Q&A: Mike Murphy, chief development officer at CenterPoint Properties
April 30, 2014
For manufacturers, one thing that can take precedence over nearly all others is cost control while maintaining a high level of supply chain proficiency and fluidity. To say it is a delicate balance is an understatement to be sure. And for many manufacturers, being efficient and effective in their supply chain operations has plenty to do with location in terms of where their manufacturing operations are located and can make a significant difference in regards to meaningful cost reductions and related gains. Logistics Management Group News Editor Jeff Berman recently caught up with Mike Murphy, chief development officer of Centerpoint Properties, a Chicago-based industrial real estate company focused on the development, acquisition, and management of industrial property and transportation infrastructure, about what manufacturers need to do to stay ahead of the curve when it comes to making decisions about locating operations and the subsequent impact on the bottom line. A transcript of the conversation between Chapman and Berman is below.
Logistics Management (LM): What do manufacturers need to do when thinking strategically about facility location and site selection and considering proximity to intermodal hubs and other types of transporation-advantaged properties like inland ports ?
Mike Murphy: What we have seen over the last five years has been those in logistics and distribution focusing in on maximizing supply chain efficiencies and minimizing their costs. Examples of this would be companies like Home Depot and Wal-mart setting up large distribution centers in the Midwest and on the coast that are really there to facilitate international container movements and getting really close to that rail head, where they can minimize their trucking expenses and consolidate under one or two roofs so they can consolidate their labor force and ultimately save on labor costs and trucking costs. As we came out of the recession in 2009-2010, there was an increased focus on supply chain efficiency and companies pulling costs out of their overall equation. Now, what we are seeing is some stabilization of that business and manufacturing coming back to the U.S. in different pieces and different areas, and the key focus there is labor power, with transportation the key driver of where these new manufacturing centers are being located and expanding. I think intermodal has an international and domestic benefit and over the last couple of years the convergence of trucks to rail for 500-to-500 mile east coast to west coast movements has become significant and the three biggest trucking firms are three of the biggest users of rail. Long-haul was always considered Los Angeles-Long Beach to Chicago at about 2,200 miles but now long-haul can be considered 1,000 miles and could be from Norfolk to Chicago or from Charleston to Memphis and that is getting done on rail for a shorter movement, with the last mile going back to trucks. We did a new intermodal facility in Greer, South Carolina for the South Carolina Port Authority and built BMW a 414,534 square-foot export facility within two miles of BMW’s 4 million square-foot manufacturing plant, which makes all the X-series cars for BMW. That is a little different story in that the facility was built 20 years ago with 1 million feet and they have grown it since then. The intermodal component was just developed in 2013 for the South Carolina ports and Norfolk Southern is the rail partner. But I think the quantity of containers coming from the port to BMW and then ultimately from BMW back to the port really helped drive the intermodal operations there. It is a 225-mile movement from the Port of Charleston to upstate to Spartenburg and Greenville. Historically, that is a 225-mile movement the railroads would say they can make money on but because of BMW’s commitment to volume, the sc port’s intervention and the NS working creatively together they made it work. BMW just announced a major $1B expansion of that facility. The labor and logistics South Carolina has been able to pull together from 3 states are all drivers.
LM: What are some other examples of this?
Murphy: More recently here in Joliet, our tenant is a 3PL, Neovia, whose main client, Caterpillar, will be importing subcomponents and ultimately exporting some level of finished goods out of their hydraulics plant and others in the area and again it gets more manufacturing here in the Midwest and it is the use of a 3PL and a new facility but in Joliet and Elwood it is the quantity of new containers that come back empty and now the likes of agricultural processors that are down there. CAT is filling those containers that used to go back empty to the west coast and are now being filled with agricultural products or in CAT’s case finished goods. That is just efficiency; it used to be an empty movement and now that deadhead is being filled back to the west coast, driving supply chain advantages for railroads, shippers and retail customers that serve as the main import piece-the main beneficial cargo owner-should result for savings for everyone in the chain. This and BMW are examples of two innovative new opportunities to maximized manufacturing and gain transport advantages, reduce energy costs and carbon footprint while driving cost efficiencies.
LM: Are we in the early innings of these types of developments? Is there interest on behalf of shippers doing similar things?
Murphy: Every market is a little different when looking at what is happening on the industrial side. Los Angeles and southern California came back faster than other markets and New York-New Jersey has come back pretty strong and Houston, which is very energy-related, has also been strong. Chicago and Atlanta have stabilized and Dallas has also stabilized and seen some growth. Each market has its own factors but, yes, we are seeing more activity and seeing warehousing and distribution have a significant movement towards intermodal transportation benefits over the last five years strongly. What we are starting to see is manufacturing, whether it be sub component or final assembly, it is starting to really analyze the value of the supply chain piece. And labor prices in China are becoming more significant and it depends what you are making, but as the value of your product begins increasing and any specialty of it becomes more of an important element, as in near shoring. We are seeing more of it, especially in Mexico pretty significantly on the auto side and in other sectors and are starting to see it more in the US to automation levels that are not clearly defined as of today. The point is we are seeing more demand for some level of manufacturing/final assembly/finished goods and the neat thing for us is in most of our products over the last ten years has really been to import and redistribute product for north American consumption. We are really starting to see growth in companies looking to export outside of the U.S. to build product here and finish assemble it or some piece of it and then containerize it and export it out to the country to where it will be consumed. Energy is going to be a big piece of that and transportation costs and some stabilization in labor costs will all be contributing factors to that. It is still early and the next couple of years will help to clarify that potential.
LM: what sectors are most active so far? Is it automotive?
Murphy: The one you can point to most specifically is automotive, like BMW in South Carolina, as well as Mercedes and Ford and to some extent in Michigan-the quantity of subcomponents being manufactured for auto in Mexico and even some Korean cos have set up manufacturing plants there. There is an increasing quantity of autos being manufactured in the U.S.-like Charleston and Savannah with BMWs and Mercedes-Benz that are going to other countries and it is significant with a lot of growth there. Big retailers now are very focused on e-commerce strategies and how to respond to Amazon and deliver to your home overnight or same day and at least in the distribution world the strategies for optimizing supply chains continue to do things but in last 12 months the retailers’ focus has been on e-commerce. It is really high value product being exported to other parts of the country, where at least subcomponents are made here and final assembly may occur in the country of consumption. We are seeing more of the elements that lead me to believe that it is a continuing trend that will strengthen over the next year or two.
LM: Shippers with the goods most expensive to make are the ones who most reap the benefits when it comes to costs and labor savings for bringing manufacturing back closer to home. What are some concerns you hear from customers when they decide to make a move like that?
Murphy: I agree and that is fair. The top one is transfer costs. When a shipper moves a distribution center, moving from one location to another is relatively inexpensive, however, when you think about manufacturing, you have capitalized manufacturing equipment, labor that has been trained and has tenure. Most manufacturers are going to build every component they can in the existing facility to ultimately maximize the return on their capital investment meaning equipment mainly. Auto still wants price reductions of 2-3 percent every year and that means they have to amortize down capital costs of their equipment, making it harder for them to move as it is really expensive. These are long cycle decisions of 10-20- years as opposed to distributors that tend to have 5-year commitments and can move more readily. For me, it is getting in front of the logistics and supply chain groups in the manufacturing segment and explaining the story and cost efficiencies and introducing them to shipping and 3PL partners to drive efficiencies as their cycle time is at least 3-5 years.
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