The Midwest: America's distribution heartland
Its location at the crossroads of the nation's transportation system makes the Midwest the country's favorite location for distribution centers.
By Toby B Gooley -- Logistics Management, 9/1/1998
It used to be called "The Rust Belt." When the economy was in a recession, manufacturing plants were shutting down and the region suffered from the country's highest unemployment rate. But the Midwest today has bounced back, boasting unemployment rates as low as 2 percent in some areas and regaining its rightful place as the nation's manufacturing--and distribution--heartland.
There are many reasons why the Midwest is the center of distribution activity in the United States. Excellent transportation infrastructure in all modes, a central geographic location, favorable state tax climates, and a workforce known for its reliability and strong work ethic all contribute to the Midwest's reputation as a smart place to locate regional and national distribution centers.
Proximity to Markets
The Midwest is home to some of the nation's largest cities and most concentrated population centers. Chicago; Columbus, Ohio; Kansas City, Mo.; St. Louis; Milwaukee; Detroit; Minneapolis, and a host of other cities are among the country's largest consumer markets. A location in one of these cities puts the lion's share of the region's consumers within easy reach. From the easternmost Midwest states, nearly 50 percent of the U.S. population lives within a 10-hour drive.
But unlike the Northeast, where it's hard to tell where one city ends and another begins, urban areas in Midwestern states usually are surrounded by more sparsely populated areas. Often, companies choose to locate a DC near a major consumer market that has good highway access to smaller markets. If, on the other hand, a warehouse or DC mainly serves manufacturing facilities--which often are located in rural areas--then proximity to consumers is less of an issue.
With U.S.-Canadian trade growing at a rapid pace, Midwestern states are emphasizing their proximity to some of Canada's largest markets. The Detroit-Windsor, Ont., border crossing is the busiest for truck traffic along the U.S.-Canada border. From there, Canada's Highway 401 offers a straight shot through Toronto to Montréal, Ottawa, and Québec--a region that encompasses more than half of Canada's total population. Similarly, Canada's largest midwestern markets, including Winnipeg, Regina, and Calgary, are easily accessible by major highways from Illinois westward.
Proximity to Canadian markets is indeed a major selling point, says John H. Boyd, president of industrial location consultants The Boyd Co. "In this post-NAFTA period, companies are beginning to rationalize their distribution networks within a North American context," he explains. Boyd says that his company's clients, which include such major firms as Digital Equipment, PepsiCo, and Time Inc., are thinking not only in terms of East-West business, but also in terms of North-South opportunities. The Midwest is right in the middle of major routes running from Winnipeg down to Mexico City, making it a natural location from which to serve all three NAFTA markets, he adds.
Physical Infrastructure
The Midwest is the crossroads of the nation, with major highways running through it in all directions. With that kind of access, it's no surprise that many of the country's largest motor carriers and most of the major van lines are headquartered in this region. Route 70, for example, connects important population centers like Cleveland, Ohio; Indianapolis; St. Louis; Kansas City; and Topeka with the East and West Coasts. Further north, Route 80 performs the same functions for smaller cities like Columbus, Ohio; Des Moines, Iowa; and Omaha, Neb. On the north-south axis, I-29 and I-35 funnel trade from Canada and Mexico through the Midwest, while Route 55 snakes from Chicago all the way to New Orleans on the Gulf of Mexico. Many other well-maintained roads connect these arteries with smaller cities and rural areas.
Businesses in the Midwest have access to more rail lines than any other region of the country. That's largely because of the Midwest's dual role as both a manufacturing and an agricultural center. Railroads like the Union Pacific, Wisconsin Central, Kansas City Southern, the Illinois Central, and many more both large and small still focus as much on moving grain, forest products, chemicals, and coal as they do on moving intermodal shipments of general freight. Kansas City and Chicago remain among the busiest rail centers in North America; a look at a rail map of North America shows a spider-web pattern of rail lines radiating from these hubs.
The Midwest also is the beneficiary of railroad mergers and cooperative agreements that will bring it superior rail service to and from all of Canada and Mexico. Canadian National Railroad and the Illinois Central Railroad's upcoming merger will bring seamless North-South service to the region, expanding on the two carriers' cross-border success with their Gateway Intermodal Terminal outside Chicago. On the southern border, Kansas City Southern's ownership stake in Mexico's northeastern rail lines provides Midwestern shippers with direct access to that country's largest industrial and consumer markets.
For shippers of bulk products, the Midwest's waterways offer efficient, low-cost transportation alternatives to truck and rail. Enormous quantities of grain, minerals, chemicals, forest products, steel, and other bulk commodities move by ship across the Great Lakes and through the St. Lawrence Seaway to global markets. These ships, known as "lakers," load and unload at terminals that connect to the region's rail lines in ports like Duluth, Minn.; Chicago; Cleveland; Milwaukee; and Burns Harbor, Ind. Barges on the Mississippi, Missouri, and Ohio rivers also carry bulk products and connect with rail lines at major junctions like St. Louis and Cincinnati. Along these waterways, specialized distribution, warehousing, and transloading facilities have grown up to serve shippers' needs.
Turning to air service, there's no shortage of airports in the Midwest. When it comes to international air freight, Chicago's O'Hare International Airport has the most to offer in the way of capacity and routes. But O'Hare often is congested, and that raises costs. Shippers have a number of alternatives, however. Less-congested airports such as Kansas City and St. Louis offer many international flights. A network of overnight truck feeder services also serves most major and mid-sized airports, allowing shippers to deliver, receive, and clear cargo through customs at local airports while transshipping via Chicago.
The Midwest also has numerous all-cargo airports offering worldwide service. Several integrated carriers have their national hubs in Ohio--Airborne Express in Wilmington, Emery Worldwide in Dayton, and BAX Global in Toledo. Many manufacturing and warehouse facilities have relocated adjacent to these air hubs to take advantage of the express service.
One of the most successful cargo airports in the country is Rickenbacker International Airport in Columbus, Ohio, which in 1997 handled 243 million pounds of cargo. The facility includes a Foreign Trade Zone, a 24-hour U.S. Customs Service station, two 12,000-foot runways, and international service via such carriers as Polar Air Cargo, FedEx, United Parcel Service, Evergreen International, Northwest, and Southern Air Transport. Businesses that have located distribution centers on Rickenbacker's property include Spiegel/Eddie Bauer, Whirlpool, Kubota Tractor, Siemens, and Timken.
Columbus, in fact, has turned itself into the distribution capital of the Midwest. The city's government has made a concerted effort to attract logistics-related businesses. It's been highly successful: Columbus is home to more than 150 distribution centers totaling more than 75 million square feet. The "Greater Columbus Inland Port" program coordinated by the Chamber of Commerce also focuses on developing integrated intermodal services. The Inland Port's relationships with the ports of New York/New Jersey and Los Angeles give exporters fast, direct, and discounted rail service to those ports. The Inland Port also encompasses a wide variety of trucking and rail services.
Economic and Tax Considerations
Distribution centers need a lot of space, and land availability is one area where the Midwest has an advantage over some other regions. State business-development offices tout the fact that there's plenty of room to expand around smaller cities and in rural areas. Land costs also tend to be much more attractively priced than in the Northeast, Northwest, and other congested regions, says Boyd. Making it even more attractive are the financial incentives that many states offer to businesses willing to build in rural locations. That helped bring Dollar General to Fulton, Mo., a town of 11,000 located in the center of the state near I-70. The discount retailer has purchased 262 acres and will build a one million square-foot distribution center. Dollar General already plans to add another 500,000 square feet by the end of next year.
Another cost factor that works in the Midwest's favor is the continuing decline in transportation costs, says Boyd. "Of all the costs we analyze for clients ... the one cost that has risen least is transportation." Deregulation, which allows market forces to control pricing and service, has reduced per-unit shipping costs "such that [companies] can afford to ship greater distances ... and service a national market from these mid-continent locations more efficiently," he believes.
Utility costs play a big role in site-selection decisions, and some of the more rural Midwestern states offer pricing that is significantly below what's available in major urban areas. For example, according to Boyd's research, electricity costs for a 350,000 square-foot warehouse in Minnesota, Iowa, and the Dakotas are half those in the Chicago area. The state of Nebraska considers its publicly owned electrical service to be an important drawing card for new business and emphasizes its low costs and dependability.
Every state in the Midwest offers a variety of job-creation incentives. These may include training subsidies, financial and managerial assistance with recruitment, and tax credits for each job created. Training grants are most common; states often will subsidize workers' salaries and/or defray the cost of training new and existing employees at companies both large and small. Just one example is Indiana, which announced more than 50 such grants under its "Training 2000'' program between January and July of this year. The grants are awarded to companies that undertake capital-improvement projects. Host communities also may receive grants for making infrastructure improvements in support of those projects.
Other forms of tax incentives for companies looking for a distribution center or warehouse site abound. Indiana alone lists 13 corporate tax credits, plus nine special tax-abatement and financing programs. Of special interest to shippers are an inventory-tax exemption for goods shipped out of state and tax abatements for businesses locating within a port district. Oklahoma, meanwhile, offers not only its own tax breaks, but also federal incentives, since two-thirds of the state formerly was American Indian reservation land. South Dakota goes furthest, boasting of the fact that it has no corporate income, personal income, personal property, and business-inventory taxes.
The Heart of the Matter
When considering locations for distribution and warehousing facilities, the facts and figures about land costs, utility rates, transportation access, and taxes tell just part of the story. Companies today are finding that the heart of the matter is labor and personnel issues, particularly the issue of "liveability," says Boyd. "The 'hot button' issue now in site selection is the fact that companies have more and more reason to want to move, and employees have fewer and fewer reasons for accepting a transfer. It behooves a company to recommend a city that not only is good for business, but also is good for living."
The Midwest has a lot to offer in that regard, Boyd believes. A low cost of living in non-urban areas, open space, low unemployment rates, state-subsidized training, low crime rates, low personal taxes, and more make much of the Midwest an attractive place to live for white-collar and blue-collar employees alike. Put those benefits together with the many business benefits of locating in the Midwest, and it's easy to see why the region has become the country's distribution heartland.
Editor's Note: For more details on economic incentives, site availability, and business-development programs, check each state's Web site on the Internet. Most state sites are named "www.state.XX.us" (substitute the state's two-letter postal code for XX; e.g. www.state.sd.us for South Dakota). For those that aren't, a search under "State of XXX" usually will find state government sites. Also recommended: The state of Iowa in partnership with Fluor Daniel Corp. publishes a 29-page Executive Guide to Site Selection. It can be ordered free of charge at www.smart.state.ia.us/siteselection.htm.
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