Archive for the ‘Supply Chain’ Category

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Flexibility and Redundancy in the Supply Chain

Monday, September 10th, 2012

By Rob Wheeler, Vice President

As I’m writing this blog post a hurricane has just pounded away at the city of New Orleans. This weather event follows a drought this year so severe that barge traffic on the Mississippi River actually had to be halted. Both of these events are reminders that flexibility and redundancy are essential ingredients to successful supply chain management.

Flexibility
Flexibility in the supply chain means being able to respond quickly and effectively to forces that impact the chain. Shifting from barge to rail, or to Port Charleston instead of New Orleans are current examples. Not as current, but still applicable, tenant rights in a lease. Termination and expansion rights negotiated into a lease allow for flexibility to contract or to grow as the business changes.

Redundancy
Redundancy is about having options when a system goes down, and being able to shift business between these areas as seamlessly as possible. It may make fiscal sense to operate from a single location, but having a way for the business to continue when things get rough is a necessity. From a real estate perspective this may mean blending how you work. Your organization might always lease warehouses and operate them in house, but for redundancy maybe a third-party warehouse is a good practice.

The Industrial Services Group at Cresa can help you evaluate the how real estate is impacting the flexibility and redundancy of your supply chain, helping limit the costs to business when it’s anything but business as usual.

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The Industrial Recovery: A Closer Look

Wednesday, April 4th, 2012

By Rob Wheeler, Vice President

In the last couple of months, I have read articles and heard first hand observations from real estate professionals in the industrial sector that the market is back.  Some have even stated that we are at pre-recession levels, and everything is looking up.   While the level of recovery is still up for debate, there is no doubt that the market has turned for the better.   There has definitely been a pickup in industrial leasing activity across the board in 2011 and the beginning of 2012.

One of the interesting things about the positive absorption that is taking place is the type of space that has been in high demand.  The largest demand has been for the “big box” space—warehouse spaces in excess of 500,000 square feet.  This demand has primarily been driven by large multi-national corporations.  Retailers have looked to streamline their e-commerce platform within their existing supply chain.  Other large organizations have started executing plans to consolidate into larger facilities to lower operating costs.  Because warehouses of this size were red hot during 2011, especially ones in port areas and densely populated markets, markets are tightening when looking at absorption from a square foot perspective.  For example, the Inland Empire in California has an industrial vacancy rate in the seven percent range.  At vacancy rates this low, speculative building of “big box” space cannot be far behind.

One thing I suggest you consider when you read about all of the positive absorption numbers is that not all tenants are “big box” tenants.  While the number of “big box” spaces available is dwindling, there are still ample smaller spaces on the market.   A quick survey of my home market, Chicago, shows these facts.   While the entire Chicago market shows only 19 existing class A and B industrial spaces over 500,000 square feet, there are over 300 choices at 100,000 square feet.  If you were just listening to the landlord side of the equation, you would hear that space is becoming scarce, and rents are going up.  If you need 500,000 square feet that may be the case, but for the smaller user it probably isn’t.

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What size is the right size?

Wednesday, February 15th, 2012

By Rob Wheeler, Vice President

When considering warehousing, what size is the right size?

One of the questions I’m continually asked by customers and colleagues alike is: what are the trends in warehousing as it relates to network design?  That is, are things trending toward fewer larger warehouses in a distribution network or toward having small regional warehouses?   My answer to this question is….it depends.

To understand how networks are designed you need to understand the business of the company that’s designing it.  The major expense of any supply chain network is always transportation, but next in line is inventory.  So, how expensive each piece of inventory is will drive how the network is designed.  The general rule is, the more warehouses you have the more inventory you will carry.

Here are a couple of examples to illustrate this fact.

Example 1 - A maintenance, repair, and operating distributor carries thousands of different products, mostly of low value.  Their go-to-market strategy is that they will have the product you need in stock, and it will be delivered next day.  Because it is a very inventory-intensive business model, spreading that inventory out over a broadly arrayed distribution network makes sense.  Their model is to get the product from vendors and warehouses close to the customer so that they can deliver it next day with minimal cost.  In fact, the company’s distribution network was designed by a parcel delivery service to cover the maximum amount of the population via overnight ground service.

Example 2 – A medical device company has very high-value products.  Each piece of product can be worth thousands of dollars.  Their key driver is to reduce inventory as much as possible while maintaining service.  Because of the value of the product, reducing to a single centrally located warehouse makes sense.  The reduction in inventory will offset the expense of shipping the product via overnight air.  In this customer’s case, they located almost all of their product across the runway from an air parcel carrier’s main sort hub.   This allowed them to eliminate as much inventory as possible by allowing them to extend the shipping window during the day as much as possible.

Both examples above have caveats attached.  In Example 1 the company has a master distribution center that carries slow moving or high value goods, helping them eliminate this inventory from the regional warehouses.  In Example 2 the company utilizes third party warehouses on both the east and west coast to hold limited inventory in case of emergency.

The bottom line is that there is a right solution for every company.  But that solution depends on a number of factors.  The Industrial Services team at Cresa can help you work through the different scenarios to find the right solution for your business.

 

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The Industrial Relocation Checklist

Wednesday, December 21st, 2011

By Sean Hoehn, Managing Principal, Industrial

Relocating your industrial facilities can be a challenging task and requires careful planning. It is important that equipment does not get damaged during the move, that the relocation is completed on time to limit disruption to operations, and that it is completed within budget.

It is important to research companies that specialize in the transportation of racking and machinery well in advance of the relocation. Be sure to choose a reputable mover, and do not base your decision on pricing alone; the latter can end up costing you more in the end. Try to find a moving company that can provide you turnkey services; it is more manageable, and less stressful, to deal with one project manager as opposed to dealing with several companies with different contacts for different services.

Prepare rough floor plans of the new site outlining where the machinery and equipment should go. Once you have a shortlist of moving companies to provide you with a final quote, have them perform site visits with you in your existing and future home and go over the rough floor plans.

Speak to your distribution or production manager regarding any possible down time and stock requirements, as you do not want your move to affect your relationships with your customers. You may want to consider over-holding machinery in your current facility for a short period and perform a staged relocation by moving certain lines at the most appropriate time.

Someone in your organization should create a timetable for coordinating services with your local providers. A common mistake when planning a relocation is forgetting a services checklist for things like draining of oil, electrical and mechanical disconnects and reconnects, or any other requirement that might apply to your operations.

Obtain budget approval from your associates and make sure they know what moving company you have chosen. Explain the plan to ensure both internal and external stakeholders are comfortable with the relocation and timetable.

Cresa and its project management team are well positioned to facilitate your relocation. Our integrated approach enables us to take you through the entire real estate process from strategy development, surveys, market opportunities, negotiations with landlords and renovations/relocations.

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The Onshoring Phenomenon

Wednesday, October 26th, 2011

By Rob Wheeler, Vice President

Earlier this month, I was a panelist at the Metro Denver Site Selection Conference.  The topic of our panel was onshoring, or bringing jobs that were once shifted overseas back to the United States.  Each panelist had dealt with this topic sometime in the past 18 months from an industrial and service perspective.

Manufacturers have always chased cheap labor and low costs wherever it appears.  For decades U.S. based firms have looked overseas for low-cost regional sourcing, locating manufacturing and production in countries with strong labor forces, low wage rates, and a favorable business climate.  This trend does persist, and as companies continue to increase the amount of contract manufacturing being utilized, the trend won’t go away.  But more and more companies are at least considering whether or not it is right to shift overseas and, more noticeably, whether some operations should be brought back to the United States.

There are many reasons that companies have begun to realize that shifting manufacturing operations overseas might not be as advantageous as it was just a few short years ago.  Cost of operations is the main driving factor.  Wage rates that were once substantially less in India and China have seen sharp increases as these economies have had tremendous economic growth.    The other factor is the increase in the cost of fuel.  As fuel prices increase, the cost of shipping something halfway around the world goes continually higher.  This, coupled with excessively long lead times and decreased flexibility, put constraints on the supply chain that many companies are deciding just isn’t worth marginal gains in manufacturing cost.   Other issues that are driving a closer look at bringing manufacturing back to the U.S. are control of intellectual capital, a depressed dollar, and job incentives coming out of Washington and the states.   Some studies have shown that in just a few short years the total actual cost of producing and transporting goods from overseas to the states for distribution and consumption will surpass the total actual cost of manufacturing the product locally.

What does all of this mean for industrial real estate?  Developers have done very little speculative building in the past three years.  Positive absorption is beginning to occur, signaling a tighter industrial real estate market going forward.   If manufacturing begins to flow back to the states on a large scale, which some experts believe will happen, it will drive up rents to a level that kicks off a new round of speculative development.

CresaPartners has the capability to evaluate the supply chain from start to finish, including offshore manufacturing and its impact on supply chain costs.  If you would like to discuss the onshoring phenomenon or any other issue related to industrial real estate and supply chain operations, feel free to contact me at rwheeler@cresapartners.com.

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Supply Chain and the Triple Bottom Line

Wednesday, August 24th, 2011

By Rob Wheeler, Vice President

Sustainability continues to be an important issue to corporations.  Eighty-one percent of Fortune 500 companies now have some type of corporate responsibility report or CR statement on their website.  In the last four decades we have moved from energy audits, to environmental audits, to sustainability assessments.  These various audits and assessments have now evolved into what is being termed the “Triple Bottom Line.”

The triple bottom line involves thinking not just of corporate profit but also along three pillars of responsibility.  Along with economic concerns, a company should also consider the ecological and societal impact of their decisions.

Quantifiable environmental impacts include water utilization, consumption of finite resources, energy use, and pollution emitted.  Societal issues include the health and safety of the employees and visitors, diversity, education, and community involvement.

What does this have to do with supply chain?  A lot, actually.  The supply chain can have a very big impact on the triple bottom line.  Through an effective corporate sustainability assessment of the chain, decisions can be made to improve the organization in all three aspects of the Triple Bottom Line.

Most people think of sustainability in environmental terms.  Think about the various decisions that can be made in the supply chain to affect the environmental impact of the organization.  While a network optimization may be geared at lowering overall transportation cost, it might also reduce overall resources and energy utilized.  Fewer miles driven means fewer gallons of diesel fuel burned.  There could also be a greater emphasis on intermodal transportation to lessen the use of fossil fuels.  What about the real estate?  Is there a way to incorporate alternative energy methods such as solar energy into a warehouse?  All of these considerations typically help the monetary bottom line, but they also help the bottom line of the planet.

The people side of the Triple Bottom Line is a little more interesting.  To sustain a business it pays to keep quality employees happy and healthy.  It has been proven time and again that maintaining this positive work environment will lead to greater profits in the long term.  What does this have to do with industrial real estate?  There are ways in which choosing an industrial facility impacts the workforce.  Does the warehouse let in natural light?  It is truly convenient for the disabled?  These are factors to consider, and they may lead to unexpected productivity gains.

Corporate responsibility and measuring the Triple Bottom Line can also lead to gains on the top line of the income statement as well.  Large organizations, especially large retailers, have begun to include various social responsibility measures into their criteria for measuring vendors.  Better shelf space, and possibly better business terms, could be awarded for doing what is right.  This should be a definite incentive to ramp up corporate sustainability measurements.

From an initial supply chain assessment, to a full organizational sustainability plan, the Industrial/Supply Chain team at CresaPartners can help your organization toward success in all three pillars of the Triple Bottom Line.   Let us know how
we can help.

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Foreign Trade Zones

Wednesday, June 22nd, 2011

By Rob Wheeler, Vice President       

If you have been around the world of industrial real estate and supply chain management long enough, you have come across the term Foreign Trade Zone or FTZ.  We hear the term often, but at the same time there are questions about what it is, how it works, and what savings can be achieved through the use of a FTZ.

Foreign Trade Zones are areas in the United States that are in or adjacent to U.S. Ports of Entry and are under the supervision of the U.S. Customs Service.  These areas allow companies to operate as though they are outside the United States.   Merchandise can be brought into the zone and held without being subject to normal Customs Duties and Taxes.  If manufacturing occurs in a FTZ, the duties and taxes are applied to the product as though U.S. based added value (think domestic materials, labor, overhead, profit) never happened.  In other words, the manufactured product is treated as though it’s just the parts, not the sum of the parts that has been assembled.  

Although overseen by the U.S. Customs Service, a Foreign Trade Zone is actually a local community development.  FTZs are typically an offshoot of an economic development corporation (EDC) or port authority that is trying to use the FTZ status to attract industrial development.  Corporations going through the industrial site selection process may see Foreign Trade Zone status as a “must have” if they import a large quantity of goods.

 In most cases, to obtain the FTZ perks a company has to locate to a General Purpose Zone.  This zone is typically land owned and developed by a port or economic development entity, or possibly an institutional development group that has partnered with the local EDC.  In some cases an organization might have enough business that a subzone is created just for that building.

An FTZ is a hot destination because of the savings it offers to the tenant.  Not only are there elimination of duties and taxes, but being in an FTZ also allows a company to file for entries on a Weekly Entry basis, not a per shipment charge, resulting in significant savings.    With the maximum dollar amount for entry on a per shipment basis being $485 for shipments valued at $230,952 and higher, a little math shows the dramatic impact of a Foreign Trade Zone.

EXAMPLE: 15 shipments per week, each with a value of over $230,952, would amount to a merchandise processing fee of $7,275 ($485 x 15) per week. If this number is annualized the amount is $378,300 (52 x $7,275) per year.

Companies in a Foreign-Trade Zone may take advantage of the Weekly Entry procedure. In the case of the above example, Weekly Entry would provide for one Entry per week. For example: the 15 ($230,952) shipments per week would be filed as a single shipment of $3,464,280 each week. The merchandise processing fee would amount to the maximum of $485 total for the week. If this fee is annualized utilizing Weekly Entry it is a total of only $25,220 yearly. In this example Weekly Entry provides a savings of $353,080 per year. The savings can be more or less depending on the number of shipments received during the year.

As you can see being in a Foreign Trade Zone can have a significant impact on budget of the supply chain department.  There are potentially significant savings to be had.  Is locating in a Foreign Trade Zone right for you?  The Industrial / Supply Chain team at CresaPartners has the experience to help your organization walk through the decision making process.

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Rising Fuel Costs, Rising Concerns in Wake of Japan Disaster

Wednesday, April 13th, 2011

Implications for Supply Chain Management

By Rob Wheeler, Vice President

Recently, the Aberdeen Group sponsored a Supply Chain Management Summit, where supply chain professionals discussed current trends and developments in the supply chain world.  There were several different topics discussed, but two topics that kept coming up during presentations and sidebar conversations were the cost of fuel and the situation in Japan.  For this blog post, I will touch on both.

Rising Fuel Costs                                       

Network optimization is a term that you hear often when a supply chain group and its real estate contemporaries combine efforts.  Together, they ensure a warehouse or manufacturing facility is in the right place, with the right distribution footprint and inventory throughput.  Network models are based on fuel costs being within a certain set of pricing parameters; therefore, when fuel costs climb, a new network model will need to be designed and executed to make a company as efficient as possible.  Many companies are facing this issue right now, as fuel prices seem destined for new all-time highs.

Speakers at the Supply Chain Management Summit talked about $5 a gallon diesel fuel as a tipping point, whereas it becomes more economically feasible to acquire additional locations to lower the cost of transportation, rather than paying more for transportation to lower the cost of real estate.  The cost of diesel fuel in the United States averaged $3.98 per gallon on April 4, 2011, and it continues to trend upward.  Could this mean that fuel -related positive absorption in industrial real estate is around the corner?  Possibly.  My belief is if fuel prices remain high long term, expiring leases for major facilities may be replaced by leases for multiple smaller facilities as organizations try to get closer to their end customer.

Emergency Preparedness

The other topic that came up repeatedly was the tragic earthquake and tsunami in Japan.  Whether or not it directly affected the supply of raw materials to a particular company (and for a surprising number attending it did), it made organizations stop and think about their preparedness in the event a disaster strikes.

From a facilities standpoint, the idea of emergency preparedness involves IT systems and redundancy.  In a perfect world, companies need to be able to flip the switch and shift work from one location to another with minimal impact to the operation.  They also need to have multiple, approved vendors for mission critical raw materials. 

The types of business continuity plans vary from organization to organization, but having one in place came to the forefront for many supply chain professionals after the disaster in Japan unfolded.

 As a real estate consultant, CresaPartners can help you put the real estate pieces into any supply chain- related decision.  Whether it is network modeling to save on fuel costs, or putting together a plan to mitigate the effects of a disaster, we can help you connect the dots and provide valuable insights into the actual cost of these increasingly important plans.

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What You Need to Consider about 3PL

Wednesday, February 9th, 2011

By Rob Wheeler, Vice President

For people outside the supply chain or logistics industry, the term “third party logistics” or “3PL” is probably vaguely familiar but not really understood.  Understanding what 3PL companies do and how they do it may provide some insight into different real estate decisions these firms make.

Third Party Logistics companies started back in the ‘70s and ‘80s, when companies began outsourcing what they deemed non-core competencies of their business.  This meant that unless they were in the business of moving goods, managing the corresponding transportation and warehousing function was increasingly seen as a non-core competency.

As the third party logistics industry has grown and evolved, various companies have concentrated on different aspects of the logistics industry.  Some 3PLs focus on warehousing, some on transportation management, and others on moving freight.  However, all of these companies look to integrate into an organization’s infrastructure, not necessarily supplant it. 

Why does a real estate director bring up 3PLs?  The access point for most companies to enter the 3PL world is the warehousing component.  They need additional space and don’t want to take on the lease or employees themselves, so they look outside their organization.  In the near term, it makes sense, is more convenient, and provides more flexibility to the organization.  But is it the best decision?  Here are some things to consider.

-A contract with a 3PL is typically of much shorter duration than an industrial lease.  It could be a two- to three-year operational agreement as opposed to a five-, seven-, or even 10-year warehouse lease.  3PLs typically don’t allow that warehouse space to be vacant.  They instead work with landlords to lease space that corresponds to the operating agreement, signing a two- to three-year lease as well.  Because the financial commitment of a longer lease provides greater return to a landlord, the net effective rent of the shorter-term lease will be higher.

-Rents landlords offer to potential tenants vary greatly based on the credit-worthiness of the tenant.  In many cases, the company contracting with the 3PL will have better credit than the 3PL itself and thus could be offered better deal terms than the 3PL would.  The 3PL will most likely pass through this higher rental rate and include a markup. 

-What if you are unhappy with the service that the 3PL is providing and you terminate a contract with the 3PL?  In many cases, the 3PL has the right to assign the lease back to its customer.  This means the customer will be stuck with the higher rental rate lease that the 3PL negotiated.

-What if something goes wrong or plans change?  Having control of the warehouse space can be very important.  Consider that should plans change, what’s the incentive of the 3PL to sublease the space?  Can you get to your goods if the 3PL goes bankrupt? 

At CresaPartners, we can help your organization walk through the 3PL contracting process by advising on all real estate matters.  It may be worth the extra dollars to have 3PLs lease the warehouse themselves and bury that cost into the operating contract.  It could be a better decision to separate the operations and real estate function to have more direct control over the process.  Our team of Industrial/Supply Chain experts can provide you with the information needed to make the right decision for your company.

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Truck Drivers Wanted: How a Shortage can Impact Real Estate

Wednesday, December 8th, 2010

By Rob Wheeler

An issue that I have been hearing about on a more frequent basis from individuals in the Supply Chain management profession is the pending shortage of truck drivers.  The Council of Supply Chain Management is on record as stating the country will need to hire 200,000 drivers in 2011.  I’ve read articles that state the shortage will be up to 500,000 drivers in 2012.

There are many reasons given for why such a shortage is taking place.  New safety standards such as the U.S. Department of Transportation-sponsored CSA 2010 (Comprehensive Safety Analysis) and an aging truck driver population are the most frequent explanations.  These factors, coupled with normal growth in freight traffic, make sense.  How this shortage trickles through the economy will be interesting to see.  In the near term companies are expecting to pay more for raw materials, commodities, and transportation services as a result of the shortage.  This will ultimately lead to higher prices on the store shelves as well.

What this means for Supply Chain managers is that a new variable has to be considered as part of their overall Supply Chain planning and execution.  Some things to consider:

-          How will a truck driver shortage impact transportation spending?

-          If there are private fleet needs, will labor be available to maintain operations?

-          Will more safety stock be necessary within the Supply Chain to hedge against

potential transportation disruptions?

-          Is inbound transportation spend buried into raw materials cost, and should that be

broken out and renegotiated as independent items?

-          Will a mode shift to air or rail be necessary for some products?

These influences can already be seen in the earnings of rail service providers.  The major Class I railroads are reporting record volumes and profits.  Major investments are being made into the intermodal service offerings they provide customers, with a shift toward regional intermodal service.

As you read through the questions and consider what is going on at the railroads you can begin to see how a truck driver shortage, if long-lived, will impact real estate decisions and could supplant fuel prices as having the greatest impact on operational costs.

Perhaps companies will consolidate into fewer locations in cities with larger working populations where the risk of a disruption in transportation is mitigated.  Railroads could continue to see increases in traffic, so an organization might look to be closer to intermodal facilities to cut down on drayage costs.  One thing is for certain, we will begin to hear more about driver shortages and potential disruptions to commerce in the very near future.  Have you considered this in your strategic planning today?

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