Location, Location, Location

Five key supply chain real estate trends confirm that it's still all about strategic location.

By Frank E. Wade and Steven J. Callaway -- Supply Chain Management Review, 10/1/2005

High-performing global companies are scrutinizing their supply chain real estate to streamline sourcing and distribution, better manage operating costs, and win long-term competitive advantage. Senior executives at these companies know that where and how they locate their logistics and distribution network can have a profound impact on their businesses. A strong real estate and facility strategy can help provide the basis of an effective and efficient supply chain. Leading the way on this front are U.S. companies such as Wal-Mart, GE, FedEx, and UPS; European companies, including Siemens, Philips, Carrefour, DHL, and TNT; and Asian firms such as LG and Hyundai.

This focus can be seen as part of a larger trend that recognizes the link between supply chain strength and a successful corporate strategy. A recent study of CFOs by UPS and CFO Research Services, for example, found that executives see a direct link between the supply chain and corporate strategy. In that study, 61 percent said the supply chain is important to their ability to meet corporate objectives, said Gene Long, president, consulting services, UPS Supply Chain Solutions, at a May 2005 University of Chicago symposium.

But there's still progress to be made. Just one-third of the CFOs believe their companies' strategic and operational plans are well integrated. "The number-one supply chain issue that executives are looking at today is creating the degree of flexibility into their supply chain operations that lets them serve their customers differentially," said Long. Because real estate is the second most cost-intensive component of distribution and logistics behind transportation, we contend that careful execution of supply chain real estate strategy can deliver significant gains in efficiency, profitability, and sustainable competitive fitness.

Indeed, supply chain real estate has become more central in corporate and supply chain strategy. Given its impact on the balance sheet, customer service, and financial performance, real estate is increasingly capturing the attention of senior executives. We also see a trend of companies worldwide elevating the role of real estate in their executive hierarchies. In the past, corporate real estate directors were two steps down and three to the right on the organization chart. Today, most big real estate issues are being handled at the level of executive vice president of supply chain or chief logistics officer — and higher.

So what are the big trends in real estate today that executives should be aware of as they design their supply chains? Many factors have an impact on supply chain real estate decisions, including transportation and energy costs and the importance of being in or near foreign trade zones and close to customs centers. In our practice, however, we have identified five key trends that stand out:

1. Regional interdependence. It's well established that the world economy is getting more integrated and interdependent, while the sources of production and consumption are becoming more widely dispersed. Note the speed at which this has occurred in the past decade. The globalization of production is accelerating. Global trade expands, on average, at a historical rate of more than 2.5 times annual world gross domestic product growth. Airfreight is growing at a 6 percent average annual rate, while ocean-going container volumes are rising 10 percent annually. While the numbers will vary in any given year, we do expect these trend lines to continue.
2. Consolidation of logistics and distribution. As freight throughput becomes concentrated at the world's major airports and seaports, companies are consolidating logistics and distribution activities at their core operating centers. In the past, various assembling, packaging, kitting, and distribution functions were performed at multiple locations. Today, the emphasis is on performing these "end-of-the-line" tasks in fewer locations that are most strategically significant to their businesses. Sony Ericsson is a case in point: Logistics and packaging functions once done at several European sites are moving to one location in Beijing. While electronics, telecom, and pharmaceuticals are among the industries leading the way in this area, we expect other sectors to adopt the strategy as well.
3. Larger facilities serving multiple modes and uses. Companies increasingly require larger facilities that are quickly accessible by all major transport modes. Demand is also growing for next-generation logistics facilities that can accommodate a range of value-added functions, especially those most closely linked to loading and offloading freight-handling centers. We see shippers demanding larger and more flexible facilities to reduce their transport costs and centrally integrate production, distribution, and even sales/back-office work. For example, a global consumer products company was seeking to rationalize its large network of small, inefficient distribution facilities throughout Mexico City. Our firm helped the company locate and develop a large, highly modernized distribution center that enabled it to meet fast-growing consumer demand in Mexico.
4. Intensifying security and surveillance. There is also a greater demand for heightened surveillance at all key points in the supply chain. Customers expect their suppliers to meet or exceed modern security standards. Existing buildings are being retrofitted, and new ones are incorporating advanced security systems, resulting in new fixed and variable costs. We see this further spurring consolidation and integration of the supply chain functions as companies seek to tighten their supply chain security by eliminating noncore links.
5. Location at "choke points." For most companies, it's essential to be located at or near the physical intersections of production and consumption worldwide—the choke points of commerce. This is especially crucial for those companies that are sourcing components and finished goods globally and distributing them to customers on one continent or more. They are seeking distribution points at or near the large airports, seaports, rail hubs, and major highways of North America, Asia, and Europe. When companies make the right location decisions, it's easier for them to control transport costs, the single biggest factor in distribution and logistics today.