The Geography of Logistics

Despite today's fast-changing business climate, the key criteria for site selection remain the same.

By Toby B Gooley -- Logistics Management, 1/1/1998

BY ITS VERY NATURE, LOGISTICS IS NOT A STAND-ALONE DISCIPLINE. IT IS INTRICATELY CONNECTED TO NEARLY EVERY ASPECT OF BUSINESS management, from product pricing, purchasing, and customer service to inventory management, manufacturing, and distribution. Logistics also can have a substantial impact on a company's ability to penetrate new markets, improve its competitive position, and boost its profitability. For these reasons, logistics should be involved in every manufacturer's or distributor's strategic planning process. One of the fundamentals of strategic planning for such companies is site selection; that is, choosing locations for facilities that provide the lowest cost and greatest efficiencies while meeting a company's operational and strategic needs. As manufacturing and sourcing have become more global, it has become clear how vital a role logistics plays in site selection.

Four Main Factors

This first installment of a year-long series is a brief overview of factors to consider when selecting the best location for a manufacturing or distribution operation. Subsequent articles will focus on the advantages and disadvantages of specific domestic and international regions.

Many factors must be considered when choosing the right location for manufacturing or distribution facilities. These factors can vary considerably from company to company, depending on each firm's strategic plans, products, and markets. Some issues, however, are important to all companies, regardless of what they make or to whom they sell their products. These include:

* Physical infrastructure;

* Proximity to suppliers and customers;

* Political and tax considerations; and

* International trade conditions.

For some companies, each of these factors will carry equal weight when costs and benefits are calculated, while for others, one or two may predominate.

* Physical infrastructure. When it comes to site selection, infrastructure is likely to be the first consideration for logistics managers. Infrastructure can include both natural and man-made features. In the former category are such geographical features as harbors, rivers, lakes, and mountains. Even with all the technological resources we have today, the same natural features that formed transport barriers in the horse-and-wagon days still affect logistics today.

In South America, for example, the Andes Mountains, the Amazon River, and the vast expanses of impassable jungle make rail and road transport between that continent's East and West Coasts virtually impossible. Coastal or river shipping and airfreight are the only options, which limits distribution network design for companies doing business throughout South America. From a transportation standpoint, at least, it doesn't make sense to try to serve all of South America from one location.

Another example of how geography influences logistics operations can be found closer to home, in Canada. The vast majority of Canada's citizens live within 150 miles of the U.S.-Canadian border. Although there are major metropolitan areas located outside of that border strip today, product distribution is concentrated in that population belt--thus, any domestic distribution systems must be designed with that fact in mind.

* Proximity to suppliers and customers. In an ideal world, facilities will be close to both the source of raw materials and the destination of the finished products. That rarely is the case, though, so shippers must weigh the cost of moving raw materials to manufacturing plants against the cost of shipping finished goods to customers from candidate locations. Mobil Oil Co., which is redesigning its Latin American distribution strategies, found that these costs could vary considerably from region to region, depending on local conditions. For example, when the company researched the best way to blend and package bulk products, it turned out that no single approach worked best for every market, says James W. Taverna, manager of lube marketing support. Analysts expected that it would be cheaper to package products close to the customer but, he explains, "in some places it was cheaper to package in remote locations and deliver packaged goods to the customer."

It's not simply a matter of measuring transportation costs, however. The ability to meet service requirements at an acceptable cost is an important part of the site-selection equation. For example, if a manufacturer guarantees delivery within a certain time frame as part of its marketing strategy, it's important that manufacturing plants, warehouses, or distribution centers be located as close as possible to the greatest number of customers. But the more facilities in the network, the greater the expense, so companies must weigh the tradeoff between cost and service. The question then becomes, if a company locates a distribution center in City A, will that compromise its ability to deliver product within the promised time frame? If so, how much business will be lost as a result? If the company adds a distribution center, on the other hand, will the value of the new business it will attract outweigh the cost of the additional facility?

* Political and tax considerations. Every local newspaper includes stories about state and local governments offering special tax breaks to businesses to entice them to locate in a particular city or town. The attraction for governments is jobs for their citizens and tax money for their treasuries. Sometimes, the long-term tax incentives offered are so great that they substantially reduce the total cost of building and operating a plant, warehouse, or distribution facility.

When international site selection is involved, tax and political issues can play an even greater role than they do in domestic situations. In these cases, a company may be deciding between countries; the real estate, profit, and employment tax regimes, therefore, can be wildly different. Bruce Arntzen, a partner in the consulting firm Global Supply Chain Associates, points out that tax burdens can be so heavy in some countries that they can cancel out other benefits a particular site may offer. In some Latin American countries, he warns, "if you have a very profitable product, the taxes on those profits will swamp any savings you achieve on freight."

Political and economic climate also may be more important in international site selection, because political instability can make it difficult for companies to move raw materials and finished products on time. Since the fall of Communism in the former Soviet Union, for example, economic upheaval has led to rampant cargo theft. As a result, shippers must employ expensive security measures that raise their total costs if they want to ensure delivery reliability.

* International trade conditions. International site selection involves all the same issues that companies must consider in domestic siting as well as some that are unique to international business. In addition to the tax considerations mentioned above, such factors as duty rates; border-crossing procedures; availability of international transportation services and equipment; the quality of roads, rails, and other transportation facilities; and even restrictions on foreign investment and currency management all can affect a company's ability to move freight efficiently and cost-effectively.

Arntzen reports that when his firm assisted Mobil Oil with its strategic planning in Latin America, all those factors were included in their analysis. But they also looked at other issues, such as market growth and decline, availability of manufacturing capacity, manufacturing costs, local-content regulations, transit times, tax and duty benefits of regional trading blocs, and more. After completing such an analysis, some shippers find that their logistics operations can be managed more effectively from outside the region. That's why many companies locate their distribution centers for Latin America in Miami, or warehouse their products for Eastern Europe and Russia in Finland or Denmark.

With site selection, perhaps the most important thing is to think in terms of a supply chain, recognizing that an entire, organic system is involved. Each of the many factors that must be considered in the site-selection process is interconnected with others and cannot be treated in isolation. As Arntzen puts it, planners must always ask themselves: "If I push at the supply chain in one place, what will happen elsewhere in the system--how will it affect the rest of the chain?"