Distribution Center site selection: Where, why, and how many?

Rapidly changing market forces require shippers to build flexibility and agility into their networks. That has a big impact on strategies for locating distribution centers.

By Karen E. Thuermer -- Logistics Management, 3/1/2007

In the logistics world, where speed to market is king, distribution centers (DCs) are increasingly central to helping shippers achieve success.

“Companies want to respond to market forces,” says Robert Hess, consulting partner with real estate developer Cushman & Wakefield's Global Business Consulting Group. Those forces are changing faster than ever, but one thing is clear: “It's all about flexibility and agility,” he says.

To keep up with those demands, shippers are under pressure to optimize their networks of distribution centers, and to do it quickly. The process usually begins by asking where, why, and how many DCs are needed. And for more and more companies, speed to market is a consideration in the answer to every one of those questions.

When a company adds a DC to its portfolio, it diminishes the distance between its fulfillment operation and its customers while reducing freight costs and providing more reliable service. One company that knows that well is Arbonne International, a manufacturer and distributor of skin-care products. Explosive growth and an expanding customer base led the Irvine, Calif.-based company to open a 208,000 square-foot, state-of-the-art distribution center in Greenwood, Ind., last year.

Before it opened the new DC, Arbonne could not offer three-day delivery to customers in the eastern half of the United States. Now the shipper can provide better service in fast-growing markets. “Our new facility is a critical addition in helping us keep up with that growth and improve our ability to ship packages to consultants and their customers in a timely manner,” says Carol Hukari, senior vice president, operations.

Transportation accessibility plays a big role in determining whether a new DC will help a shipper meet customers' delivery requirements. For example, rail service was an important consideration when siting Nike's 2.7-million-square-foot DC in Memphis, Tenn. Much of Nike's footwear and apparel arrives from Asia via the Port of Los Angeles; from there, many shipments move by rail to Memphis, a centrally located city served by three major railroads. From Memphis, outbound shipments can reach 45 of the 48 continental United States, as well as several cities in Mexico and Canada, within two days.

Having several modes of transportation available gives shippers different options for moving freight when circumstances change. “The theme is flexibility and the ability to respond quickly to unexpected events,” Hess says. Reliability, redundancy, and flexibility are all reasons why intermodal hubs near cities like Chicago, Kansas City, and Dallas are attracting more DCs to locate there.

If a DC will primarily handle imports, close proximity to the port of entry becomes a critical factor in reducing time to market. Consequently, companies are developing import centers near seaports. One example is Wal-Mart's 4-million-square-foot facility in Houston, Texas, which transformed the port into a major gateway for imported goods.

Congestion at seaports and inland points in areas like Southern California are leading some importers to rethink their ports of entry and where they locate their warehouses. Many are choosing to spread the risk to minimize the chance of delays. “It becomes an issue of whether or not they should bring, for example, 30 percent of their imports through a DC in Vancouver and the rest into Long Beach, or transport shipments through the Panama Canal and come in at East Coast ports,” Hess says.

For many companies, a rural location with good transportation access meets their needs. When Best Buy wanted to add a northeast regional DC to help it grow market share, it began by pinpointing Yonkers, N.Y., as its logistical “centroid” — the largest concentration of customers in that particular market.

The rule of thumb for regional DCs is that they should be within a 100-mile radius of a market's logistical center. Beyond that, the cost picture can change significantly. “You can deviate to outside the circle, but freight costs escalate and the centroid has no relative meaning,” says J. Michael Mullis, president/CEO of J. M. Mullis Inc., a Memphis-based project-location firm.

Following the 100-mile-radius rule, Best Buy and its real estate consultant, Cushman & Wakefield, identified a search area that encompassed eastern New York, northeastern Pennsylvania, western Massachusetts, and western Connecticut. (See “Search Area” map, below.) For speed and flexibility, Best Buy wanted the DC to be located within a reasonable drive from both New York City and Boston, and no more than 10 miles from interstate highway access. It also had to be within 100 miles of an airport. In the course of an extensive evaluation process (detailed in the table on Page 48), the number of counties under consideration was trimmed from 40 to six. There were seven finalists, including the winner, Nichols, N.Y. (See “Screening Results” map below.)

A rural location can offer a different type of speed advantage: Large sites of 100 acres or more that can be developed within shippers' time lines are more readily available in rural areas. But they have drawbacks, too: “Most land-hogging DCs need to be located in the 'boonies,' and that means trade-offs,” Hess says.

Local authorities are often willing to help move the process along. To convince Best Buy to locate its $45 million, 650,000-square-foot DC on a farm field in Nichols, officials with the Tioga County Department of Economic Development and Planning figured out how to get water, sewer, natural gas, and electricity to the site, and how to modify the road system to connect the facility to a highway.

It was a challenging task, to say the least. “This included eliminating a creek, shifting another, and rerouting a road,” recalls Jeffrey D. Stoke, deputy director. Site planners also found a Native American burial ground where the DC's wastewater-treatment plant was to go, so more land nearby was purchased for the plant's location. Despite all of those roadblocks, Best Buy's new DC was operational in just 10 months.

For some shippers, the time frame for adding a DC to their distribution network is so short that their best choice is to turn to third-party logistics companies (3PLs). They can take advantage of 3PLs' existing operations, or they can ask the service provider to identify an appropriate facility in the optimal location, outfit it, and get it up and running in short order.

The largest 3PLs have extensive networks indeed. CEVA Logistics North America, for example, manages nearly 18 million square feet of DC and warehouse space in 26 countries. “Our network is focused on finding all available options in a market,” says CEVA's Steve McNeal, director of properties.

Shippers also turn to 3PLs because they don't believe they are getting optimal use from their DC, the facility may no longer be cost-effective, or markets are so dynamic that they need to revise their network every few years. Rather than start the site-selection process from scratch, they may find that a 3PL already has what they need. “[The shipper] might have a warehouse in Charlotte that does not make sense anymore and should have one in Atlanta,” comments CEVA spokesman Russ Dixon. “This is where a 3PL can add value.”

It doesn't matter what industry, product, or geography a shipper is involved in; getting products to customers quickly and efficiently is a necessity for success. And the key to making that happen boils down to siting, developing, and running a DC in a location that guarantees flexibility and agility.