Is your distribution center cramped? Or do you think you might save substantially on your outbound shipping costs by moving into a DC? A warehouse relocation may be just the thing for you. But before you go breaking ground or signing lease papers there are factors worthy of consideration: inbound transportation costs; labor cost, availability and peak staffing needs; facilities costs; state and local government incentives; and risk evaluation to your business. Marketers must evaluate all these factors to see how they impact the total savings or costs for the potential move.
1) Transportation costs
The first attempt at selecting optional sites is to try to locate one near the optimized outbound shipping origin (carrier hub). This usually makes sense, since outbound freight costs typically represents the largest operating cost – often 6% to 8% of the average order. Significant savings are usually possible for companies currently located on the West Coast with the typical nationwide distribution of clients and shipments. California, Texas, New York, Illinois, and Florida represent the largest population centers for customer shipments for many catalogers. Moving a West Coast company closer to the Midwest or the mid-Atlantic area makes sense based on outbound freight. But with the increase in imported product from the Far East, some merchants that may see a dramatic increase in inbound freight costs if they move further East.
The move to a more centralized location, such as the Midwest or mid-Atlantic, for an East Coast company results in less potential outbound freight savings due to the typical volume of shipments into the Northeast. Some savings are possible but usually not enough to justify the move.
But your study needs to evaluate inbound and outbound savings and cost increases based on your consolidators and carriers, who can supply the data. This data is available from them. This is the only way to accurately evaluate the impact of a warehouse move to another location.
2) Facility costs
Some warehouses located in extremely high rent areas find significant cost savings with a move. But typically, this is not the case and will not justify a move by itself. The costs and risks associated with a move are not usually justified based on facility costs alone.
Labor—rather than location proximity to customers—is becoming the key driver in the decision making process as to whether to move or not. Freight and facilities cost are the most predictable and reliable than labor costs unfortunately. Determining wage rates, labor availability, and workforce productivity is critical to a successful move but is the most difficult to evaluate. Labor is becoming the most uncertain and riskiest factor to evaluate potential warehouse moves but it can also yield the highest potential cost savings.
Your initial reaction may be to simply find areas with the lowest labor costs and then evaluate the other cost factors for these areas. The downside is that everyone else is doing the same thing. We all know of areas that were attractive for relocations at one time that quickly lost their appeal when the labor market of available workers dried up or became more expensive than planned. When you evaluate wage rates paid in any area, the two key unknowns are: 1) what other companies are moving into the area and what they may be paying; and 2) the overall productivity and quality of the work force in that market.
It is difficult to gather accurate, independent wage data for new areas under consideration. One approach is to use published Bureau of Labor Statistics (BLS) data to determine wages paid in metropolitan areas. Using several of the job classes available for the data can give a general picture of the relative wage levels paid. Comparisons of BLS data for the area closest to your current facility to other areas under consideration can indicate the approximate percent differential between labor markets.
Several companies who moved their warehouses recently expressed surprise in the degree of difficulty in recruiting warehouse staff that equaled their previous staff productivity. They were also surprised at the actual labor cost they had to pay to attract employees of the caliber they expected. As a result, it took longer than expected to meet the payback goals established for the move.
One option to minimize the surprise factor is to spend time conducting “on the ground” research talking with companies in the areas under consideration to determine actual labor conditions. This can be a time consuming process. But the impact of labor can destroy your potential savings or return on investment. The detailed evaluation of the labor market using independent detailed research is a critical step in selecting the right metro location. An experienced consultant can perform these relocation studies or guide your efforts.
4) Government incentives
State and local incentives should be part of the decision process as there are significant potential savings available in some localities. These incentives typically are available to companies who create jobs and qualify based on their size and type of operation. But the application process can be difficult and the requirements to qualify can be prohibitive in some cases. Since this factor is an unknown in most cases, it should be viewed as the last comparative issue between competing sites which otherwise appear equal in their desirability when considering the other key relocation factors of transportation, labor, and facilities.
5) Risk evaluation
Having worked through your savings study of the above factors, you need to perform an evaluation of the risks. Here are some we typically address: What confidence do you have in the accuracy of the cost study? What about the cost, quality, and availability of the site’s warehouse labor? What fulfillment management will move to the new facility? What systems, infrastructure, and other changes are required? If you relocate your entire facility, how will you assure the current operation remains in place until it is relocated? How will you keep business interruption to a minimum? What hiring, training, and recruitment challenges are there? Can you successfully “export” your culture and work ethic? How will your management team deal with managing multiple facilities and not risk the operations and finances of the company?
The old rules for relocation are changing and the degree of risk associated with a move is increasing. Given the amount of investment required for one time moving costs and capital needs to equip the facility, making a good decision is critical. You need careful planning and research to avoid putting the entire business at risk.
Curt Barry is president of F. Curtis Barry & Co., a Richmond, VA-based consultancy specializing in fulfillment and operations.