Rising fuel and shipping costs, coupled with a weak economy, have companies searching for distribution sites that will help cut operating costs. They're finding some attractive opportunities.
In today's uncertain domestic economy and with increasing global cost pressures, many companies are finding the best way to improve the bottom line for their warehouses and distribution centers is to focus on the cost side of the ledger, not on the revenue side.
With fuel and shipping rates projected to rise significantly in 2012 and beyond, comparative costs in areas like labor, property taxes, energy, and real estate are under the site selection microscope like never before. With the exception of shipping rates, which are often negotiable, most operating costs facing the distribution warehouse planner are fixed. For many, a less-than-optimum operating cost structure for their warehouses can compromise their competitive position for years.
That's one reason why many companies are considering relocating warehouses and distribution centers right now. Those that are searching for sites that will help cut operating costs now and in the future are finding attractive opportunities.
Location matters
Exhibit 1 shows the annual BizCosts.com comparative cost ranking of U.S. cities based on their housing a hypothetical 150-worker distribution center occupying 450,000 square feet and serving a national market with over-the-road truckload shipments.1 Total costs include labor, land, construction, taxes, utilities, and shipping. They can range from a high of $24.5 million per year in San Francisco to a low of $13.1 million in Greenville/Spartanburg, S.C.
These costs are expected to rise throughout the coming year. Despite continued advancements in warehouse automation technologies, overall operating costs for distribution warehousing are expected to increase by 14 to 16 percent in 2012 due to a rise in diesel fuel costs, above-average utility rate increases, and recovering real estate markets in most locales. These costs will be up from an estimated 13-percent increase for 2011. Labor costs, however, will continue on the flat-to-weak trajectory they have followed since 2009, with a projected increase of 2.1 percent in 2012 for non-exempt warehouse personnel.
There are many other variables that can affect the attractiveness of one location versus another. One of the newest is cap-and-trade legislation designed to reduce carbon emissions and improve the environment. New Jersey, for example, recently opted out of the Northeast Regional Greenhouse Gas Initiative in a move to improve its competitiveness against neighboring Pennsylvania, which is not a member. New Jersey authorities may be right to worry: Industry insiders believe the fruit and juice company Ocean Spray's recent decision to relocate its Bordentown, N.J., distribution facility to Pennsylvania's Lehigh Valley was in response to concerns about New Jersey's carbon program and escalating utility prices.
Another business climate variable that companies continue to monitor is the relative strength of unions in each state. "Right-to-work" status continues to be a hot-button issue for many companies involved in distribution. Right-to-work legislation restricts the power of organized labor by barring practices such as requiring union membership to work in a warehouse or factory. This can be very important for some projects, as labor costs can account for as much as 50 percent of overall warehouse operating expenses. Lower labor costs and more favorable labor/management relations tend to be found in the 22 states that have right-to-work legislation, mostly in the South and West.
Nowhere is the strength of the unions more of an issue for the supply chain field than in California, where California Bill AB 950 could effectively keep the now-dominant independent drayage trucks from working at California's major ports, including Los Angeles/Long Beach. That measure could lead to larger, possibly unionized trucking organizations controlling drayage operations between the ports and regional warehouses.
The likely result of the California legislation would be a further increase in distribution costs in that state. The rise in costs could then drive distribution projects to other markets along the I-15 and I-10 corridors, including North Las Vegas and Mesquite, Nev.; St. George, Utah; and Phoenix, Kingman, and Casa Grande, Ariz. All of these locations are in right-to-work states where land and industrial space costs are also at historic lows due to the real estate collapse in those markets.
Expanding trade attracts warehousing
Not just the domestic economy but also the global economy is having a profound effect on the location of distribution centers. The cities that are especially well-positioned to attract new distribution projects are those that link to the global economy through ports, airports, and access to NAFTA (North American Free Trade Agreement) trade corridors like the Canamex Corridor in the U.S. West and the I-35 NAFTA Superhighway, which extends from Mexico to Canada in our nation's Heartland region.
Booming north-south NAFTA trade in the manufacturing sector and a resurgent agricultural economy led by corn and ethanol are driving the logistics economies of Heartland cities along the I-35 trade route, including Omaha, Neb.; Kansas City, Mo.; and Oklahoma City, Okla. North-south trade, up 15 percent in 2011 from 2010 levels, is expected to continue to grow as the Canadian economy outpaces that of the United States and the Canadian dollar reaches parity with its U.S. counterpart.
As the Canadian economy grows, some Canadian companies are developing a keen interest in establishing U.S.-based distribution facilities. Due to the strength of the Canadian dollar, and with U.S. real estate prices at all-time lows, the economics are very attractive for Canadian companies that are looking to set up shop in the States for the first time.
In addition, the expansion of the Panama Canal, set for completion in 2014, is already affecting distribution warehouse site selection. Container shipments are projected to increase tremendously at U.S. East Coast ports, creating inland warehouse opportunities (not unlike California's Inland Empire) for communities situated within a few hours' drive by truck from deepwater ports in Miami and Jacksonville, Fla.; Savannah, Ga.; Charleston, S.C.; Norfolk, Va.; Baltimore, Md.; Wilmington, Del.; Newark/Elizabeth, N.J.; and Boston, Mass.
Airfreight growth also has been a positive force for a number of distribution projects, especially those close to major hubs operated by UPS in Louisville, Ky., and FedEx in Memphis, Tenn. In addition, Minneapolis, Minn.; Chicago, Ill.; and St. Louis, Mo., have strong air-cargo service to and from China, a huge plus for a growing number of companies in those areas.
A warm welcome
While the weak economic recovery and rising costs have had some negative effects on the warehousing market, they have also resulted in at least one positive consequence. It used to be that many communities were resistant to new warehousing projects and viewed them with skepticism. Now, however, communities are actively courting logistics industries because the economic benefits are clear and compelling. Indeed, for cash-strapped municipalities, warehouses are a significant source of new jobs. Large warehouses on extensive acreages translate into huge property tax revenue. Other coveted revenue streams generated by a new warehouse or distribution center for the host municipality and state include sales taxes, personal property taxes, utility taxes, fuel taxes, telecommunications taxes, and personal and corporate income taxes.
As a result, state and local economic development organizations have been providing warehouse operators with access to millions of dollars in financial incentives, and communities have been warmly welcoming them. Additionally, residents of local communities are beginning to see distribution and warehouse facilities as an employer of choice. In years past, the typical warehouse labor force was dominated by lower-skilled and lower-paid material handling workers and a small clerical pool. Today's highly automated and computer-driven warehouses, however, depend on a wide range of both blue-collar employees and well-compensated white-collar employees who manage such sophisticated technologies as radio-frequency identification technology (RFID), automated storage and retrieval systems (AS/RS), mobile robotics, inventory tracking, and software-driven pick-and-pack systems.
Warehouses and distribution centers should continue to be seen as employers of choice, in part because an increasing number of them are opting to relocate other value-added functions to the lower-cost warehouse environment. These functions typically include final assembly and quality control, customer service, accounting, call center operations, regional sales, information technology, and other "back office" functions that traditionally are carried out at the more expensive head office or regional office location.
Endnote
1. BizCosts is a registered trademark of The Boyd Company Inc.
Editor's note: This story first appeared in the 2011 special bonus issue of CSCMP's Supply Chain Quarterly, a journal of thought leadership for the supply chain management profession and a sister publication to AGiLE Business Media's DC Velocity. Readers can obtain a subscription by joining the Council of Supply Chain Management Professionals (whose membership includes the Quarterly's subscription fee). Subscriptions are also available to non-members for $89 a year. For more information, visit www.SupplyChainQuarterly.com.
The consulting firm Accenture has acquired Staufen AG, a German management consulting firm, saying the move will expand Accenture’s capabilities to drive operational excellence and competitiveness in manufacturing and supply chains.
Specifically, adding Staufen will help Accenture serve clients in discrete manufacturing industries including automotive, aerospace and defense, industrial goods, and medical equipment.
According to Accenture it made the deal because manufacturers are under pressure to mitigate supply chain disruptions, geopolitical tensions, and fluctuating tariffs while staying abreast of rapid technological advances. To meet those needs, Staufen brings expertise in helping clients optimize their entire value chains, drive value with digital manufacturing initiatives, and improve overall businesses performance.
Staufen’s service portfolio includes solutions for Industry 4.0, supply chain management, and organizational change as well as data-driven tools, continuous improvement techniques, and lean management principles. Its approach enhances clients’ product design, shopfloor processes, time to market, and sustainability efforts, reducing costs, eliminating inefficiencies, and optimizing production capacity, the company said.
“Manufacturers must continuously improve their entire value chains to stay competitive,” Matthias Hégelé, Accenture’s supply chain and operations lead for Germany, Austria, and Switzerland, said in a release.
“The acquisition of Staufen aligns with our strategy to reinvent supply chains and manufacturing for clients. We will combine Staufen’s proven expertise in operational excellence and value chain transformation with our capabilities in digital technologies, such as AI, generative AI, digital twins and supply chain and manufacturing software platforms, to help clients transform their core value chains, improving efficiency and productivity, supporting sustainable practices, and building resilient, autonomous systems,” Hégelé said.
Part of the reason for that situation is that companies can’t adjust to tariffs overnight by finding new suppliers. “Supply chains are complex. Retailers continue to engage in diversification efforts. Unfortunately, it takes significant time to move supply chains, even if you can find available capacity,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release.
“While we support the need to address the fentanyl crisis at our borders, new tariffs on China and other countries will mean higher prices for American families,” Gold said. “Retailers have engaged in mitigation strategies to minimize the potential impact of tariffs, including frontloading of some products, but that can lead to increased challenges because of added warehousing and related costs. We hope to resolve our outstanding border security issues as quickly as possible because there will be a significant impact on the economy if increased tariffs are maintained and expanded.”
Hackett Associates Founder Ben Hackett said tariffs on Canada and Mexico would initially have minimal impact at ports because most imports from either country move by truck, rail or pipeline. In the long term, tariffs on goods that receive final manufacturing in Canada or Mexico but originate elsewhere could prompt an increase in direct maritime imports to the U.S. In the meantime, port cargo “could be badly hit” if tariffs on overseas Asian and European nations increase prices and prompt consumers to buy less, he said.
“At this stage, the situation is fluid, and it’s too early to know if the tariffs will be implemented, removed or further delayed,” Hackett said. “As such, our view of North American imports has not changed significantly for the next six months.”
U.S. ports covered by Global Port Tracker handled 2.14 million twenty-foot equivalent units (TEUs) in December, although the Port of New York and New Jersey and the Port of Miami have yet to report final data. That was down 0.9% from November but up 14.4% year over year, and would be the busiest December on record. For the year, December brought 2024 to a total of 25.5 million TEU, up 14.8% from 2023 and the highest level since 2021’s record of 25.8 million TEU during the pandemic.
Global Port Tracker provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.
Having reported on the supply chain world for some 25 years, I've seen technologies come and go. Many were once touted as the best thing since sliced bread but either failed to live up to the hype or else had to simmer a few years before they caught on.
Remember the hoopla surrounding dot-com retail? In the late 1990s, we were told that stores as we knew them would eventually go away, to be totally replaced by online shopping. The ease and convenience of e-commerce made that a reasonable expectation. But in March 2000, the bubble burst, and a host of online retailers closed their virtual doors forever. Of course, online shopping is still very much with us, and its share of total retail sales is growing by the year. Maybe we'll get to that retail seventh heaven someday, but it's taking much longer than originally predicted.
Then there's RFID (radio-frequency identification). These small electronic tags were going to replace barcodes largely because of the vast amount of data they can hold and their capacity to update information.
In 2003, Walmart famously demanded that its top 100 suppliers affix RFID tags to all pallets and cases shipped to its DCs. We figured that if Walmart had gone all in on RFID, the rest of the industry would automatically follow. Well, not so fast. It's true that after years of stutter-step progress, Walmart today is more heavily invested in RFID than ever. But in the rest of the world, the humble barcode is still king.
A more recently hyped technology is blockchain. It was actually conceived back in 1982 but remained just a concept until 2008, when a person (or persons) using the name "Satoshi Nakamoto" created an actual blockchain to serve as the public distributed ledger for cryptocurrency transactions. Blockchain was expected to revolutionize the way supply chain partners do business. But it, too, has been a bit slow to take off, and it's still unclear how the blockchain story will play out.
That brings us to the latest potentially game-changing technology: artificial intelligence (AI). In some ways, AI is really just data analytics on steroids. Supply chains have relied on data analytics for decades—the difference now is the promise of greater accuracy and better simulations. Will it ultimately change everything we do in supply chain management? Maybe. But it may take a while. A November report from workplace tools developer Slack showed that AI adoption rates among U.S. workers had slowed in the last quarter, while a recent analysis of open supply chain jobs by software integration specialist Cleo found that only 2% of open jobs required AI skills.
So is AI just another fad or a truly transformative technology? It appears we'll need a few good use cases before we can make that call.
Economic activity in the logistics industry expanded in January, growing at its fastest clip in more than two years, according to the latest Logistics Managers’ Index (LMI) report, released this week.
The LMI jumped nearly five points from December to a reading of 62, reflecting continued steady growth in the U.S. economy along with faster-than-expected inventory growth across the sector as retailers, wholesalers, and manufacturers attempted to manage the uncertainty of tariffs and a changing regulatory environment. The January reading represented the fastest rate of expansion since June 2022, the LMI researchers said.
An LMI reading above 50 indicates growth across warehousing and transportation markets, and a reading below 50 indicates contraction. The LMI has remained in the mid- to high 50s range for most of the past year, indicating moderate, consistent growth in logistics markets.
Inventory levels rose 8.5 points from December, driven by downstream retailers stocking up ahead of the Trump administration’s potential tariffs on imports from Mexico, Canada, and China. Those increases led to higher costs throughout the industry: inventory costs, warehousing prices, and transportation prices all expanded to readings above 70, indicating strong growth. This occurred alongside slowing growth in warehousing and transportation capacity, suggesting that prices are up due to demand rather than other factors, such as inflation, according to the LMI researchers.
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
As commodities go, furniture presents its share of manufacturing and distribution challenges. For one thing, it's bulky. Second, its main components—wood and cloth—are easily damaged in transit. Third, much of it is manufactured overseas, making for some very long supply chains with all the associated risks. And finally, completed pieces can sit on the showroom floor for weeks or months, tying up inventory dollars and valuable retail space.
In other words, the furniture market is ripe for disruption. And John "Jay" Rogers wants to be the catalyst. In 2022, he cofounded a company that takes a whole new approach to furniture manufacturing—one that leverages the power of 3D printing and robotics. Rogers serves as CEO of that company, Haddy, which essentially aims to transform how furniture—and all elements of the "built environment"—are designed, manufactured, distributed, and, ultimately, recycled.
Rogers graduated from Princeton University and went to work for a medical device startup in China before moving to a hedge fund company, where he became a Chartered Financial Analyst (CFA). After that, he joined the U.S. Marine Corps, serving eight years in the infantry. Following two combat tours, he earned an MBA from the Harvard Business School and became a consultant for McKinsey & Co.
During this time, he founded Local Motors, a next-generation vehicle manufacturer that launched the world's first 3D-printed car, the Strati, in 2014. In 2021, he brought the technology to the furniture industry to launch Haddy. The father of four boys, Rogers is also a director of the RBR Foundation, a philanthropic organization focused on education and health care.
Rogers spoke recently with DC Velocity Group Editorial Director David Maloney on an episode of the "Logistics Matters" podcast.
Q: Could you tell us about Haddy and how this unique company came to be?
A: Absolutely. We have believed in the future of distributed digital manufacturing for a long time. The world has gone from being heavily globalized to one where lengthy supply chains are a liability—thanks to factors like the growing risk of terrorist attacks and the threat of tariffs. At the same time, there are more capabilities to produce things locally. Haddy is an outgrowth of those general trends.
Adoption of the technologies used in 3D printing has been decidedly uneven, although we do hear about applications like tissue bioprinting and food printing as well as the printing of trays for dental aligners. At Haddy, we saw an opportunity to take advantage of large-scale structural printing to approach the furniture and furnishings industry. The technology and software that make this possible are already here.
Q: Furniture is a very mature market. Why did you see this as a market that was ripe for disruption?
A:The furniture market has actually been disrupted many times in the last 200 years. The manufacturing of furniture for U.S. consumption originally took place in England. It then moved to Boston and from there to New Amsterdam, the Midwest, and North Carolina. Eventually, it went to Taiwan, then China, and now Vietnam, Indonesia, and Thailand. And each of those moves brought some type of disruption.
Other disruptions have been based on design. You can look at things like the advent of glue-laminated wood with Herman Miller, MillerKnoll, and the Eames [furniture design and manufacturing] movement. And you can look at changes in the way manufacturing is powered—the move from manual operations to machine-driven operations powered by steam and electricity. So the furniture industry has been continuously disrupted, sometimes by labor markets and sometimes by machines and methods.
What's happening now is that we're seeing changes in the way that labor is applied in furniture manufacturing. Furniture has traditionally been put together by human hands. But today, we have an opportunity to reassign those hands to processes that take place around the edges of furniture production. The hands are now directing robotics through programming and design; they're not actually making the furniture.
And so, we see this mature market as being one that's been continuously disrupted during the last 200 years. And this disruption now has a lot to do with changing the way that labor interacts with the making of furniture.
Q: How do your 3D printers actually create the furniture?
A:All 3D printing is not the same. The 3D printers we use are so-called "hybrid" systems. When we say hybrid, what we mean is that they're not just printers—they are holders, printers, polishers, and cutters, and they also do milling and things like that. We measure things and then print things, which is the additive portion. Then we can do subtractive and polishing work—re-measuring, moving, and printing parts again. And so, these hybrid systems are the actual makers of the furniture.
Q: What types of products are you making?
A: We've started with hardline or case goods, as they're sometimes known, for both residential and commercial use—cabinets, wall bookshelves, freestanding bookshelves, tables, rigid chairs, planters, and the like. Basically, we've been concentrating on products that don't have upholstery.
It's not that upholstery isn't necessary in furniture, as it is used in many pieces. But right now, we have found that digital furniture manufacturing becomes analog again when you have to factor in the sewing process. And so, to move quickly and fully leverage the advantages of digital manufacturing, we're sticking to the hardline groups, except for a couple of pieces that we have debuted that have 3D-printed cushions, which are super cool.
Q: Of course, 3D printers create objects in layers. What types of materials are you running through your 3D printers to create this furniture?
A: We use recycled materials, primarily polymer composites—a bio-compostable polymer or a synthetic polymer. We look for either recycled or bio-compostable [materials], which we then reinforce with fibers and fillers, and that's what makes them composites. To create the bio-compostables, we marry them with bio-fibers, such as hemp or bamboo. For synthetic materials, we marry them with things like glass or carbon fibers.
Q: Does producing goods via 3D printing allow you to customize products easily?
A: Absolutely. The real problem in the furniture and furnishings industries is that when you tool up to make something with a jig, a fixture, or a mold, you tend to be less creative because you now feel you have to make and sell a lot of that item to justify the investment.
One of the great promises of 3D printing is that it doesn't have a mold and doesn't require tooling. It exists in the digital realm before it becomes physical, and so customization is part and parcel of the process.
I would also add that people aren't necessarily looking for one-off furniture. Just because we can customize doesn't mean we're telling customers that once we've delivered a product, we break the digital mold, so to speak. We still feel that people like styles and trends created by designers, but the customization really allows enterprise clients—like businesses, retailers, and architects—to think more freely.
Customization is most useful in allowing people to "iterate" quickly. Our designers can do something digitally first without having to build a tool, which frees them to be more creative. Plus, because our material is fully recyclable, if we print something for the first time and find it doesn't work, we can just recycle it. So there's really no penalty for a failed first printing—in fact, those failures bring their own rewards in the form of lessons we can apply in future digital and physical iterations.
Q: You currently produce your furniture in an automated microfactory in Florida, with plans to set up several more. Could you talk a little about what your microfactory looks like and how you distribute the finished goods?
A: Our microfactory is a 30,000-square-foot box that mainly contains the robots that make our furniture along with shipping docks. But we don't intend for our microfactories to be storage warehouses and trans-shipment facilities like the kind you'd typically see in the furniture industry—all of the trappings of a global supply chain. Instead, a microfactory is meant to be a site where you print the product, put it on a dock, and then ship it out. So a microfactory is essentially an enabler of regional manufacturing and distribution.
Q: Do you manufacture your products on a print-to-order basis as opposed to a print-to-stock model?
A: No. We may someday get to the point where we receive an order digitally, print it, and then send it out on a truck the next day. But right now, we aren't set up to do a mini-delivery to one customer out of a microfactory.
We are an enterprise company that partners with architects, designers, builders, and retailers, who then distribute our furnishings to their customers. We are not trying to go direct-to-consumer at this stage. It's not the way a microfactory is set up to distribute goods.
Q: You've mentioned your company's use of recycled materials. Could you talk a little bit about other ways you're looking to reduce waste and help support a circular economy?
A: Yes. Sustainability and a circular economy are really something that you have to plan for. In our case, our plans call for moving toward a distributed digital manufacturing model, where we establish microfactories in various regions around the world to serve customers within a 10-hour driving radius of the factory. That is a pretty large area, so we could cover the United States with just four or five microfactories.
That also means that we can credibly build our recycling network as part of our microfactory setup. As I mentioned, we use recycled polymer stock in our production, so we're keeping that material out of a landfill. And then we tell our enterprise customers that while the furniture they're buying is extremely durable, when they're ready to run a special and offer customers a credit for turning in their used furniture, we'll buy back the material. Buying back that material actually reduces our costs because it's already been composited and created and recaptured. So our microfactory network is well designed for circularity in concert with our enterprise customers.