July 28, 2014
strategic insight | Site Selection

Illinois: Driven by logistics

Illinois: Driven by logistics

With a long history as a center for logistics and transportation, Illinois might be a good spot for your next Midwest DC. Here are three reasons to consider the state ... and one reason not to.

By Susan K. Lacefield

Crisscrossed by 12 major interstates. Served by seven Class 1 railroads. Home to O'Hare International, one of the world's premier aircargo gateways. And a history of investing in transportation infrastructure that stretches back to the 1830s. The state of Illinois has a lot going for it as a hub of logistics and distribution activity.

As Dan Seals, assistant director of the Illinois Department of Commerce and Economic Opportunity, puts it: "Logistics is at the core of what we do."

With that kind of infrastructure and history, it's easy to see why Illinois would make a good location for a Midwest distribution center. But it's not ideal for every company, according to site selection consultants and industrial real estate firms. Here are four factors to consider when deciding whether or not to locate your next DC there: three in favor and one against.

One of the most obvious reasons to locate a distribution center in Illinois is the city of Chicago, with its consumer base of 2.72 million people. As the third-largest metro area in the country, Chicago is a market that can't be ignored. "Companies just need to be here to serve this market, whether it is by a warehouse near the metro area or away from the city in more of a regional DC location," says Bill Frain, senior vice president with the industrial real estate firm CBRE. "Our population base compels people to be here."

It is possible to serve Chicago from outside the state. For example, some companies serve the city from regional logistics hubs such as Indianapolis or across the state line in southeast Wisconsin. "But ultimately, service requirements are changing, and as speed to market becomes more critical, more companies are going to make decisions based on proximity to market," says Frain.

Adam Roth, director of NAI Global Logistics, a real estate and supply chain solution firm that focuses on distribution and warehouse companies, says a "reurbanization" trend is under way in Chicagoland that will compel companies to bring their distribution facilities within the city limits.

Illinois also has the benefit of being located in the middle of the continent, with excellent connections by rail, truck, air, and barge to East and West Coast ports as well as the Gulf of Mexico and Canada. As a result, some companies use their area DCs to serve not just the state or region, but also national and even international markets. In 2012, Illinois' exports to Canada and Mexico exceeded $25 billion, according to John Greuling, president and CEO of the Will County Center for Economic Development, a nonprofit development organization for Will County, located 35 miles southwest of Chicago.

"We're a natural hub geographically," says Greuling. "Illinois really meets the needs of just about any company looking to import/export to serve a good part of the North American market."

Since the early 1800s (almost as soon as Illinois became a state), the Illinois legislature and business community have tried to take advantage of the state's prime location by building a superior transportation infrastructure. This commitment has continued into the 21st century, with more than $43 billion being poured into its infrastructure since 2010, according to Seals.

For example, the "Chicago Region Environmental and Transportation Efficiency Program" (CREATE), a partnership between rail companies and federal, state, and city government, is investing $3.8 billion in 70 projects to improve freight and passenger rail efficiency in the city. Another public-private partnership is looking to create the "Illiana Expressway," which would link Illinois and Indiana, and allow trucks to bypass Chicago.

Perhaps the century's most successful infrastructure investment so far has been the CenterPoint Intermodal Center (CIC) in Will County. Opened in 2001, CIC is the largest master-planned inland port in North America, situated on more than 6,500 acres just outside Chicago, according to Michael Murphy, CenterPoint's chief development officer. Located near the interchange of Interstates 55 and 80, the center has access to the BNSF Railway's Logistics Park in Elwood and the Union Pacific Railroad Co.'s intermodal terminal in Joliet. By allowing companies to avoid the rail congestion that occurs at older rail yards inside the city limits, the intermodal facility helps shippers reduce dray costs and cut their carbon footprint, says Murphy.

"I think the investment that CenterPoint Properties made in the intermodal facility in Joliet and Elwood is paying enormous dividends for the region," says Frain, noting that retail giants Wal-Mart Stores Inc. and Home Depot Inc. have located 5 million square feet of DC space there.

Growth in and around the intermodal center looks to continue apace as trucking costs rise, capacity tightens, and more companies turn to rail, according to Roth. "I'm seeing a migration more toward boxcar and spur service, and I'm seeing more of a gravitational pull toward intermodal centers," he says.

Another factor working in Illinois' favor is its strong labor pool, according to Chris Lydon of the industrial real estate firm Cushman & Wakefield. Overall, Illinois has a labor force of more than 6.5 million workers and ranks third in the nation for transportation and material moving occupations. Looking to the future, the state expects to add nearly 20,000 jobs across the transportation, distribution, and logistics industries by 2020, according to Murphy.

Not only is the labor base large, it is also highly skilled. According to Seals, Illinois' population is among the most educated in the country. And if the skills aren't there, the state has several workforce development programs to help fill the gaps. "States across the country are grappling with the skills gap concern within the manufacturing and distribution sector, especially as older generations retire," says Murphy. "In response, a number of public- and private-sector organizations in Illinois have introduced various workforce development programs and grant initiatives to ensure the strength and volume of local skilled workers in the future."

The one drawback to the labor force in Illinois, at least in some companies' eyes, is the strong union presence in the state. "Unlike in Indiana and parts of Wisconsin where you can get away with nonunion labor, here in the Chicagoland area, you have to go union for the most part," says Lydon. "Obviously, those costs can have an impact and are sometimes a [liability] for us when competing against neighboring states."

If there is a disincentive that keeps companies from situating a DC in Illinois, it's the state's taxes and onerous regulatory environment. "Some businesses have called out Illinois' tax and regulatory policies for increasing the cost of doing business compared with nearby states," says Murphy.

For companies engaged in e-commerce, one big drawback to locating in Illinois is sales tax. Companies with a physical presence in Illinois must charge their customers in that state a sales tax on the goods and services they buy online, while those without a physical presence in Illinois are exempt from that requirement. "Companies without a physical brick-and-mortar presence in Illinois try to stay out of the state to avoid those taxes," says Eric Stavriotis, senior vice president with CBRE. For example, Amazon.com built two distribution centers to serve the Chicago market in nearby Kenosha, Wis.

Not surprisingly, neighboring states like Indiana, Wisconsin, and Missouri have capitalized on those liabilities, offering incentives and real estate tax rebates to lure business away from Illinois.

"Illinois has lost projects to places like Indianapolis, which have fairly aggressive incentive programs," says Stavriotis. "But on a gross basis, companies must determine whether it's better and more cost efficient to be outside of the state, rather than being close to their service area, where their transportation costs are going to be different."

Roth agrees, saying that while incentives can be an important factor in site selection decisions, they are often a secondary consideration. "They're typically not as much of a factor as transportation costs because transportation is forever," he says.

About the Author

Susan K. Lacefield
Editor at Large
Susan Lacefield has been working for supply chain publications since 1999. Before joining DC VELOCITY, she was an associate editor for Supply Chain Management Review and wrote for Logistics Management magazine. She holds a master's degree in English.

More articles by Susan K. Lacefield

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