Making an Informed Decision
The e-commerce industry is under an increased amount of pressure to decrease costs through distribution center site optimization. Many distribution center locations are chosen simply by the MSA (metropolitan statistical area) or within a 100-mile radius from the results of a supply chain study. Others follow where competitors tend to locate and some simply select the major market parcel hubs. To ensure ongoing operational costs are the lowest possible, companies must utilize cutting edge data to select the most optimal site within a MSA, and not just any site in an area/region.
Those who select the typical major markets will quickly discover the required labor to operate these fulfillment centers might be the most expensive and hardest to attract, train and retain. The celebration of a cost effective real estate transaction is over within days, while a poor labor decision can challenge a company indefinitely. To ensure success, companies must locate their site where they can recruit and retain the necessary labor today, as well as many years from now.
Furthermore, in relation to large MSAs, too many companies fail to continue the detailed analysis at the specific submarket level. Just because a city or MSA is preferred, site selection is not over. Site selection within the city is just as important as the multi-state search. Factors such as labor, inbound and outbound transportation, and customer density must be analyzed. Additionally, within each market area, specific factors impact cost, including traffic congestion, drive time, inbound vs. outbound freight costs and business and personal property tax rates.
Total Cost of Occupancy Example
A great example of total cost of occupancy analysis is shown on the map below. The Atlanta MSA was chosen and the northern section was a logical choice because there were several available real estate options and rents were less expensive. However, after reviewing the actual data, the analysis proved a location in the center of the city closer to the Center of Gravity for deliveries and employees would provide a significant annual employment savings complemented by better delivery service to the end customer. These savings far outweighed the potential real estate savings in the north.
How do we get there?
The following labor data points can assist companies with making better location decisions within a MSA. There is an opportunity to pay for the below data and then companies must utilize analytics to create evaluation metrics.
Each data point must be scored and weighted based on the importance to each client’s operation. The above data is effective in quickly eliminating sites and areas. However, the analysis is not over. The data must be verified with qualitative analysis via interviews. Following are potential resources to interview:
- Economic Development Agencies – These groups will know if there are other large distribution center projects in the market which could create further wage pressure.
- Staffing Agencies – These groups can provide further insight on availability, wage rates, customary benefits provided by similar companies.
- Existing Distribution Companies – Many companies are open to providing insight into the labor market from their perspective.
Upon the completion of the data analysis and interviews, the picture should be very clear of the best potential sites within a MSA. However, the site alone will not drive all the value. Companies will need to continue to find creative strategies to recruit and retain employees.
In Part II, I will discuss unique to ways to help solve this issue.
ESRP’s industrial team has successfully led several corporations through the site selection process while analyzing the total cost of occupancy. Our team of industrial brokers align with our Site Selection team to ensure extensive data and analysis is provided, allowing our clients to make informed decisions that ultimately positively impact the firm’s finances, operations, and culture.
Brad Struck, SIOR
President, Industrial Services