The downturn in the U.S. economy may have slowed the tide of goods arriving from overseas, but according to just about everybody who looks at these things, imports will still grow faster than the economy as a whole for some time to come.
And that means importers will have to find ways to handle the seemingly endless waves of incoming goods. In recent years, companies both large and small have been looking to build warehouses and distribution centers near ports along the U.S. coastline. As imports continue to grow, many more will do so.
What should an importer look for when selecting a site for an import distribution center? To get some insight, I asked a couple of experts in the business how they advise their clients. Kristian D. Bjorson is a Chicago-based managing principal with the logistics practice group of the Staubach Co., a global real estate advisory firm. Mike Peters is first vice president of ProLogis, the world's largest developer and manager of distribution facilities. Both have long experience in site selection.
Pick a port
Bjorson and Peters agree that the site decision is about much more than the real estate; it's also about what lies outside the dock doors—the area's network of highways and rails, the community's labor pool, and more. But the first order of business is to choose the right port
"The first discussion we have is whether to locate on the West Coast or the East Coast," says Bjorson. As part of this determination, he and his clients review the importer's traffic patterns— where the goods are coming from and where they're headed. They also look at which shipping lines serve the various ports on a given coast as well as what kinds of outbound transportation services are available.
Once they've narrowed the search to a specific geographic region, the process of evaluating and comparing ports begins. "Then we will focus more on what port services are [available] now and will be in the future," says Bjorson.
With the emphasis on speed these days, the top-of-mind consideration for most importers is the quality of port services. To evaluate service levels, Bjorson recommends that his clients ask four key questions: What is the ocean transit time from their shipments' port(s) of origin? How long does it take to get shipments onto trucks or the rails once they arrive at the port? How flexible and efficient are the port operations? What kind of record does the port have for security and shipment damage?
But it's not enough just to consider current port capabilities, Bjorson warns. Importers also need to think about how things will look five, 10, or 20 years out. "Most ports can meet [shippers'] requirements today. They can handle this type of ship and have that type of capacity," he says. "The question really is—and this is a betting man's question—what will it look like in 2015? That's where you get into the capital investment at the ports. Do they have deep water and sufficient berths and terminals? Which carriers are making or not making investments? What are the contract conditions of the carriers in port? The hardest thing is predicting tomorrow. What investments are they making that will give you a comfort level in 2015?"
Peters agrees with Bjorson. ProLogis looks closely at future potential when choosing markets for development, he says. "As a developer for shippers, you want to make sure to invest in a market that has continuing opportunity for growth. For the shipper, it is a similar issue. If the port is capacity-constrained, you want to be cautious about that."
But what will it cost?
As they compare port services and capabilities, importers are sure to be looking at the variable costs as well. Oftentimes, the port decision will come down to those variable costs, says Bjorson.
With import operations, transportation is inevitably the largest variable cost. Not only does the importer have to consider the cost of ocean freight, but it also has to factor in the cost of domestic transportation. Peters cautions importers not to overlook the expenses associated with shuttling containers between ports, intermodal terminals, and DCs in their calculations. "Look at the drayage cost from the port and how that impacts outbound transportation costs," he says.
The second-largest variable cost, especially on the East Coast, is labor, Bjorson says. Because wage scales can vary widely up and down the coast, it behooves importers to do some comparison shopping whenever possible, he adds. "The question is, what is your flexibility?" Bjorson says. Labor costs are higher for unionized workers in, say, New Jersey than in Charleston, S.C., he reports, which could be a factor in a location decision if that option makes sense.
It's important to note that variable costs can be mitigated somewhat by incentive packages offered by local governments eager to attract business. These, too, can vary widely from port to port, Bjorson says. "You will not get the same incentives in Atlanta as you will in Savannah."
An ocean view?
As the search moves from picking a port to choosing a specific site, the focus turns to facility requirements.
"The second thing is what do you want the role of the facility to be," says Peters. "Is it truly a transload facility, just to get goods out of the international container and into domestic trucks and get them to your DC network?" he asks. "Or is the plan to replace a regional DC and have this facility in the port market serve as a regional DC and ship to stores or on to your customers?"
The facility's role will have a direct bearing on how close to the port it needs to be—and by extension, on land costs. If the importer intends to open a sizable distribution facility that will serve, say, the LA/Long Beach area, Peters says, its best bet might be the Inland Empire some 40 miles east of the ports rather than in the high-rent area immediately surrounding the San Pedro Bay ports.
If, on the other hand, the importer simply needs a small, narrow transload facility, a site near the port may be worth the expense. Choosing a site close to the port will keep down drayage expenses. It will also help assure fast container turnaround, which has become more important in recent years. As demand for containers around the world has soared, shipping lines have turned up the pressure on shippers to return containers promptly.
Picking a corner
With the question of the port and type of facility settled, it's time to get specific. "Once you [have a] handle on that," says Bjorson, "you can begin to get to the 'street corner' questions. That is, what street corner will you be on, what is the labor availability, what are the other costs? What are the [local] taxes and incentives?"
For most importers, the number one "street corner" question is about access to transportation. "At the end of the day," says Bjorson, "the transportation side really drives the decision."
Transportation needs will vary for manufacturers, consumer goods importers, and retailers. "Those three categories require different infrastructure based on the distances they are sending stuff," Bjorson says. Retailers on the East Coast will likely want to send products by full truckload out of the port, making highway access paramount. But a manufacturer may need proximity to rail service.
Peters notes that there are other issues that might seem peripheral to DC operations but that may ultimately prove to be important. These tend to be highly individualized matters, he says. "If you have a facility with 300 employees, access to public transportation might be a priority, but if you have just 30 workers, it might not be much of a concern. It is not one size fits all."
Another consideration might be the area's political climate. "One of the things we try to be very aware of is community opposition," says Peters. "We want to be sure that we are in an area where what we do fits well with the community. ... We do not want surprises down the road."
That said, Bjorson and Peters agree that no site is likely to have a perfect balance of attributes. Tradeoffs are inevitable. But careful consideration of port costs, services, and infrastructure capacity in light of your current and future needs will boost your chances of picking the right site.