Warehouse Location – Is it really that important?

We are constantly told by Real Estate companies that the three most important elements of any real estate purchase are location, location, location. But does this really hold true for industrial real estate and in particular distribution centres (DCs) and warehouses? I would like to argue… not quite!

If we look objectively at a company’s needs for DCs, we should start with the premise that we don’t need any. In an ideal World, where demand is consistent and supply reliable, then by adopting a Just In Time (JIT) approach, products can flow directly from supply to customer.

Sadly that ideal world does not exist, due to fluctuations in customer demand, inconsistent supply and all manner of glitches that can occur in a Supply Chain.

For these reasons, we need to hold product at DCs within our Supply Chains to act as a buffer so that we can ride out these variations in supply and demand and meet our customer service requirements. Therefore, selecting the ideal warehouse location becomes crucial for enhancing operational efficiency and managing costs effectively.

The Location Question

I am often approached by businesses seeking assistance in designing or selecting the location for a new DC. Frequently, this is due to existing facilities reaching capacity. Assessing potential warehouse locations is crucial, as it involves strategic planning to ensure proximity to suppliers, reduce lead times, and manage transportation costs.

It should be said at this point, that there are a whole range of measures and changes that can be adopted within the Supply Chain to reduce the DC capacity requirement, or indeed to better utilise the existing DC capacity, before embarking on adding more facilities to the network.

Cost Relationships and Transportation Costs in Distribution Networks

But assuming that a new facility is required; is the location really that important, and what drives location decisions? Given the rise in popularity of distribution parks, hubs and even logistics cities (such as in Dubai) then perhaps the location decisions have already been made?

It is worthwhile to take a step back and examine, objectively, some of the key cost relationships in a network of Distribution Centres. Identifying optimal warehouse locations by utilizing logistics software to analyze business data and determine suitable sites for operations is crucial (it’s something we deal with a lot as a warehouse consultancy).

As the number of Inventory Points in a network increases, so the costs are impacted as follows:

• The cost of storage rises, due to the increase in facility numbers and fixed costs.
• The inventory holding cost (cost of capital) increases as more inventory is required. (Due to increased safety stock requirements with more locations)
• The primary transport, or linehaul cost increases, as more tonne/kms are being travelled.
• The customer delivery cost (secondary transport) reduces, as with more facilities, the distance to the customer reduces.
• DC systems costs increase, as more licences, interfaces and hardware may be required.

Key Considerations for Warehouse Location in Supply Chain Logistics

Transportation Infrastructure

Highways, railways, ports and airports impact operational efficiency and delivery times. A location with multiple options for shipping gives flexibility in shipping methods and can reduce costs, especially when considering the distance between manufacturing facilities and a central warehouse. Consider current infrastructure and planned developments that will affect future access and traffic.

Labour market availability

The local workforce size, skill level and wage expectations directly impact operational success. Areas with existing logistics sectors have experienced workers but more competition for talent. Consider population demographics, unemployment rates and nearby educational institutions that can supply trained staff for warehouse roles.

Proximity to suppliers and customers

Positioning between suppliers and key customer bases can reduce transportation costs and delivery times. Analyse customer distribution patterns and supplier locations to find the sweet spot. Consider seasonal variations in demand and the need to serve different markets.

Local regulations and zoning laws

Municipal regulations, zoning and building codes can impact initial build and future operations. Some areas have specific requirements for loading docks, truck parking, operating hours and noise levels. Research local development plans and potential changes to regulations that will affect operations.

Local Environmental Factors and Considerations

Local environmental factors include climate that affects building maintenance, energy costs, and natural hazards. Consider how extreme weather will impact operations, flood risk, and the need for climate control. Environmental regulations and sustainability requirements vary by location and should be considered.

Utility availability and costs

Access to electricity, water, gas and high speed internet is essential for modern warehouse operations. Compare utility rates across locations as they can be a big operational cost. Consider backup power options and the reliability of local utilities.

Future expansion possibilities

Choose locations with room to grow, either through adjacent vacant land or building expansion potential. Consider local development plans and whether surrounding areas will become residential or commercial and limit future expansion or operating hours. Consider long term market growth.

Tax implications and incentives

Local tax structures and incentives can be a big operational cost. Many areas offer tax breaks, grants or other incentives for warehouse development. Consider immediate tax benefits and long term implications as incentives expire and tax rates change.

Impact on Warehouse Operations

Efficiency and Effectiveness

The perfect warehouse location can significantly impact the efficiency and effectiveness of warehouse operations. A strategically located warehouse can streamline operations, reduce transportation costs, and enhance customer satisfaction. By being closer to suppliers, customers, and transportation hubs, warehouses can reduce lead times, increase productivity, and improve overall supply chain logistics. Moreover, a well-designed warehouse space can optimize storage capacity, improve inventory management, and reduce labor costs.

Imagine a warehouse situated near major highways, railways, and ports. This proximity allows for quicker and more flexible shipping options, ensuring timely delivery to customers. Additionally, being close to suppliers means that raw materials and products can be replenished more swiftly, reducing downtime and keeping the supply chain moving smoothly. This strategic positioning not only boosts operational efficiency but also enhances customer satisfaction by ensuring that products are delivered on time, every time.

Operational Costs

The right warehouse location can also have a significant impact on operational costs. By reducing transportation costs, labor costs, and energy consumption, warehouses can minimize their environmental footprint and improve their bottom line. Additionally, a warehouse location with access to multiple transportation modes can reduce reliance on a single mode, increasing flexibility and reducing costs. Furthermore, a warehouse location with a stable and skilled workforce can reduce labor costs and improve productivity.

Consider a warehouse located in an area with a robust transportation infrastructure, offering access to highways, railways, and ports. This variety of transportation options allows for cost-effective and flexible shipping solutions, reducing the dependency on any single mode of transport. Moreover, a location with a stable labor market ensures a steady supply of skilled workers, which can lead to lower labor costs and higher productivity. By carefully selecting the right warehouse location, businesses can achieve significant cost savings and operational efficiencies.

Warehouse Space and Layout

Design and Functionality

The design and functionality of a warehouse space are critical factors in determining its efficiency and effectiveness. A well-designed warehouse space should prioritize functionality, safety, and flexibility. The layout should be optimized for efficient storage, receiving, and shipping of goods, with clear aisles and accessible storage areas. Additionally, the warehouse should be equipped with modern mechanical appliances, such as conveyor belts, forklifts, and pallet jacks, to improve productivity and reduce labor costs. The warehouse should also be designed with safety features, such as fire suppression systems, emergency exits, and proper lighting, to ensure a safe working environment.

A thoughtfully designed warehouse space can make a world of difference in daily operations. For instance, clear and wide aisles facilitate the smooth movement of goods and equipment, reducing the risk of accidents and improving operational efficiency. Modern mechanical appliances, like conveyor belts and forklifts, can significantly speed up the handling and movement of products, cutting down on labor costs and boosting productivity. Safety features, such as fire suppression systems and emergency exits, are essential to protect both the workforce and the inventory, ensuring a secure and compliant working environment.

In conclusion, the design and functionality of a warehouse space are paramount to achieving operational efficiency and effectiveness. By focusing on these aspects, businesses can create a warehouse environment that supports optimal performance, safety, and flexibility, ultimately contributing to the overall success of the supply chain.

Finding the Optimal Warehouse Locations

So the objective within any distribution network is to find the optimum number of facilities that will reduce the total cost curve, whilst still maintaining appropriate levels of customer service.

So what about the location of these facilities? What drives the optimum location? Evaluating and planning warehouse locations is crucial for optimizing logistics strategies. Well it is certainly not location, location, location as in the residential or retail property market. Again, taking an objective view of DC locations, we need to understand what drives, or should drive businesses to select certain locations over others.

In fact the cost driver that frequently has the least impact on the total cost of selecting a given location, is land and building cost. This is due to the fact that inbound and outbound transport, as well as labour costs are a far higher proportion of the total costs of a distribution network.

A Practical Example

So the location decision process might go something like this. We have established a need for 6 DCs in the network. We have established that one of these of a certain size, is required to be located in city X.

Given the choice of a number of locations in city X that all meet the required location characteristics, the specific choice of one location over another is often not that important. This is because land and building cost will often have a much lower impact on the overall cost than those costs driven by the supply and demand profile.

As an example, I was recently involved in the DC location decision for a large company that operates a fleet of some 400 delivery vehicles from one site alone. They needed to move to a new purpose built larger facility. A well-implemented location system can significantly enhance inventory management efficiency by systematically identifying and categorizing storage areas.

The choice of a range of potential facility locations had a massive impact on delivery transport costs. Imagine moving to a location that was 30 minutes further away from the centre of gravity of demand? A fleet of 400 trucks would now be driving an extra hour per day. That could actually increase fleet costs by at least $3.6 m pa.

Conclusion

So when selecting the location of Logistics facilities, are the three most important elements location, location and location? No. Well not in terms of a specific location.

But given a range of locations that all meet the needs of the business, such as access to customers and resupply, access to highways, ports and the like, then the costs of land and building of one location compared to another can start to be important.

Perhaps the three key elements should not read location, location, location, but lowest overall cost, best overall service and access to the right infrastructure?