March 1, 2006
special report | Site Selection

Plotting your next move

plotting your next move

There's no one right way to go about choosing a site for your next DC. But there's definitely a wrong way.

By John R. Johnson

As DC Site searches go, Kumho Tire's team had it easy. All they had to do was scout out a facility that was large enough to house the Korean tire-maker's fast-growing distribution operations yet lavish enough to serve as the company's North American headquarters. That might have been a tall order had it not been for the scope of the mission. While some search teams end up scouring the continent, Kumho's team could conduct this search just by driving around local neighborhoods.

Kumho's need to relocate was a symptom of its explosive growth. By 2005, the company, which makes tires for passenger cars, SUVs, and both light and commercial trucks, had simply outgrown its quarters. Its cramped and outdated distribution center in Fontana, Calif., had become an order fulfillment bottleneck. The building bulged at the seams. Its staff could barely keep up with inbound and outbound shipments. There was no room in the yard for additional trailers. Detention charges mounted from disgruntled carriers whose trucks were delayed at the dock.

Eventually, management bowed to the inevitable, and late last year, the tire-maker moved to a spacious building in a nearby community, Rancho Cucamonga. At 830,300 square feet, Kumho's new facility is more than triple the size of the old DC. It currently houses 1.5 million tires, six times as much stock as the old facility could accommodate.

Notably, the facility also features more yard space for trailers as well as 136 truck docks and 144 trailer stalls. The company can schedule outbound deliveries more efficiently, which has led to a big drop in carrier- imposed penalties for loading delays. Kumho doesn't palletize tires for loading onto trailers, preferring to load them manually in order to get as many as possible onto each trailer. "If we used a forklift, we could do it in 30 or 40 minutes," says Scott Thompson, Kumho's logistics manager, "but because we man-handle them, our average load time is two to three hours. Moving to the larger facility has helped us to keep [detention] fees under control because it's easer to get trucks in and out."

As for the site itself, Kumho decided at the outset to focus its search on Southern California's Inland Empire—a rapidly developing region east of Los Angeles and 50 miles inland from the coast. The Inland Empire (roughly San Bernardino and Riverside counties) has become something of a distribution hub in recent years, owing to its easy highway and rail access, relatively cheap land (at least, compared to LA and Orange County) and proximity to the region's ports. In fact, those were the very attributes that had drawn Kumho to Fontana in the first place.

Relocating to another Inland Empire community would allow the company to maintain a DC within a 50-mile radius of the Port of Long Beach, where Kumho's tires enter the country. (Upon arrival at the port, the ocean containers are trucked to Rancho Cucamonga, where workers unload the tires for distribution to Kumho's four regional DCs in North America.) Though the tire-maker could have found cheaper real estate farther inland, Thompson says, higher drayage costs and soaring fuel prices would have eaten up any savings. With 250 containers coming in every week, he points out, even a $20-per-trailer surcharge would have cost Kumho an extra $5,000 a week.

Another draw was Rancho Cucamonga's location in a designated Foreign Trade Zone (FTZ). As a foreign-owned company, Kumho receives tax breaks for locating within an FTZ. A Foreign Trade Zone is a government-sanctioned site where foreign and domestic goods and materials can be stored duty free. The goods' owner can keep them there indefinitely, paying duties only when it ships the materials or merchandise out of the zone to another U.S. location. "If you're in the right kind of business, the savings can be significant," says Cliff Lynch, principal of C.F. Lynch & Associates, which provides logistics management advisory services.

Let's make a deal!
Access to a foreign trade zone and a pro-business climate like the Inland Empire's may sound like incentive enough to attract new business. But few economic development agencies are content to leave it at that, especially if they have a chance to snag a DC. These days, states, counties and even cities engage in all-out bidding wars, vying with one another to offer the most lavish incentive package—tax abatements, employee training, free land, road improvements and the like. Sounds excessive? This is a high-stakes game. Today's high-tech DCs require skilled workers, which means they bring relatively high-paying jobs (and plenty of payroll tax revenues) to the community.

Giant retailers like Wal-Mart, Target and Big Lots, which typically build facilities in the one million-square-foot range, naturally attract many of the most lucrative offers. Big Lots, for example, landed a package worth an estimated $20 million from economic development officials in Durant, Okla., where it built a 1.2 million-square-foot DC in 2004. In addition to 137 acres of free land, Big Lots capitalized on infrastructure improvements like the free construction of a one-million-gallon water tank, land and sales tax credits, and education credits for its staff. But what clinched the deal was the city of Durant's offer to reimburse Big Lots for 5 percent of the DC's total payroll for 10 years.

Still, however generous, incentives alone should not influence a company's decision to locate in a particular region. Saving a few million dollars in property taxes may sound enticing, but not if the location puts you farther away from your customers than you want to be. And those huge labor incentives may be a signal that there's a shortage of educated workers in the region.

In fact, experts who have been through the process often counsel site selection teams to pay no notice to the incentive offers until they've completed a rigorous search and analyzed all the options. "At the end of the day, the location decision needs to be driven by transportation costs," says Mike Peters, first vice president of ProLogis Solutions, which develops industrial distribution facilities. "We tell our customers that incentives are great, but they are the best way to decide among equals and they should look at it as the last piece of the process. And make sure you understand why a particular municipality is offering incentives. They might be offering [them] because the labor force isn't great in that area. [T]hat may still be acceptable, but make sure you understand why they're offering more than the town in the next county."

Steve White of DHL is of the same mind. "The first thing we always look at is the operation and where the hub fits into the network that makes sense to service the customers," says White, who is senior vice president of hubs and gateways at express carrier DHL. (DHL just opened a 262,000-square-foot West Coast distribution facility at the March Air Reserve Base in Riverside, Calif., part of the Inland Empire.) "From there, incentives do come into the discussions at some point, but the real driver has to be network planning and making decisions that are best for our business."

Ongoing effort
Luckily for today's distribution executives, analyzing a DC network no longer means sitting down with maps, piles of printouts and a spreadsheet. The advent of sophisticated mapping and network optimization software has made manual analysis a thing of the past.

But the tools' easy availability doesn't guarantee that companies will use them effectively, warns Ted Newton, a network analysis consultant at Forte and a former Procter & Gamble distribution executive. Newton says the most common mistake he sees companies make is the failure to review their distribution networks on an ongoing basis. It's not enough to analyze your network when it's time to build or lease a new DC, he says. You should evaluate your network every 18 months or whenever a major event occurs.

In Newton's view, network optimization is one of the most valuable exercises a company can undertake. He reports that Procter & Gamble saved upward of $2 billion by running optimizations for its plants and DC network. "It's not just something you do after an acquisition or when you decide to build a new plant," he says. "It's something you should do before any strategic project." To drive home his point, he likes to tell the story of a company that neglected to review its network before installing an expensive enterprise resource planning (ERP) system in all of its DCs. Just months later, it was forced to close one of its DCs and shelve the expensive new technology it had installed.

Of course, optimizing your distribution network is not just about costs. It's about customer service too. That's particularly true of companies that sell medical supplies or perishable goods and need to be within quick reach of their customers. Contrary to what you might expect, these suppliers, which by any normal standard are already close to their customers, often gain the most from an optimization. "I've seen some projects where [companies] reduced the time it takes to get product to the customer by one or two full days," says Newton. "And these were companies that were pretty good to start with."

About the Author

John R. Johnson
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.

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