| Rank | Metro | State(s) | Count |
| 1 | Houston-Baytown-Sugarland | Texas | 179 |
| 2 | Dallas-Forth Worth-Arlington | Texas | 156 |
| 3 | Chicago-Naperville-Joliet | Ill./Ind./Wisc. | 138 |
| 4 | Cincinnati-Middletown | Ohio/Ky./Ind. | 124 |
| 5 | Detroit-Warren-Livonia | Mich. | 108 |
| 6 | New York-Newark-Edison | N.Y./N.J/Pa. | 99 |
| 7 | Pittsburgh | Pa. | 79 |
| 8 | Columbus | Ohio | 77 |
| 9 | Cleveland-Elyria-Mentoor | Ohio | 67 |
| 10 | Charlotte-Gastonia-Concord | N.C./S.C. | 60 |
| 10 | Washington-Arlington-Alexandria | D.C./Va. | 60 |
| Tier 2: Metros with population 200,000 to 1 million | |||
| Rank | Metro | State(s) | Count |
| 1 | Dayton | Ohio | 41 |
| 2 | Akron | Ohio | 39 |
| 3 | Toledo | Ohio | 38 |
| 4 | Allentown-Bethlehem-Easton | Pa./N.J | 29 |
| 5 | Des Moines | Iowa | 28 |
| 6 | Grand Rapids-Wyoming | Mich. | 27 |
| 7 | Greensboro-High Point | N.C. | 24 |
| 7 | Tulsa | Okla. | 24 |
| 7 | Youngstown-Warren-Boardman | Ohio/Pa. | 24 |
| 10 | Omaha-Council Bluffs | Neb./Iowa | 23 |
| Tier 3: Metros with population less than 200,000 | |||
| Rank | Metro | State(s) | Count |
| 1 | Sioux City | Iowa/Neb./S.D. | 20 |
| 2 | Springfield | Ohio | 10 |
| 3 | Danville | Va. | 9 |
| 3 | Decatur | Ala. | 9 |
| 5 | Florence | S.C. | 8 |
| 6 | Jackson | Mich. | 7 |
| 6 | Wheeling | W.Va./Ohio | 7 |
| 8 | Blacksburg-Christianburg-Radford | Va. | 6 |
| 8 | Bowling Green | Ky. | 6 |
| 8 | Dubuque | Iowa | 6 |
| 8 | Elkhart-Goshen | Ind. | 6 |
| 8 | Muskegon-Norton Shores | Mich. | 6 |
| 8 | Owensboro | Ky. | 6 |
| 8 | Tuscaloosa | Ala. | 6 |
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