While individual corporate strategies and in-depth studies ultimately determine where a company should locate its distribution centers, there is a wealth of easily accessible information that can help companies spot the cities with the best operating costs and most efficient service coverage. In fact, two leading consulting firms recently released reports that provide detailed information, site selection recommendations and rankings of DC locations based on total operating costs for a typical DC, as well as the ability to provide the best service to all points in the U.S.

DC Cost Analysis
The Boyd Company, a Princeton, N.J.-based site location consulting firm, provides operating cost data called BizCosts Reports. The company recently released a report on the cost of operating a distribution warehouse in 50 top markets around the U.S. The report details specific costs in each city for such operating items as labor, land, facilities, utilities, taxes and transportation. Boyd ranks the cities both for a new construction assumption and for a lease assumption (See Table One).

The annual operating costs in the BizCosts reports are scaled to represent a 350,000 square-foot DC employing 150 hourly workers and shipping over-the-road to 10 strategic points representing a national market. The typical site built into the calculations is a 50-acre lot that is fully serviced by utilities, has access roads and is in a controlled industrial park.

"The true value of the Bizcosts report is to reveal the huge differences in operating costs for these 50 major markets," says Jack Boyd, the consulting firm's principal. He points out, for example, that there is a 50 percent cost discount for operating a leased DC in Mobile, Ala., compared with one in the New York City area.

In terms of the individual cost elements, the biggest single differentiator was land values. While certain markets such as Southern California and metropolitan New York have long had notoriously high land costs, big differences now exist across the country.

"Cities have become a victim of their own success in terms of land costs," says Boyd. "Just 10 years ago, Phoenix was a fairly low-cost location, but today the land costs have skyrocketed, so it is now a high-cost area."

According to Boyd, labor is another major differentiator, both in terms of cost and quality. Depending on the type of distribution operation, using a flat hourly rate for unskilled warehouse workers may not provide a true picture.

"We are spending much more time in labor market analysis for DCs than ever before," says Boyd. "We are having to look at quantitative factors as well as the hourly wage because many warehouses are very technologically advanced. Workers in a highly automated warehouse often need computer skills and training that command higher wages."

Another labor-related trend that Boyd has to consider for individual clients is a broadening of functions that increasingly are brought into a DC complex, to include customer service, call centers, accounting, human resources and other back-office operations. These functions traditionally are in headquarters-type facilities, but with office rents running $25 to $30 a square foot as opposed to $6 a square foot in a DC complex, Boyd says that he sees more of these operations being placed in expanded DC facilities.

"We look at available skill sets and costs for each client need at locations under consideration," says Boyd.

According to Boyd, the lower costs in the South are attracting the attention of more and more of his clients, but other factors add to their appeal. The right-to-work laws throughout the South offer lower, non-union labor costs, but also fewer strikes, sickouts and other disruptive problems. Congestion of highways and port areas in the West and Northeast are driving companies to look at areas in the South served by ports such as Savannah, Jacksonville, Mobile, Charleston, New Orleans and Virginia Ports.

"The entire southeast is gaining from this trend," says Boyd, "It is not just the port areas, but also accessible inland points such as Greenville/Spartanburg, S.C., Greensboro N.C. and eastern Tennessee.

New, non-cost-based factors that Boyd is considering in his site location work are security and risks of disruption. For these reasons alone, some companies are avoiding large population centers such as the New York metropolitan area and Los Angeles.

"The concern is not so much that there will be a major terrorist attack, but that the hair-trigger nature of homeland security can cause airports, ports, major highways to be shut down just as a precaution," says Boyd. "We have seen that if there is a security alert in a major city, highways can get shut down, ports and airports can close, and business just comes to a halt."

Such concerns are steering companies to areas less likely to have these problems. For example, instead of Northern New Jersey, Boyd says that companies are looking at Lehigh Valley in eastern Pennsylvania.

"Not only is the land cheaper and transportation less congested, the access is more secure," says Boyd.

According to Jack Boyd, his firm offers detailed cost analysis for each client based on their operations and individual needs. More information on the BizCost database is available at www.bizcosts.com

Best DC Service Networks
Chicago Consulting does site location studies for its clients using a very sophisticated network optimization model that it has developed over its 25-year history. According to Terry Harris, managing partner for Chicago Consulting, his firm created a report called The 10 Best Warehouse Networks for 2005 by running their model using just one data input, the U.S. population dispersion, to produce just one output, optimal DC networks or single DCs that provide the lowest over-the-road transportation service time to the entire U.S. population. The model assumes the networks will have to make shipments to everyone in the country as direct home delivery. Since many retail networks are based on the same population data, the output is reasonably accurate for serving retail stores around the country as well.

No one would base decisions on such a simplified model, According to Harris, but it does reveal important findings for any company serving a national market, whether via direct home delivery or through a retailer.

"For an actual customer, we would include a great deal of data such as transportation costs, inbound and outbound shipping patterns, inventory costs, and so on," says Harris.

Harris explains that the 10 Best Warehouse Networks report is a marketing tool to introduce companies to the consulting firm capabilities.

"For any number of reasons, companies need to constantly re-evaluate their DC network, their inventory locations and which facilities should serve their customer base," says Harris. Typical uses would be to see if changing business patterns require a new DC or closing an existing one, to assess the value of a DC if a lease is up for renewal, or to rationalize a network after a merge. One such client was a multi-division electronics company that had 15 warehouses in southern California for 15 different divisions. The obvious question is whether these divisions should consolidate all or any of the warehouses.

"To answer any of these questions, a company needs to look at the entire network," says Harris. "We provide our clients with the model and with training, so they can do the analysis themselves if they wish."

The report shows the exact delivery transit time to customers based on networks of one to 10 DCs, and exactly where those DCs should be to capture that optimal transit time. While logic would suggest that more warehouses produce better transit time, that is not the case. Looking at the data, there is no improvement in transit time for the networks with more than seven DCs, and the service time improvement is negligible for networks of more than four or five DCs (See Table Two).

"The point of diminishing returns sets in very quickly, in part because transportation today is very good," says Harris. "For most businesses, these data show that three or four DCs is more than enough, and two might do the job and save tremendously on the cost of running more DCs and stocking more inventory."

In fact, Harris says that this report shows that transit time may be the key consideration for sizing a DC network under this example because of service time. The transit time improvement for more than two DCs increases only in fractional days, so customers may not perceive any improvement. The real improvement would probably be in such internals as order processing time, so shipments can be put on trucks faster. According to Harris, most companies today have an order cycle time of three to five days, so a transit time of one or two days becomes a relatively small portion of the total lead time -maybe 20 percent.

"Companies need to look at their entire operations before they can make intelligent decisions about their DC networks," says Harris. "That should be the take away."

GLSCS readers can get a no-obligation evaluation of their DC networks from Chicago Consulting by calling Terry Harris at 312-346-5080.