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.
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 email@example.com.
Site Selection Factors
- 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
- 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.
2475 Northwinds Parkway, Suite 600
Alpharetta, GA 30004
Radical Strategic Logistics Modelling Inc.
Address 2425 Matheson Blvd. East
Suite 816, 8th Floor
L4W 5K4 Canada
Conway Data Inc.
35 Technology Parkway, Suite 150
Norcross, GA 30092
Fax (770) 263-8825
OptiSite for Windows
2200 Clarendon Ave., Suite 1002
Arlington, VA 22201
Fax (703) 527-1693
166 Beaver Trail
Athens, GA 30605
(706) 613-5493 or (847) 991-8476
Strategic Real Estate Solution (SRES)
1919 Fifth Street
Berkeley, CA 94710
Fax (510) 666-3699