Information needed when evaluating a Distribution Centre

Roger OakdenGlobal Logistics, Logistics Management, Procurement, Supply Chains & Supply NetworksLeave a Comment

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Factors in a location decision.

The criteria for selecting the site for a DC or warehouse have been established for many years. However, the changing structure of larger cities could provide an additional influence on the decisions to be made. It is therefore important to conduct appropriate research and analysis to avoid a less than desirable site and subsequent costly surprises.

The main factors influencing site selection decisions have been market access and operating costs:

  • Market access: This reflects the response time from order placement to delivery of goods at the customer’s destination, This requires a trade-off between total cost and location, analysed using techniques such as centre of gravity, load-distance and linear programming. The increasing costs of offices in city centres can influence decisions concerning the location of multiple market access functions in the same location. The functions include: region or area sales, customer service, distribution and post-sales support.
  • Total cost: Transport costs, both inbound and outbound, can be up to 60 percent of total distribution costs. Although labour costs are an important factor, they may only comprise only about 15 percent of total distribution costs. Too much attention maybe given to the cost of labour and not enough to its quality and competence. However, a policy decision could have been made concerning either the employment of permanent staff or crews supplied by labour hire firms. In part, this depends on the extent to which an organisation views distribution as a core function.

To ensure the correct calculation of total costs, identify the following factors: the expected volume of receipts and shipments bu SKU and time period; current customer service requirements and goals; hours of operation required; projected peak inventory levels; required reverse logistics and value-added services. Prior to calculating the total area required, understand the type of material handling and storage systems to be implemented and the number of people required, including any seasonality.

Government: While loans, grants and tax incentives are a consideration in the selection process, their total impact could be less significant as long-term benefits. More important is understanding the business regulations affecting the proposed facility.

Financial: The main factors in the ‘own versus lease’ decision are:

  • How strategic is the location or property to the business? This will depend on the business and its relationships with suppliers and customers
  • How specialised will be the facility? Due to higher risks, developers and investors are less inclined to build non-standard facilities for lease, due to the requirement for specific fit-outs and the possibility of ‘stranded assets’
  • Duration of occupancy: Total lease payments could exceed ownership cash flow after about 10 years. So, if flexibility is required with the business model, leasing is preferable, even with additional costs. Leases should be 5 years with a five year extension. Alternatively, if the business is operating in established markets with some certainty of revenues past 10 years, then ownership can be considered. This is, of course, dependent on the availability and cost of capital.

For realistic decisions to be made, the logistics facilities plan should look forward at least five to seven years, If there is a flexible business model, then the facilities plan is likely to be repeated every five years.

Additional factors in the location decision

Changing business models, the influence of IT based technologies and changing work conditions can influence decisions about the location of logistics facilities.

  1. Urban development and congestion. If the priority of governments has been on roads, then urban sprawl is the result, as all roads can potentially extend outward, without limits. For example, in Melbourne, Australia, the north-south distance is more than 140 km and the east-west distance more than 100 km and they continue to increase. Sydney has a similar situation.

In Melbourne, the morning commute from the suburbs to the 10 km inner city ring (where many of the ‘better’ jobs are located) takes 70 percent longer than at midnight; going home in the evening ‘rush hour’ (between 3.30pm and 6.30pm) takes more than 40 percent longer. And the longer vehicles are in stop or slow mode, the higher are emissions. Congestion means that quick and on-time delivery is either not possible, or truck schedulers must build-in a congestion time allowance, with more costs.

Associated with urban development is population density. The Greater Melbourne population density is 450 persons per kmyet inner city Melbourne population density is nearly 6,000 persons per km2. In comparison, greater Shanghai has a density of over 3,000.

2. The growth of on-line shopping through eCommerce. This is generating an increase in delivery loads of less than truckload throughout urban areas and will require new distribution and delivery models if fast delivery is the objective. For example, some e-retailers are integrating online with bricks-and-mortar shopping. In inner city areas, the shop/warehouse will have a relatively small floor area, requiring regular replenishment. However, more restrictive regulations could mean that only permit holding vehicles can enter a city area, within defined off-peak and overnight delivery times. This form of distribution could possibly require mini-DCs within the city and warehouses sited at suburban logistics hubs.

3. The potential for introducing road user charges. These would replace current taxes and charges on operating vehicles. This could be part of a wider ‘Mobility as a Service’ whereby using a technology gateway, transport services for individuals and goods that are offered by public and private providers can be combined, planned and charged through a single account. How this would change distribution patterns is currently not known.

So, when evaluating the need for distribution centres and warehouses, Logisticians must not only consider the business issues, but also the broader community influences. Combining the business and community factors indicates that a location evaluation process should possibly incorporate consideration for five distribution types: the inner city, inner suburbs (10 km ring), outer suburbs, regional towns and rural and remote. The outcome could be more than one distribution location.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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