Supply Chain

Proximity to the Logistics Centers
of the Future

How Close Is Close Enough?

By Chris Steele, President, Real Estate Line of Business, TranSystems

Access to markets for customers, raw materials and clients affect location decisions for just about any industry, but some much more acutely than others. Indeed, proximity can be the sole driver in industries where it is imperative to get goods to an end consumer — particularly where the product is perishable — as well as in industries where customer desires change rapidly or where there’s a high degree of customization.

However, the world is always in flux, and three key, current trends have forced a new look at transportation costs, impacts and ultimately the relationship between location optimization and proximity to the end consumer. Each of these carries significant implications for the kinds, locations and capabilities of distribution facilities we will need in the future:

Fuel Costs: When transportation costs were cheap, the advantages of a distant location vastly outweighed any benefits of being close to the end consumer. But that model may become something of a relic if fuel costs continue to escalate.
While annual oil price increases of about 100 percent will likely be proven to be an anomaly, manufacturers have been especially sensitive to the issue. Stories abound of companies that outspent their 2008 transportation budgets before June, and there is speculation that we may very well be looking at the beginning of a significant change in the types and locations of distribution facilities.

Green Pressures: The greening of North America and of manufacturing, warehousing and distribution generally has fed this same dynamic, but in a different fashion. While the oil crisis has forced behaviors that reduce the use of energy in an attempt to reduce costs, consumer and government pressures have forced companies to reduce reliance on carbon-based fuels and to generally make less of an impact on the environment. So although the driver is different, many of the strategies have been complementary. A distribution strategy that reduces a company’s carbon footprint because of efforts to use less fuel has been embraced by environmentalists and accountants alike.

Security and Sourcing: Whether for nationalistic, regional, human rights or product-safety reasons, consumers have recently gained an acute curiosity about where their products originate. Examples such as Mattel’s difficulties with lead paint last year and our difficulties with salmonella-infected vegetables this summer emphasize that the ability to track the exact route of a product from initial mining or seeding through final delivery can be very important. Simplifying and shortening this process through moving production closer to the end consumer market can provide as much of a marketing advantage as a risk-management strategy for manufacturers.

Implications

Rising oil costs are very likely to cause manufacturers and distributors to move their facilities closer to population centers as a cost-cutting measure. Procter & Gamble has announced that they are developing strategies to do exactly this, using some of their Chinese facilities as a test-bed. The company has already noted that this is only the first step in moving toward a more decentralized and customer-market-oriented manufacturing-and-distribution location strategy.

Similarly, Wal-Mart recently announced a new strategy for sourcing food products for its mega centers. As part of a larger initiative to broaden its offerings, the retailer is moving toward buying more of its produce directly in local markets and from local farmers. In addition to providing more local flavor, this also gains the company a host of cost and product-safety advantages.

These changes also carry some intriguing implications for other aspects of the real estate strategy. A more diverse, market-access-centered network strategy naturally calls for a greater number of medium- and small-sized facilities as opposed to a small number of large, centralized facilities. In addition to the advantages of getting closer to the end market and serving consumer needs more quickly and potentially lowering transportation costs, this strategy has another real estate advantage of lowering the investment in any one facility. This allows a company to make smaller, incremental changes on a rolling basis as market changes or opportunities occur. Any one addition, change, closure or even mistaken location decision carries much less operational and P&L risk.

In sum, some measurable advantages have evolved for locating more manufacturing and distribution in close proximity to the direct zones of consumption. Even so, it’s important to note the sensitivity of these decisions to environmental and economic changes. Certainly, we did not foresee the circumstances that would push for on-shoring even a short five years ago. Given the compelling dynamics outlined above, it is important to remember that times change, and remaining flexible is the best strategy.