Truckloads of cash Featured

7:00pm EDT December 26, 2008

There are two schools of thought on distribution center trends. On one hand, those favoring more small distribution centers argue that a number of facilities spread across the country are the ideal model. Those favoring fewer large distribution centers believe that one million square feet and above is the best strategy to pursue.

Lindsey Stieve, CCIM, an associate at Colliers Turley Martin Tucker, stands firmly in the corner of fewer, larger distribution centers pointing out that million-square-foot facilities are becoming the norm.

“There are three factors driving the shift from many smaller distribution centers to several larger ones across the country: economies of scale, full truck-load shipments and the ability to reduce inventory levels,” says Stieve.

Smart Business spoke with Stieve about the advantages of large distribution centers, what mistakes to avoid when looking for optimal industrial space and how to go about selecting a quality broker.

How can a large distribution center reduce operating costs through economies of scale?

A large distribution center reduces operating costs significantly. Instead of spreading your labor and equipment costs over 200,000 square feet, you are spreading your costs over a million square feet. These are fixed costs for labor, warehouse management systems, fork trucks and general distribution center equipment. As square footage increases, cost per unit decreases. Third party logistic firms that we have dealt with in our market believe maximum operational economies are achieved at one million square feet.

How can utilizing large warehouses help reduce inventory?

Let’s use a large consumer products company as an example. By keeping all of its lines of product (shampoo, laundry detergent, deodorant, etc.) in one facility, it can maximize full truckload shipments, which greatly reduces transportation costs.

Inventory is capital. By reducing inventory a company reduces its capital costs. By housing full product lines under one roof, a company effectively and efficiently reduces inventory. Efficiency is achieved by having all product lines in one building and full trucks can be on the road within hours. If the inventory is spread across the country the truck must wait for the orders to come together from the various locations before it can reach the customer.

Also, it is important to note that large retailers — the Wal-Marts, the Costcos — will not accept LTL (less than truckload) shipments from large companies. They want all of their products on one truck at one time. LTL shipments increase transportation costs and paperwork.

How can transportation costs be minimized?

By utilizing full-truckload shipments versus LTL shipments, companies can reduce transportation costs. In addition to driving down transportation costs, using full truckloads saves time and products are delivered directly to the end user. On the other hand, partial-truckload shipments often sit in the LTL facility for extended periods of time waiting for a full order to come together. Not only is time a factor but also the more times a product is handled the greater chance of damage.

What are the biggest mistakes companies make when looking for industrial space, and how can these mistakes be avoided?

As corporations have become increasingly sophisticated, mistakes have been minimized. In today’s market, large companies have a strategic plan in place prior to enlisting the services of a broker or searching for property.

Companies looking for a suitable location for a distribution center should make sure there is a decent labor pool. Once you are there you can’t create labor from surrounding areas if there is not a large enough population to pull from. Also, it is important to evaluate taxes and other costs associated with a location.

How should a company go about selecting a quality broker to help secure optimal industrial space?

The broker should be an industrial real estate expert who specializes in the logistics industry. In the interview process, a broker should be able to fluently discuss operational and real estate issues. You are hiring a broker for his or her expertise. If the broker can’t provide you with the necessary tools to secure an industrial space that meets your supply chain needs, the person is not doing his or her job. A good broker is an expert just as a company is an expert in its industry.

Additionally, it is important that a broker communicates and works well with the company’s team.

LINDSEY STIEVE, CCIM, is an associate at Colliers Turley Martin Tucker. Reach her at (314) 236-5459 or lstieve@ctmt.com.

Lindsey Stieve, CCIM
Associate, Colliers Turley Martin Tucker