Natural SELECTION

The science of site selection is all about making sure you’re in the right place at the right time. Selecting a distribution center site is one of the most important and far-reaching strategic decisions that the management of a growing fulfillment company will make. Those companies that understand the critical relationship between their strategic objectives and the location of their facilities will benefit from lower operating costs and better customer delivery response time. Companies that use more intuitive and subjective processes in selecting their distribution center sites will suffer by comparison.

Regardless of how you arrive at a decision on where to locate, getting it right the first time is of critical importance. Just as in the selection of a spouse or business partner, you can always rectify a poor decision; however, corrective future action is usually expensive, time-consuming, and unpleasant.

The primary drivers of the site selection process are operating costs and customer service objectives. Considering that transportation costs, both inbound and outbound, often comprise up to 50%-60% of a company’s total distribution costs, failure to understand the strategic importance of the DC location in relation to supplier and customer locations can severely affect a company’s competitiveness. Although labor costs are also a vital factor, they are considerably lower in importance, since they often comprise only 15% of total distribution costs (see chart on page 26). Furthermore, while tax abatement incentives are important considerations in the overall process of selecting a facility site, the total impact of such inducements is less significant in terms of cost and long-term benefits.

Peanuts for monkeys

From a customer service perspective, the site selected also has considerable impact on the response time from order placement to delivery of goods to the customer’s destination. If a company’s strategy requires a maximum one-day transit time for LTL shipments to customers, it is likely that the firm will need multiple facilities to support that service goal.

Many companies have placed too much importance on incentives such as free land or low-cost labor, only to find that these benefits were short-term and ultimately insignificant when included in the overall scale of operating costs. Sometimes too much attention is given to the cost of labor and not enough to the quality of the labor force. A recent article in Site Selection magazine notes that one company has consistently chosen to locate in areas of high unemployment. Such a choice frequently results in an artificially low labor rate that must be readjusted with the passage of time. It was once said, “If you pay peanuts, you get monkeys.” A well-trained and experienced workforce is generally much more productive than one that is unskilled and lacks the motivation to develop the needed skills.

Since most companies will probably be required to choose a new facility site only a few times in their history, those who participate in this decision-making process should be both experienced and competent. Owners of small businesses are more liable to resist calling upon others to help select a site, preferring to make such decisions through more intuitive and entrepreneurial methods. Often, however, smaller companies do not possess internal resources with the necessary qualifications or experience, and management may decide to forge ahead and undertake the decision in a more cursory manner, without obtaining valuable insight from others.

Mid-sized and larger companies are not so likely to take such a seat-of-the-pants approach. They generally have a better appreciation of what is needed in terms of project team experience and qualifications and the time required to consider the seemingly endless number of available options and alternatives. Whatever the size of the business, failure to take the time to conduct appropriate research and analysis often results in selecting a less than desirable site and subsequent costly surprises in terms of excessive implementation and operating costs.

When a company does find it necessary to rely on assistance outside its internal resources, the following types of organizations can provide valuable experience and counsel: Chambers of Commerce, utility companies, commercial/industrial park developers, banks, real estate services companies, and site location consultants.

Surprise party

You can do everything right, including sign off on 999 points of evaluation, but you will still end up severely disappointed if, after you sign the contract, you discover that the site is not suitable for construction due to the existence of poor subsoil conditions, building code restrictions, or other such disturbing surprises.

Checklists used for moving through the site selection process generally include hundreds of considerations to evaluate prior to selecting an optimum location. A new project file and site selection checklist from Norcross, GA-based Conway Data Inc. includes more than 1,000 points of evaluation. Of course, the relative importance of many of these criteria varies according to the type and size of the company. For instance, availability of a redundant electrical power source may be extremely important to the operator of a large, highly mechanized facility, but of lesser importance to a smaller operation that utilizes more basic information and material handling systems.

Artistic science

Books have been written on the art and science of site selection. Some are written from a quantitative and operations research perspective, while others are more useful to those desiring a step-by-step approach that lists the do’s and don’ts of the site selection process. Here is a shorter list of the most important factors to consider in identifying fulfillment facility sites:

  1. A strategic business plan

    The site selection process starts with your company’s strategic business plan. Even though the founder and owner of a Western-wear apparel business may prefer to live in Laramie, WY, that location may not score well in terms of distribution cost and response time. The size and location of your logistics facilities must accord with the commercial vision of where your customers and suppliers will be located, associated distribution center receipts and shipments, projected inventory levels, value-added services, customer service goals and requirements, and related business objectives.

    This plan should look forward for a minimum of five to seven years, or you will find yourself enmeshed in a continuous process of planning, building/equipping, and expansion. Reducing the business planning horizon to a shorter period may prevent the incorporation of potentially beneficial technologies if you cannot achieve critical mass within the shorter-range projections.

  2. Clear understanding of goals and objectives

    Company executives need to communicate the company’s strategic plan, goals, and objectives clearly to the site selection team so that members understand the ramifications of the plan on the size, equipping, and location of the DC. Those associated with the initial planning must be aware of management’s relative degree of confidence in the planning criteria, vision concerning application of new technology, and possible changes in product mix or customer service. All of these factors and more will directly influence initial and future site requirements and planning criteria.

  3. Opportunities to improve processes

    With every new facility or expansion of an existing facility comes the opportunity to incorporate new processes, operating procedures, and technology. Take advantage of this unique opportunity to improve processes and incorporate the new technologies and advances that could be beneficial in reducing costs and compressing the total order/delivery cycle time.

  4. Preliminary estimates of site requirements

    The size of your new site will be directly related to the throughput volumes, inventories, and processes to be carried out in the proposed facility. You must prepare accurate estimates of critical design criteria such as the number of inbound and outbound doors, hours of operation, number of SKUs shipped, peak inventory levels, value-added processes, and reverse logistics requirements. Many of the software tools used to evaluate alternative distribution network configurations are not sensitive to such matters, and you should take care to assure that facility sizing is in sync with new processes and systems that may be employed at your new site.

    It is amazing the number of times that planners state facility requirements in terms of “total square footage” without any reference to the clear height and type of storage systems needed. Obviously the capacity of 100,000-sq.-ft. bulk floor storage using counterbalanced fork trucks is significantly different from the same space associated with a high-rise, very narrow aisle storage system. Know and understand what type of systems will be employed before calculating the total acreage that will be required to meet your future needs.

    In addition to making preliminary estimates of space requirements, you should project accurately the number of people required to operate the facility. You’ll need these projections later in determining least-cost site locations. This is particularly important for businesses that are highly seasonal, with significant variations in employment levels during the year. The community you choose must have a sufficient labor pool from which to draw during periods of increased demand.

  5. Beyond the next five years

    Don’t forget to address what happens after you have implemented your five-year growth plan. The cost of land is usually a relatively small part of the total cost to construct, equip, and implement a new facility. If you fail to plan for future expansion, you may end up having to begin the planning of yet another facility before you have even completed the fifth year of operation. Don’t be shortsighted. Acquire enough land to carry you through a longer term so you can protect your options in the future.

  6. The optimum site plan

    Once you have completed the master facility plan, prepare a preliminary optimum site plan that depicts the proposed building footprint, future expansion areas, and parking and other paved areas. Although the site that you acquire will likely need some adjustments, this drawing will depict the general “footprint” configuration that will drive the overall site depth and width you need once you begin actual site search. If you just tell the real estate department that you need 50 acres, you may find yourself looking at properties that are not properly configured for your needs.

  7. Strategic regions of importance

    Once you have translated your business plan objectives into facility and space requirements, you are ready to commence the next step: analyzing product flows and transportation costs associated with the movement of goods from points of supply through your supply chain and finally to your customers. Many good software analysis tools are available to perform this review, at the conclusion of which you can determine the optimum number and location of distribution facilities. Manipulating these models generally requires experienced technicians who have been trained in using strategic business projections and adapting that data to the distribution network determination software.

    This process will result in identification of the general geographic regions that can be expected to meet your specified service levels at the lowest facility operating costs. These models generally can also factor in regional cost variances associated with each area being considered.

  8. Communities of interest

    Once you have established the general region of interest, the next step is to conduct a detailed review of the communities to consider within the general region. You must review a wide variety of factors that will ultimately be included in the overall selection process. A few of these factors are listed in the table on page 27.

  9. Identify and evaluate specific sites

    Once you complete the community assessment, commence the search for specific sites that meet your requirements. Following an initial review of those sites that meet your general requirements, you can visit sites that remain interesting and begin a detailed review of the specific conditions associated with each site. As you reduce the number of qualifying sites to two or three, expand your investigation to other factors that could become deal-breakers if not satisfactorily resolved. Examples of such factors might include geotechnical studies of the property, wetlands issues, easements and right-of-way restrictions, building height restrictions, and availability of communications infrastructure.

  10. Keep competition alive

    Throughout this entire process, it is important that you keep the spirit of competition alive, not only in communicating with those representing specific properties, but also at the state and local government levels. It is often beneficial to engage site selection consultants and/or real estate services companies. Ignorance of how to “do the dance” or hurried decision-making can result in increased property acquisition costs and/or not failing to realize all of the available benefits and inducements that might have been available.

  11. Outside resources

    While it is always good to utilize your internal resources to the greatest extent possible, smaller companies frequently limit their engagement of outside resources in the site selection and evaluation process. They tend to oversimplify the process, and as a result, they end up making costly errors that would likely lead to excessive implementation and operating costs, transportation system limitations, and/or potential reduction in customer service standards. The one-time cost associated with employing experienced advisors is miniscule when compared to the negative consequences that may otherwise result.

  12. Contract negotiation and award

    Once you have identified your preferred site, you should employ a qualified real estate attorney to establish a suitable contract for the acquisition of the land, building, and equipment. Having experienced professionals draft these contracts and participate in the following negotiations will ensure that the interests of the client company are properly represented and protected.

Given the significant impact of the site selection process on the initial investment and ongoing costs of a company’s fulfillment operations, it is imperative that you devote sufficient time and resources to determining the optimum facility sites required to support your strategic business plan.

Frank Renshaw is a registered professional engineer and is president and co-founder of Keogh Consulting Inc. He has been actively involved in distribution facility location analysis and planning activities for over 30 years. He may be reached at (561) 775-3833, ext. 14, or by e-mail at frenshaw@keogh1.com.

Site Selection Factors

Transportation

  • Access to interstate highway system
  • Access to major carriers and terminals
  • Proximity to airports and small-package hubs
  • Adequacy of highways and roads
  • Transportation cost and service

Labor

  • Availability of qualified workers
  • Prevailing labor costs
  • Employment opportunities for family members
  • Labor/management relations history

Quality of Life

  • Proximity to schools and hospitals
  • Access to shopping facilities
  • Housing and community appearance
  • Educational facilities
  • Recreation and civic facilities
  • Crime rate

State and Local Government

  • Tax structure and tax abatement opportunities
  • Building construction codes and restrictions
  • Availability of financial aid for project
  • Training incentives
  • Planning and zoning

A la Carte

The following are some companies that offer consulting and/or software products to help you determine an optimum facility location:

CAPS Logistics Inc.
Baan
2475 Northwinds Parkway, Suite 600
Alpharetta, GA 30004
(678) 942-8800
www.caps.com

CAST
Radical Strategic Logistics Modelling Inc.
Address 2425 Matheson Blvd. East
Suite 816, 8th Floor
Mississauga, Ontario
L4W 5K4 Canada
(905) 361-2830
www.radical.co.uk

Conway Data Inc.
35 Technology Parkway, Suite 150
Norcross, GA 30092
(770) 446-6996
Fax (770) 263-8825
www.conway.com/cdi

OptiSite for Windows
MicroAnalytics Inc.
2200 Clarendon Ave., Suite 1002
Arlington, VA 22201
(703) 841-0414
Fax (703) 527-1693
www.bestroutes.com

Radical Logistics
166 Beaver Trail
Athens, GA 30605
(706) 613-5493 or (847) 991-8476
www.radicallogistics.com

Strategic Real Estate Solution (SRES)
Vectiv Corp.
1919 Fifth Street
Berkeley, CA 94710
(510) 666-3600
Fax (510) 666-3699
www.vectiv.com

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Natural Selection

There are very few SQL Server/Windows applications in the catalog management software field. Natural Order from Indianapolis-based Natural Solutions is one of them, and one of the best. Written in Powerbuilder, this two-tier client/server solution offers a clean, professional interface that is thoughtfully laid out and easy to navigate.

Currently in use in over 15 direct commerce sites (including a large call center and fulfillment service bureau), the system is capable of handling up to 10,000 orders per day. Starting at $35,000 for a ten-user license, Natural Order is also reasonably priced.

A companion application, Natural Web, is a fully integrated e-commerce solution with Web pages assembled using user-configurable templates. Natural Web shares Natural Order’s customer, order, and inventory databases in real time, with full support for product sizes and colors (up to four size dimensions), quantity price breaks, personalization, check payments, and open account payments. Web customers can also maintain their own profile information, and the system can be used to create completely personalized catalogs for each customer.

Multi-function

Natural Order supports multiple companies, multiple business units, and multiple catalogs. Much of the system is table-driven or parameterized, with user-defined fields available for adding information to an already full roster of fields for defining and tracking customers, vendors, orders, SKUs, promotions, and catalogs.

You can have an unlimited number of ship-tos per order, and you can specify the ship-to by line item. However, you cannot apply source codes at the line-item level: There is only one source code for the order.

Natural Order handles business and consumer sales, with business titles, hierarchical company relationships, multiple contacts, multiple (unlimited) phone numbers, bid/proposal processing, open account billing, tax exemption numbers, and sales commissions.

For companies selling intellectual property or licensed products, there is a separate Royalty Management module.

Order management

Natural Order allows you to enter comprehensive notes for customers, line items, and orders, while providing customer communications tools for faxing or e-mailing, but there are no spell-checking functions, no search capabilities in the notes, and no “ticker/reminder” options.

Prompting is straight-line, not branched. Cross-sells and upsells are triggered only by the SKU number, not by customer information, date, source code, or other possible triggers. However, catalog code, customer type, customer purchase history, and product type do trigger product discounts. While you cannot set up multiple discounts in a hierarchy, you can let the system choose the largest discount among those that qualify.

The number of substitute items for a SKU that is out of stock is unlimited, and it is possible to suppress substitute recommendations if the substitute itself is backordered or out of stock — a very customer-friendly function. Natural Order handles kits quite well, including kits assembled to order.

Show me the money

If you have sales tax nexus in multiple states, there is unfortunately no default interface in Natural Order to third-party sales tax management systems such as Vertex or Taxware. These could be customized, however. The software supports Canadian sales taxes and non-U.S. addresses, but country code is not an intelligent field and there is no support for currencies other than U.S. dollars.

Natural Order breaks out shipping and handling as separate charges to permit taxation of shipping charges in those states that require it. Default credit card processing interfaces are available for Paymentech and First Data.

Fulfillment options

Future shipments can be specified as “must ship by” or “must arrive by.” Natural Order has flexible batching options for fulfillment, with support for consolidated cart picking, wave picking, zone picking, and pick-to-light flow racks. For manifesting there are standard interfaces for the Neopost, Kewill, UPS, Pitney Bowes, FedEx, and Airborne systems.

There is support for basic continuity shipments (both open-ended and closed-ended), but with limited sophistication for managing multiple-cycle shipments, suspensions, or billing options (slated for improvement in the next release in July 2002).

You can “force” a backorder for a large quantity on a single order, but you cannot globally cancel a backordered item if it turns out to be non-replenishable.

Inventory management

The system supports an unlimited number of warehouses. You can maintain an item in more than one bulk location and more than one primary location. Transfers within or among warehouses can be annotated with reason codes and logged in an audit trail. You can have an unlimited number of suppliers for each SKU, and the system will calculate economical reorder quantities.

For inventory receiving, Natural Order displays expected quantities for “exception” receiving, but does not allow you to suppress quantities for “blind” receiving. You can produce inventory report cards for each supplier based on delivery performance and merchandise quality.

Although you can track the serial numbers and lot numbers of items, there is no support for unit-of-measure conversions or for item number aliases (to accommodate misprints, for instance).

Cycle counts can be assigned by SKU and vendor on a scheduled or ad hoc basis. You can limit scheduled counts to a specified number of SKUs, and can decide whether to include items with a zero count. Expected quantities can be displayed or suppressed, and the system can print shelf tags along with count sheets. Counts that are voided will automatically be reassigned to the next cycle count session.

Natural Order does not capture lost demand on canceled line items, and there are no merchandise forecasting capabilities (these functions are also slated for July 2002).

There is an optional Return Material Authorization module for managing returns, and the returns process automatically updates all appropriate files. You have the option to refund all, part, or none of the original S/H fee.

Customer management

The customer database in Natural Order supports a multitude of demographic and purchase history fields, functions, and analyses, but you cannot use the system to extract names for mailings or promotions on an nth selection basis, nor is there any reporting on list rental activity.

While there is support for duplicate identification based on a match code constructed from customer last name and zip code, it is not as powerful as it should be. This seems to be the one system glitch that otherwise satisfied users of Natural Order complain about. Natural Solutions has placed this at the top of its priority list for enhancements to future versions of the system.

There is every indication that the company will rise to this challenge, for the same users give Natural Solutions extremely high marks for support and responsiveness to requests for changes and modifications. “It’s like having their team as our own IS department,” says one.

State-of-the-art reporting

Users are full of praise for the CyberQuery tool (from Cyber Science) that is available with Natural Order to handle SQL queries covering virtually all fields within Natural Order. Reports can also be extracted and sent as e-mail attachments. One user who has worked at some of the largest and/or best-known catalog companies in the industry says, “We would have killed to have this kind of user-friendly analytical power.”

Natural Solutions offers a reasonable amount of training on the system, and virtually every feature and function is well covered in over 2,000 pages of documentation.

All in all, this is a very impressive enterprise-level solution that should continue to grow, evolve, and compete aggressively for clients in the direct commerce field.

Ernie Schell is president of Marketing Applications Analysis, Inc. He can be reached by phone at (215) 396-0660, by fax at (215) 396-0696, and by e-mail at ernie@schell.com.

Natural Solutions

8003 Castleway Drive, Suite 200
Indianapolis, IN 46250
(317) 596-1215
Tyce McIntosh, President
www.naturalsol.com

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