Site Selection – Part 4 – Weighing the Intangibles

When retail giant Wal-Mart decided it needed a food distribution center to serve the U.S. Northwest, several site selection criteria had to be weighed before it eventually chose Grandview, Washington, as the location for its 800,000-square-foot facility. For instance, it was advantageous that the land had been zoned for light industrial use and environmental reviews had already been completed. Although the land had to be annexed into the city of Grandview, relatively few people lived in the area, so the vote went in Wal-Mart's favor.

Grandview is situated near an interstate highway, 1-82, and the land chosen was flat, which were important considerations for the retailer. The city is centrally located within 200 miles of three major cities: Seattle, Spokane, and Portland. More than 60 local trucking companies serve the outlying area, as well as two railroads and nine air freight operators. Nearby, the Port of Pasco, located at the convergence of the Yakima and Snake Rivers, offers barge service on the Columbia River to the Port of Portland for containerized cargo.

In Grandview, Wal-Mart (not exactly known for paying top wages) found a populace with the lowest median wage in the area for warehouse workers—$8.11 per hour, more than $2.00 lower than the $10.58 Seattle pays. What's more, the average hourly wage for truck drivers in Grand-view is $14.02, considerably lower than the $17.62 they earn in Seattle.

And then there were the intangibles that no index or study can accurately categorize, but that played a huge part in Wal-Mart ultimately opting to go with Grandview. One of those intangibles is that the community was anxious to attract Wal-Mart's business and the jobs that went with the new DC. Other companies that had chosen Grandview as a distribution site—notably retailer Ace Hardware, which operates a 500,000-square-foot DC there—spoke positively of the area's capabilities. Even the mayors of surrounding communities came forward to support Grandview as the best site for the DC.

Yakima County, where Grandview is located, offered hiring and training support, and hooked Wal-Mart up with the state employment services agency, WorkSource Washington. The agency screened more than 6,000 applicants for the 400 jobs at the DC, and then sent the best candidates to Wal-Mart for final interviews. Overall, while labor costs and logistics capabilities made Grandview an attractive site for a DC, Wal-Mart's site selection best practices demonstrated a willingness to explore the qualities of a community that aren't necessarily published in a government report.

QUALITY OVER QUANTITY

Sometimes, having just one DC is plenty, even when a company has gotten too big for its current facility. That describes The Container Store's situation, a retailer of storage and organization products. Thanks to a 20 percent annual growth rate, the Dallas-based company outgrew its 300,000-square-foot DC, so it added a 155,000-square-foot satellite facility nearby That still wasn't quite sufficient, though, so it also arranged for space for 5,000 pallets under a third-party contract.

Even when the retailer reached the point where it had more than 30 stores throughout the United States, it still determined that one centrally located DC would be enough. "We looked into our whole network and asked whether it was time to do store replenishment out of our DC and direct customer fulfillment out of a different site," explains Amy Carobillano, The Container Store's vice president of logistics and distribution. The retailer decided that keeping to a single site worked to its advantage. For instance, all of the inventory is in one place, with corporate headquarters directly attached to the DC. That central location works well for the company's logistics network, which imports from Asia through the U.S. West Coast and from Europe through the Gulf of Mexico at the Port of Houston.

So the retailer opted to remain in Dallas, but to expand into a new 1.1-million-square-foot DC in another part of town. Not all of that square footage is currently being used, since The Container Store's master distribution plan calls for taking over the entire facility in stages. "If we're where we want to be, we'll need a conveyor in 2007 because that's when we'll have enough of our products conveyable to justify the expense," Carobillano says. In the meantime, the retailer focused its layout on its present needs. "Once you know what the vision is, you can buy part oi it now and develop the solution in phases." A lot of things will change before they take over the entire DC, she notes.

Even though The Container Store was staying in the Dallas area, it recognized that a move of any distance could affect some of its workers, so it sought their input throughout the site selection process. "We took out a map of the Dallas-Fort Worth metroplex and put a pin where every single employee lived," Carobillano explains. Then the retailer looked for a site that would allow it to retain its employee base. "We talked to the employees who lived farthest away and would have the longest commutes," Carobillano notes, and offered to help them find a different way to get to work or to hook up in carpools. As a result, the company didn't lose a single warehouse or office worker after it relocated. "Nobody knows your business or cares about your business like you do," she points out.

When moving day arrived, The Container Store shut down its old DC over a four-day weekend and opened the new facility, and then began moving the merchandise from the old DC to the new one. The entire process took about eight weeks, at which point the retailer began receiving inbound merchandise at the new DC.

Focusing on its employees is definitely a best practice for The Container Store, where the corporate philosophy of "one great employee is worth three good ones" has fostered an environment conducive to developing great people. That kind of thinking pays off, as the company is consistently listed on Fortune magazine's list of "Best Places to Work."

Site Selection – Part 3 – Match Your Network to Your Business Strategy

However, Gillette's theoretical analysis ended up taking a backseat to a practical consideration: The company was locked in to significant lease commitments with its current warehouses, which made it prohibitively expensive to just pack up and leave. So the question became: How can Gillette deliver much better customer service without changing its physical infrastructure?

"The goal was, at a minimum, to have a warehouse on the East Coast that carried all of our products," Knabe says. Ultimately, Gillette ended up keeping both its Massachusetts and Tennessee DCs, but what changed was how they functioned in terms of what products they carried and who they shipped to. Both warehouses now stock all Gillette products.

So far, so good. Gillette discovered it could improve its customer service without having to invest in new infrastructure. However, as Knabe discovered, carrying all products in both warehouses would have significantly increased inventory levels, which was a no-no. To get past this potential sticking point, the company conducted a statistical safety stock analysis to optimize its distribution network. Gillette made some process changes to set its safety stock targets, which made it possible to hold inventory constant while improving customer service.

"Your distribution network should be a function of what your business strategy is," Knabe emphasizes. "If your business strategy is to be the low-cost provider, you set up one kind of a network. Wal-Mart, for example, sets up its distribution network to be as cost efficient as possible. If your business strategy is to be as responsive as possible, you set up a different network. For Boston Scientific, a maker of surgical equipment, it's not about the cost of its distribution network, it's about having the right product at the right place instantly."

In the end, by adhering to best practices in configuring its distribution network, Gillette was able to maximize its use of truckload shipments while improving its on-time deliveries to its customers. As a result, its goal of "excellent customer service at least cost" became a reality.

HOW MUCH IS TOO MUCH?

So how do you know if you're spending too much on your distribution network? Using the Site Selector index of the most logistics-friendly cities, location consulting firm The Boyd Company developed a comparative cost model that identifies how much it costs, on average, to operate a warehouse in the top 50 markets.10

Boyd's comparative model focuses on a hypothetical 350,000-square-foot warehouse employing 150 nonexempt workers. This hypothetical warehouse serves a national distribution network that delivers products to 10 destination cities. Not surprisingly, New York City is the most expensive city in which to own a warehouse, in terms of annual operating costs, which Boyd estimates to be $15.8 million. Of the cities studied, the least expensive is Mobile, Alabama, at $10.4 million.

The most expensive city in which to lease a warehouse is San Francisco ($14.5 million), while Mobile again ranks as the least expensive ($9 million). Overall trends play out pretty much as you'd expect: Cities in the Southeast tend to be the least expensive, those in the Northeast and on the West Coast are the most expensive, and the Midwest places in the middle.

Boyd also looks at a hypothetical outbound shipment model that assumes a volume of freight in 30,000-pound truckload shipments costing $1.46 per mile to move. This model indicates that it costs the most to serve a national market from Portland, Oregon ($4.1 million), while the most economical city for outbound shipments is St. Louis, Missouri ($2.4 million).

According to Jack Boyd, principal of The Boyd Company, companies now prefer to build their own warehouses rather than lease them. The trend today is also toward building fewer but larger facilities, often including nonwarehousing corporate functions within the buildings to save on costs. In effect, this involves moving white-collar workers into blue-collar locations. You're locating to a warehouse where real estate costs $5 per square foot versus the $20 or more per square foot you would pay in an office building, Boyd points out. "Staffing requirements for warehouses have been elevated over the years as companies become more information technology intensive," Boyd explains. "There are greater labor and skill set demands, and it does require more labor cost analysis as part of the mix in terms of where these warehouses should be located."

Site Selection -Part 1 - Location, Location, Location

On-time delivery is a fundamental premise behind supply chain management, and it's a key benchmark on the road to achieving the perfect order. Although same-day delivery is available from several logistics providers, any company relying on the fastest and most expensive transportation options to fulfill its delivery obligations isn't going to be in business very long. The old adage, "Build a better mousetrap and the world will beat a path to your door," is now hopelessly out of date. It's no longer good enough to build that better mousetrap—you also have to build a better distribution network from which you can optimally service your customers. According to a study undertaken by consulting firm ProLogis Global Solutions, the number-one challenge for supply chain professionals is to create a distribution network that can deliver on customer demands while still keeping costs in line.

High-tech manufacturer Hewlett-Packard Co. operates one of the largest supply chains in the world, as well as one of the most sophisticated distribution networks. Its 88 distribution hubs serve more than 1 billion customers worldwide, in 178 countries. HP's supply chain also includes 32 manufacturing plants, 700 suppliers, and 119 logistics partners, and all told in 2005 the supply chain group managed $51 billion—or 64 percent—of the company's total spend.

The company credits much of its success to its adaptive supply chain—a product-agnostic supply chain portfolio that allows multiple supply chains. After direct materials, logistics is the company's main cost driver, according to Robert Gifford, HP's vice president of worldwide logistics and program management. It is "an absolute necessity to consider logistics activity" when deciding where to source products and where to build factories, he emphasizes.

"We don't just say, 'We're going to put up a factory here,' and then figure out how we'll move product," Gifford notes. Instead, HP relies on collaboration across its entire supply chain to design the optimum distribution network to bring a given product to a specific marketplace.

Where once upon a time HP, like other high-tech companies, relied on design for manufacturability strategies to build products as efficiently and inexpensively as possible, the company recently has adopted a best practice known as design for supply chain. This relatively new concept looks at all of the costs throughout a product's life cycle, even past the point of its functional use. By its very nature, design for supply chain requires the involvement of multiple departments when a product is being designed.

"Design for supply chain includes not only research and development type people but also people involved with logistics and packaging, and people who are focused on the environment," explains Greg Shoemaker, HP's vice president of central direct procurement. "When we design for logistics enhancements, for instance, we make sure we've got the right size box that'll lit on the right size pallet to optimize our shipping costs. When we design for tax and duty reduction, we may manufacture in certain places in the world in order to reduce our taxes or duty."-

The applications of design for supply chain are seemingly limited only by a company's imagination, as well as its ability to effectively pull together disparate functions. Design for postponement, which is also popular with the apparel industry, allows a company to wait until the last minute to finish making a product, pushing off configuration or a value-added feature until the product is as close as possible to the end customer. HP also engages in design for commonality and reuse, which involves using similar or identical components in different products. HP's designs for take-back and recycling efforts are supplemented by its own recycling operation plant, which has recycled more than 4 million pounds of computer hardware.

"What we're really working on and making a lot of progress in is making sure that the development teams get a good view and understanding of all the supply chain variables that can be affected by their design, depending on what the particular sourcing strategy is," Shoemaker explains. "So we try to identify all those needs up front, even where the product is going to be manufactured, so that the designers can spend a good amount of quality time creating the best package."

STRIKING THE PROPER BALANCE

A well-run supply chain depends on having a streamlined distribution network to receive raw materials and deliver product to the end user, and that network needs to use the least number of intermediate steps possible. Developing such a network where total system-wide costs are minimized while system-wide service levels are maintained involves studying and weighing numerous factors. The ultimate goal of this network planning is a supply chain that is properly balanced between the competing considerations of inventory, transportation, and manufacturing.

"The objective of strategic distribution network planning," according to Dale Harmelink, a partner with supply chain consulting firm Tompkins Associates, "is to come up with the most economical way to ship and receive products while maintaining or increasing customer satisfaction requirements; simply put, a plan to maximize profits and optimize service."

Distribution network planning determines how many warehouses or distribution centers a company requires to satisfy its customer base, as well as where those warehouses should be located.

A distribution network plan, Harmelink suggests, should answer the following questions:

How many distribution centers (DCs) do you need?
Where should the DCs be located?
How much inventory should be stocked at each DC?
Which customers should be serviced by each DC?
How should customers order from the DC?
How should the DCs order from suppliers?
How often should shipments be made to each customer?
What should the service levels be?
Which transportation methods should be used?

Depending on the market needs of a company and its overall supply chain mission, the answer to question 1 may necessitate adding one or more DCs to the network, or conversely, it may require consolidating several DCs into a single regional distribution hub.