By Dennis J. Donovan and Larry Moretti, WDGC
Read the trade publications or your local news source – these are a sampling of typical headlines. Let us face it…we, as consumers, love quick access and delivery of products with the click of a button and a trip to the front door. For years, manufacturers have baked in just in time delivery for their inventory, but recent supply chain bottlenecks at the ports or overseas, as well as critical parts shortages, have created a ripple effect in delivery of raw materials. Businesses need to respond with an ever-increasing, intricate web of optimized logistics operations to maintain cost effective and rapid service delivery. How does all of this effect site selection in the warehouse/distribution sector?
When we speak with prospects and delve into projects with clients in the warehouse-distribution sector, we see several factors that play into the site selection equation. Optimizing a location solution is complicated by the fact that some factors are at odds with others. Let us have a look.
Unprecedented Workforce Challenges
Not surprisingly, and not unique to warehouse employment, having a level of confidence in finding and retaining workers is front and center in any site selection decision. There are many well-publicized reasons, and while some are pandemic-centric and exacerbated by Covid, the tight labor challenges were present before. Working in a warehouse environment can be tough physically and repetitive mentally – elements such as heavy loads and/or cold storage further impact job desirability. Off-shift work, particularly second shifts add further challenges. Robotics and tracking software, whilst improving flow and efficiency, can be desensitizing to human labor. Warehouse and distribution wages have increased significantly, perhaps more than most sectors – and manufacturers, often competing for the same resources have increased wages to remain competitive with the regional labor market and comprising submarkets.
The Clustering Effect
The clustering of warehouse and distribution operations in small geographic regions (optimized by logisticians) further intensifies the labor challenge and drives wages even higher. Areas such as the Lehigh and Cumberland Valleys in Pennsylvania, the I-295 Corridor in New Jersey, the far western suburbs of Chicago and California’s Inland Empire are notable examples of areas inundated with big box distribution centers because they so often optimize customer-supplier freight solutions. Additionally, since the costs of freight can be among the largest operating cost elements of a supply chain network, warehouses continue to locate in the same geographic territories.
Not in My Backyard
The clustering effect not only drives excessive labor competition for limited resources, it also creates alarm bells to local communities and citizens concerned about increasing truck traffic congestion, damage to road surfaces, and loss of scenic resources such as farmland. Some economic development groups are actively or subtly discouraging warehouse projects as they are often unpopular locally for the reasons above. Furthermore, they take prime industrial land off the market that might have a higher and better use for manufacturing – which tends to create higher-paying and more desirable jobs. Often, manufacturing will have a higher level of investment and hence, make a greater contribution to the local tax base.
Limited Industrial Building Product in Desirable Location…now
Some locations are running out of developable land, at least for the short term, in the most desirable submarkets. Some locations have not completely recovered from the headwinds of recent years relative to real estate investor confidence in speculative building development. On the other hand, there are locations which have managed to balance the supply-demand equation in terms of buildings on-line now, and within the next 12-18 months. We have found with most of our distribution sector clients that speed of start-up is of the essence and that big box real estate availability more than 18 months out is irrelevant, and, in many cases, 12-18 months pushes the limit. End users want availability as soon as possible.
Building Characteristics Need to be Aligned to Product Requirements and to Workforce Attraction
For most of our industrial clients siting a distribution center, the following specifications/requirements are typical:
- Very-large building footprint, many exceeding 350K square feet, and not infrequently over one million square feet under roof
- 30’ plus consistent ceiling height
- 40’ to 60’ column spacing
- Linear flow and corresponding position of dock doors and bays
- Tilt-up construction typical
- Superlevel reinforced floors
- 24-7 operations and trucking permitted for local zoning
These characteristics, with the addition of heavier intensity power and utility infrastructure, would also satisfy the needs of a wide range of light and moderate manufacturing users. Thus, the typical new construction, particularly for smaller footprints up to 200,000 square feet, can satisfy a variety of user types. That said, manufacturers often prefer not to locate in an area dominated by warehouse-distribution users, because of the workforce competition and truck congestion concerns raised earlier.
Other building and site characteristics are becoming essential in recruiting and retaining workers. Climate controlled warehouses are front and center. In more markets, our interviews with local employers and workforce experts suggest that companies are investing in air conditioning for large warehouse spaces. Though not universal, this is a trend, and at least, ultra-large fans for circulating and cooling air are essential during summer and in generally hot weather climates. For one recent WDGC project, several employers in multiple markets indicated the first question asked by job applicants interviewing for positions: “what Covid protocols per air filtration and conditioning do you have in place?” As the costs of installing, let alone operating, fully air-conditioned industrial spaces can run in the millions of dollars, this is an important trade-off between operating costs and applicant flow, workforce efficiency, and retention. And in a seller’s market from the employee perspective, the costs may well prove value-additive in building and maintaining a productive, quality workforce.
Beyond the physical characteristics of the workspace, our interviews with distribution sector employers reveal (as well as confirm much in the way of common sense) workplace practices and amenities that go a long way towards recruiting and retention of a workforce. Some frequently mentioned keys include:
- Flexibility in work hours or in need to take time off
- Recognition of the small things (monetary, time off, or other)
- Well-stocked break rooms
- Social activities (whether it be monthly lunches, annual BBQ, or similar)
- Employee involvement
- Clear communications
- Opportunities for advancement
Public transit or ride-share arrangements can be an important consideration in warehouse site selection. In some regions, low density makes extensive use of public transit impractical. Some other areas are very oriented to ‘car-culture’ and employee-motivated ride sharing. In larger metro areas, established warehouse-distribution zones may indeed have some modicum of public transit (typically bus) to the edge or within an industrial park – multiple stops are desirable to minimize walking in what are often large, sprawling campuses. Some companies have negotiated incentives with economic development groups to establish new bus lines, though with mixed success relative to long-term ridership and any significant benefit per employee recruitment and retention.
Steps in the Warehouse-Distribution Site Selection Process
Site selection is often described as a process of elimination. To a degree this is true, but more to the point, it is a process of best fit – recognizing trade-offs and choice points. For distribution site selection, the process often starts with an optimization analysis – seeking minimal cost/maximum service level solutions pertaining to inbound and outbound freight.
A typical analysis consists of the following elements:
One: Discovery. Whether it be for a consultant’s project engagement with a client, or an internal client team analysis, the process starts with understanding the parameters, specifications, and criteria for the search. A thorough understanding of the supply chain and logistics components is the logical starting point. Specific elements might include:
- Supplier locations, current and projected
- Inbound materials and volumes
- Distribution channel structures and intermediate points (such as a regional distribution center distributing to customer warehouses or local end-user distribution points)
- Tariff and related considerations if a cross-border project frequently key ports of entry comprise the starting point)
- Location of production/value-added activity if within a manufacturing supply chain
- Customer locations, current and projected
- Outbound product SKUs and volumes
- Modes of shipping
- Freight cost responsibility and structure
Scrubbing and verifying this data can be a time and resource intensive process prior to an optimization analysis – this often takes more time and effort than the modeling itself.
Beyond the transportation-related inputs are elements that factor into most site selection projects including labor requirements, infrastructure requirements, building-site requirement, and the timing of delivery.
Two: Transportation Analysis. The goal here is to identify target geographies, often across various transportation scenarios using sophisticated network optimization models. The target geographies are typically selected on the combined basis of cost minimization and service delivery level maximization (e.g., shipping time to customers). These target geographies (perhaps a 50 to 100 mile radius of an optimal ‘node’) provide the search area for further location and site research and analysis.
Three: Location Screening and Short-listing. At this stage, the stereotypical process of elimination begins. What locations and sites within the target areas are suitable candidates from workforce, property, infrastructure, and business environment perspectives. This analysis can be an extensive or pragmatic process depending on the size of the search area and the potential to remove obviously unqualified areas early on. The typical flow is a two step screen. First is elimination of areas failing to pass criteria thresholds. Second is a comparative review of remaining locations with the goal to arrive at a shortlist, typically three to four locations. These locations will have qualified buildings and sites that can be thoroughly investigated in the next step.
Four: Field Investigation and Verification. Now it is time to ‘kick the tires’ so to speak. Getting on the ground to see the sites, tour available buildings, get the ‘feel’ of the area and best-fit submarkets, and interview local companies and development partners are essential due diligence activities. These investigations provide critical insights regarding the labor market, business climate and economic development goals of the region, and the costs and feasibility of operation. Understanding what levels of incentives support may be available to help offset start-up and operating costs along with other challenges begins here too. The goal of this step is to provide the decision support to arrive at a preferred and a back-up location.
Five: Negotiated Commitments. Wrapping up the selection process are incentive and real estate commitments specific to the finalist communities and properties. Distribution and warehouse operations do not generally garner significant economic incentives packages, something that should be recognized by the site seeker and stakeholders early in the process. Nevertheless, it makes sense to seek opportunity where possible, factoring in project tax impacts and other potential cost offsets as well.
A Note on Supply Chain Challenges
Supply chains have been undergoing major changes. These dynamics include revamped sourcing strategies, increased demand for customers to minimize delivery times, lengthening inbound shipping times due to port congestion, and escalating freight costs. Consequently, many companies are evaluating their warehousing networks. A network optimization analysis will address the following questions:
- How many warehouses are needed?
- What product mix should they have?
- What should be their capacity?
- Which network minimizes freight costs and maximizes service delivery to customers?
- What are the overall business costs for each network scenario?
- What is the degree of improvement compared to the existing network?
- What capital costs will be required to add or reduce warehouses?
- Should shipping modes/volumes be changed?
- What, if any, alternatives should be utilized versus existing seaports?
- If a new warehouse is required, what should be the geographic search region?
- When should any network change be implemented?
- Should any warehouse operations be outsourced?
Essentially, several logical scenarios are identified. Each scenario is then contrasted against the current network. A decision is then made on the best network model looking into the future. In the end, the overriding considerations boil down to costs (greater inventory in more warehouses) versus service levels to customers. Companies employ any number of network optimization tools to conduct such analyses. Given rapidly changing supply chain dynamics, it is a good idea to revisit existing warehousing network every few years.
Trade-offs and Choice Points
Perhaps the biggest challenge today for site selectors is in navigating often stark choice points in finding best fit locations and sites…or at least those that can perform best within a constrained pool of candidates. Below are a few examples our team has seen within the past year:
- Workforce vs. Building-Site Availability: As sites proximate to the needed workforce are becoming increasingly scarce in many markets, developers head farther afield within a region to find properties for industrial development. The key question is: where is the inflection point for commuting? We find for a typical warehouse-distribution workforce profile, 20 to 30 minutes is the maximum tolerable commute. A better qualified building ‘too far out’ relative to its labor shed may lose out to a less desirable property, more proximate to a prime labor source in a competing market.
- Timing of Building Delivery vs. Desired Start-date of Operations: How tolerant is the company in delaying the start-up date, if in the ideal location, it will take an additional six months to start operations? What alternative short-term solutions might be available to the company that might mitigate the delay? Site selection should be based on the long view.
- Higher compensation and rewards vs. tolerance of employee ramp-up and turnover challenges: Some employers are willing to absorb higher turnover by offering pay and benefits below market norms, but there is a hidden cost in this tactic per continual recruiting and training investments plus risking a negative reputation in the local job market.
Perspectives for Site Seekers and Economic Developers
We wrap up with some insights from our distribution sector location projects for the benefit of site seekers, economic developers, and real estate developers whose responsibilities might include recruiting logistics-related businesses to their markets.
Know your Limits: Many markets are at the tipping point of being able to accommodate much more big box development. Out of the norm solutions will be increasingly necessary. Accepting a less optimal transportation solution to the benefit of workforce quality and availability should be heavily weighed in the ultimate decision. Economic developers are starting to recognize their own limits too in attracting this type of investment.
Take the Road Less Traveled: Decentralizing/de-densifying warehouse site selection away from the prime interstate corridors, perhaps considering alternative four-lane or high capacity two-lane highway access, plus increasing use of rail.
Go Urban/Not Rural: Urban site selection, such as former industrial brownfield or former retail shopping center sites, is gaining momentum in some parts of the U.S. Development and leasing costs tend to be higher, and labor costs may be too, but elements such as high population density and potentially transit-rich infrastructure provide solid indicators of sustainability both from a workforce perspective and an environmental perspective.
Workforce Development Partnerships with Employers and Economic Developers: Many areas and companies are recognizing that working together to find solutions to the unprecedented tight labor markets helps a lot. An encouraging trend we have seen in several areas are community college customized training and certifications for logistics-distribution companies, at no charge to students. Such programs encourage workforce recruitment, but also help enhance career-building interests in students to develop a logistics career – transforming the idea of working in a field that could be perceived as less exciting and rewarding. This approach would comprise the first steppingstone in building a career pathway in the supply chain sector.
It is never easy to find the right site in any location selection undertaking. Warehouse-distribution site selection is perhaps less challenging than siting for complex and advanced manufacturing requiring mega-sites or sophisticated technology centers, however, site and workforce shortages are ubiquitous to all. What is distinctive about the warehouse-distribution sector is the proportion of operating costs driven by transportation and corresponding focus of center of market (and supplier) optimization. This imperative results in, what seems at times, a lemming effect where too many companies are seeking the same geographic solutions, creating major labor market and site capacity challenges.