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52 Current Dynamics Impacting Facility Location Decisions Freight is dynamic by its very nature. As a result, the context in which the process and drivers outlined above are applied changes over time. Some of the more prominent factors currently affecting freight facility location trends are as follows. 7.1 Changing Role of the Freight Facility Transportation and logistics are dynamic by their very nature. Freight is in motion, and the means of accommodating this motion evolve constantly. Primarily, interviewees noted an ever-increasing emphasis on âgoods in motionâ. This term signifies the supply chain ideal of goods delivered at the moment of need straight from production. Logistics facilities are used for modal transfer, consolidation, deconsolidation, and redirection - not storage - and it results, for example, in more crossdocking, and concern about the fluidity of ports of entry. Distribution centers may be reducing in size for some users, but increasing in number and situating closer to markets. Orders should be filled from goods already on the way, and this will result in smaller static inventories. Technologies to enable this approach will continue to improve. Companies noted that the freight facility has become a key link in goods production, and has acquired the role of final stage manufacturing - conducting customized kitting, assembly, packaging and labeling of goods for local use. This can reduce transportation costs, but also provide the ability to have market level modifications and add value close to the market, point of sale, and consumption. As an example, some retail interviewees noted that as much as 65% of the inventory moving through the distribution center must be assembled as it moves through the facility. This can be very labor intensive and influences the location requirements accordingly. 7.2 Organizational Factors and Comprehensiveness Complicating the approach shown in the preceding chapter, companies approach the location selection process with varying levels of sophistication and integration of functional units. Put another way, in some cases either the real estate department or the logistics department will run the location process, with little input from other portions of the company. In these cases, rent and occupancy might take more precedence in the location selection than would otherwise be the case. Likewise the presence of a specific 3PL partner might dictate a location which otherwise does not meet objective strategic goals. This may reflect the larger corporate structure in many cases. Logistics and supply chain report through operations to the Chief Operating Officer, and real estate may report through finance to the Chief Financial Officer. Each division may have individual performance measurement criteria which do not adequately match combined goals. Integration of the two chains of command may not occur until the Chief Executive Officer is involved, who may or may not review the location decision and compel an optimum result. Increasingly, the total operating costs of the supply chain are forcing a review of the decision making process, ensuring a more holistic approach across large companies. In these cases, competing goals and measures are being replaced with an initiative to minimize total landed cost and preserve future options for change. Even so, many companies still will retain networks whose legacy reflects some internal lack of coordination.
53 7.3 Computer Model Use and Sophistication Interviewees noted both the use and limitations of computer models such as ILOG and CAPS, which optimize logistics costs within performance criteria. These models interactively simulate transportation linkages across modes and can determine the sensitivity of operations cost against changes across the operating environment. They are able to evaluate huge numbers of scenarios, allowing corporations to determine the ideal number, size, and location for distribution centers and cross-dock facilities. However, respondents noted that while these models are precise and can allow for the manipulation of huge amounts of data, they are limited in that they canât accurately represent on-the-ground local details such as traffic or inefficient highway interchanges or transfer points between modes. Additionally, these models are largely static and cannot easily incorporate future changes to the network or its capacity. As an example, a one-hour drive-time analysis for a site on the outskirts of a major metropolitan area will usually show that a truck can travel just as far into and through the city as outward from the city. Anyone who uses this same roadway network during the morning or evening commute might suggest that travel in one direction can be easier in one direction and considerably more difficult in the other. As such, interviewees noted that computer models are powerful, useful, and that their sensitivity is increasing. They are not yet (nor are they likely to be) a practical substitute for local knowledge of actual conditions. Nevertheless, they are widely applied and tend to govern decisions in the initial planning stage, meaning that the large scale design of supply chains is determined by the factors they consider or omit, and the methods they employ. 7.4 Changes in Global Sourcing Interviewees noted that the trend towards freer trade and the corresponding global sourcing of products has likely had the largest single impact on their freight facilities and distribution networks. This has resulted in new growth at and near ports on both the west and the east coast, and has forced the realization that locations in the hinterland have to be strategically located at multi-modal infrastructure and commercial interchanges in order to make intermodal and DC concentrations work. Leading into the current environment, manufacturing in the Pacific Rim coupled with major consumption zones on both American coasts, in the growing Sunbelt and in the Midwest, had forced a reconsideration of logistics networks. Manufacturing in Asia naturally resulted in additional port activity at Pacific ports, particularly in Los Angeles and Long Beach. Distribution networks were then designed to efficiently move these goods across the country and disperse to the consumptions centers of the United States. Increasing volumes and resulting congestion at these ports and risk management by supply chain operators has led to consideration of alternative ports on the west coast or longer waterborne trips to the Gulf and east coast. For example, some traffic now comes to North America in the opposite direction by way of the Suez Canal. This resulted in new expansion in Norfolk and Savannah, which those authorities took particular steps to encourage (such as providing nearby sites for freight distribution companies). Growth of the Gulf and Atlantic ports is expected to continue as the Panama Canal expansion is completed in 2014, as this will allow fast, all-water routes to more major consumption zones. Sourcing decisions in todayâs economic and political environment are in flux. Overseas production seems unlikely to fall away - at least one interviewee speculated that the American transformation to a knowledge economy necessarily results in knowledge workers who demand high-quality, low-cost products from global sources. Nevertheless, the rise of production in locations like Brazil and India suggests diversity, and the
54 Obama administration goals for doubling the volume of American exports combined with a lower US dollar exchange rate could support domestic manufacturing and agriculture production. The growing concern for fuel and carbon costs (explored below) could indicate nearshoring for certain products, and a shortening of some supply chains. For purposes of this research, these issues do not need to be settled (and arenât likely to be for some time â in the words of one respondent, there is âno one trendâ.) Instead, change should be expected as the status quo, and facility usage will follow. 7.5 Fuel Costs and Environmental Factors Starting in the early 2000s, fuel costs grew up to 5-6 times faster than the overall rate of inflation (as measured by the consumer price index). Gasoline and diesel prices peaked in the $4.50 per gallon range, and many truck-reliant freight businesses spent their entire forecasted annual fuel budgets by midway through 2008. Figure 7-1: Fuel Cost Increases Relative to CPI, 1996-2010 (Energy Information Administration, Bureau of Labor Statistics) At about the same time, consumers and state governments began to look more closely at how transportation was impacting the environment at large. In the case of consumers, a push began to try to understand the overall carbon footprint of the good they purchased. Governments â in an attempt to curb both pollution and congestion â began to look at ways to reduce truck trips and miles traveled. Both factors have had an impact on the location selection and distribution network equation. There is a general tradeoff between the cost of having more facilities and the cost of shipping goods longer distances. Put another way, it becomes more efficient to consolidate warehouse and distribution operations when fuel costs are low and the cost to ship goods long distance by truck is relatively inexpensive. However, higher fuel costs have pushed some freight-dependent companies to investigate more dispersed distribution networks, with larger numbers of smaller facilities. These facilities reduce distances from the centers to the final delivery points, which are the most dispersed and truck dependent, and allow consolidated carriage inbound to the DCs by a relatively smaller number of long-haul trucks, or by rail. This method trims transportation costs while boosting facility expenses. During the fuel spike in 2008, supply chain designers are reported to have been considering âUrban Distribution Centersâ in line with this model, which are larger number of smaller footprint facilities situated close to big cities, preferably with high ceilings and high degrees of automation, offering short commutes to labor and short distances to product delivery. - 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CPI Oil Per Barrel Gas Per Gallon Diesel Per Gallon Co st Inc re as e Ind ex ed to 19 96 = 1. 0
55 The same set of behaviors also tends to reduce environmental impacts, because fuel efficiency and carbon efficiency are positively correlated. This is important as the current focus is starting to heavily weight green/carbon factors. According to one respondent, approximately one-third to one-half of his customers are requesting measurement of green and/or carbon footprint data. Rail companies such as BNSF and intermodal operators like JB Hunt now provide their clients with internet based âcarbon calculatorsâ to estimate the impacts of specific shipping decisions, underscoring the fuel consumption and carbon emission advantage of long-haul rail. While a different respondent described customer attitudes to greening as mostly âwait and seeâ, with an influential company like Wal-Mart3 7.6 Network Congestion now expecting carbon reductions from its vendors, the requirement is likely to spread. Interviews confirmed that the effect of carbon monetization on supply chain design would be identical to that of higher fuel prices â but also emphasized that monetization is essential, because then carbon becomes a âreal costâ. Interviewees noted that network congestion for all modes impacts their location decisions. Each mode has at least one identified choke point or bottleneck in the national freight system. Containerized ocean shipping views the southern California ports as a concern. Freight travelling by rail experiences difficulty in major urban areas, at the interface point between Class I railroads, or between Class I railroads and short line carriers. Truck carriers experience difficulty in any number of urban markets. Unfortunately, almost all of the interviewees noted the lack of readily available data specific to congestion in their distribution networks. All have experienced it and understand where it is, but have difficulty using this information in a meaningful way in simulating distribution networks. Real-time highway data on congestion is a growing area of intelligent transportation systems (ITS). As an example, the I-95 Corridor Coalition has been advancing this kind of information for trucking over the past decade. Interviewees also noted an increasing level of competition for capacity between freight and passenger movement on both road and rail infrastructure. 7.7 Competition with Other Development Types Freight users in some cases are prohibited from locating in ideal freight locations either due to land use prohibitions or due to conflicts with surrounding uses. In many cases, land that had previously been used for freight movement has now been converted to commercial, retail, or even residential use. The developable industrial land that remains now is subject to increased limitations due to conflict with the new land uses. One example of this trend is the US Governmentâs decision to expand military and associated operations at the Aberdeen Proving Ground and Ft. Meade in Maryland as a result of BRAC activity. In consequence, land which had previously been used or permitted as warehouse and industrial space along the key East Coast distribution corridor of Interstate 95 will now be converted to office development instead of a freight-related use. The opportunity to implement Urban Distribution Centers â with their clear advantages for fuel and carbon efficiency and truck VMT reduction â is dependent on suitable sites, most likely on Brownfield properties with established but perhaps dormant industrial designation. The risk to such properties from land use conflicts could reduce supply chain performance by social as well as commercial and economic measures. 3 âWal-Mart Unveils Plan to Make Supply Chain Greenerâ, The New York Times, 2/26/10.
