Download How changing supply chains impacts location choices

Corporate Real Estate Journal Volume 4 Number 3
How changing supply chains impacts location
choices
René Buck
Received (in revised form): 13th January, 2015
Buck Consultants International, P.O. Box 1456, 6501 BL, Nijmegen, The Netherlands
E-mail: [email protected]
René Buck is founder and CEO of Buck
Consultants International. René has academic
degrees in economic geography (cum laude)
and urban planning/real estate from the
University of Nijmegen, The Netherlands. Buck
Consultants International advises corporations
on supply chain optimisation, location choices
and corporate real estate. The firm employs 60
professionals in offices located in Nijmegen, the
Hague (The Netherlands), London, Paris,
Brussels, Frankfurt, Chicago and Shanghai.
René Buck is a research fellow at the Amsterdam
School of Real Estate.
Abstract
Supply chain strategies determine the number,
size, activities and location profile of distribution
centres as 80 per cent of the value chain’s life-cycle
costs are locked in at the start with the footprint of
distribution centres (and production plants). The
direct relationship between supply chain strategy
and location choices also means that location
choices have a direct impact on the three drivers of
shareholder value: growing rev­enues (due to geographic expansion), costs and capital deployment.
The author presents a proven location decision tool
(the cost-quality-risk model), in which all relevant
cost factors, quality of the business environment
factors and risk factors are included.
Keywords: supply chain, supply chain
strategy, location decision tool, location
choice,
footprint,
cost-quality-risk
model
SUPPLY CHAIN STRATEGIES ARE
DRIVEN BY BUSINESS STRATEGIES
According to the Council of Logistics
Management, supply chain management
(SCM) can be defined as the process of plan­
ning, implementing and controlling the effi­
cient and effective flow and storage of goods,
services and related information from the
point of consumption for the purpose of
conforming to customers’ requirements. In
other words, SCM optimises the flow of
products, services and related information
from source to customer. As shown in
Figure 1, SCM can contribute to the three
drivers of shareholder value: growing rev­
enues, keeping costs down and minimising
capital deployed. This substantial impact on
shareholder value has made SCM a priority
boardroom issue. Figure 2 shows the results
of an example of the benefits of optimising a
supply chain.
The supply chain strategy of a firm depends
on the customer service strategy (channel
selection, service offerings etc), which in turn
is dependent on the business strategy of the
firm. In general there are three different busi­
ness strategy focuses, while it is acknowledged
that successful firms have ingredients from all
three: product leadership, operational excel­
lence and customer intimacy. Table 1 shows
that each of the three typical business strategies
has different supply chain characteristics: prod­
uct leadership asks for agile supply chains,
operational excellence demands lean supply
René Buck
Corporate Real Estate Journal
Vol. 4 No. 3, pp. 223–229
© Henry Stewart Publications,
2043–9148
Page 223
How changing supply chains impacts location choices
Figure 1 Relationship between supply chain management and shareholder value
Table 1: How business strategies drive the supply chain strategy
Product leadership
Operational excellence
Customers’ perspective
• ‘They’re the most innovative’
• ‘Constantly renewing and creative’
• ‘Always on the leading edge’
Internal perspective
•F
ocus on continually introducing
new products into the marketplace
• ‘Product is king’
Supply chain characteristics
• Short pipeline
•F
ocus on eliminating tiers from the
chain
Customers’ perspective
• ‘A great price’
• ‘A no-hassle firm’
• ‘They never make mistakes’
Internal perspective
• Focus on cost and quality
• ‘Process is king’
Agile
Lean
Customer intimacy
Customers’ perspective
• ‘Their services are unique’
• ‘Exactly what I need’
• ‘They’re very responsive’
Internal perspective
• Focus on identifying, understanding
and serving customers
• ‘Customer is king’
Supply chain characteristics
Supply chain characteristics
• Robust
• Flexible
• Capable of dealing with high • Individualised solutions
volumes
• Linked to customer process
• Focus on cost
Responsive
Source: Buck Consultants International
chains, while customer intimacy leads to
responsive supply chain set-ups.
Different supply chain set-ups
Within a supply chain strategy the focus
should be on the strategic network design.
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It is ­estimated that 80 per cent of the value
chain’s life-cycle costs are locked in at the
start. In other words, the majority of the
supply chain costs depend on the network
of production, inventory and distribution
locations, not on pure transportation
Buck
Figure 2 Case study of an FMCG company
Figure 3 Case profile of Medtech
costs. In the network design a company
has various basic supply chain strat­egies to
service a certain geography. In Figure 3
the case study of a medical technology
firm is outlined. European coverage can
be achieved in one of three ways (see also
Figure 4):
•• European distribution centre (EDC) struc­
ture: one central DC (pictured in Figure 3);
•• bulk distribution centre (BDC) structure:
bulk distribution structure;
•• regional distribution centre (RDC) struc­
ture: delivering to European customers
out of three regional DCs.
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How changing supply chains impacts location choices
Figure 4 Different supply chain configurations
BDC, bulk distribution centre; EDC, European distribution centre; RDC, regional distribution centre
Table 2: Distribution drivers for centralisation versus decentralisation
Central execution
Decentralised solution
Low
Low
Low
Low
High
High
High
High
High
High
High
High
Low
Low
Low
Low
Local market volume/local SKUs
Ability to forecast accurately
Required market responsiveness
Transport intensity
Product value density
Labour intensity
Number of global suppliers
Importance of consistent quality
Source: Buck Consultants International
The choice of a centralised solution or a
more decentralised solution depends on
­various factors, as illustrated in Table 2. The
dynamics that impact the supply chain of
firms are numerous and include:
•• rapidly and unpredictably changing markets;
•• a shift from mass markets to fragmented
niche markets;
•• increasing opportunities in e-com­merce;
•• ever-shortening product life cycles;
•• growing pressure on the financial impact
of supply chain performance;
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•• continuous pressure to squeeze waste (both
time and cost) out of the supply process;
•• SCM becoming ‘core business’.
THE CROSS-INDUSTRY
CONCLUSION: ALL COMPANIES
THRIVE ON MORE FLEXIBLE,
TRANSPARENT AND COST-EFFICIENT
SUPPLY CHAINS, TAILORED TO EACH
PRODUCT CATEGORY
From the above it has become clear that the
supply chain strategy and accordingly the
supply chain design define the number, size,
Buck
Table 3: Listing of relevant location factors for a new distribution centre
Location categories
Relative weight
Location factors
Relative weight
Cost factors
1 Cost of labour
In US$
2 Transport cost
In US$
1.1 Job title A
1.2 Job title B
1.3 Job title C
2.1 Inbound transport costs; from (air)port to
distribution centre (DC)
2.2 Outbound transport costs; from (air)port
to DC
3.1 DC rental costs (+ service charges)
3.2 Land costs
3.3 Building costs
3.4 Costs for utilities infrastructure
3.5 Real estate taxes
4.1 Inventory costs
5.1 Capital grants
5.2 Employment incentives
5.3 Training grants
5.4 Other incentives
In US$
In US$
In US$
In US$
A1 Availability of third party logistics service
providers (3PLs)
A2 Distance to international highway networks
A3 Distance to international airport/seaport
A4 Distance to international cargo hub
A5 Distance to customers
B1 Availability of logistics personnel
B2 Productivity and loyalty
B3 Unemployment
B4 Multilingual skills
C1 Time to obtain licences/rulings
C2 Flexibility and business orientation customs
D1 English language speaking skills
D2 Other language speaking skills
E1 Working schedule flexibility
E2 Hiring & firing regulations
E3 Turnover of labour
E4 Works council involvement
F1 Availability of pre-built facilities
F2 Availability of suitable land pots
F3 Building permits/timing
G1 Corporate tax rate
G2 Ease of doing business
G3 Quality and reliability of telecommunications
... %
... %
... %
... %
... %
A1 Government stability/democracy
A2 Geopolitical conflicts
A3 (Tax) policy consistency
A4 Immigration policy
A5 Strikes
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
(Continued)
3 Warehouse costs
In US$
4 Cost of capital
In US$
5 Investment
In US$
incentives and grants
Quality factors
A Infrastructure &
accessibility
... %
B Labour
characteristics
... %
C Customs
... %
D Language skills
... %
E Labour regulations . . . %
F Facility & sites
... %
G Business climate
... %
In US$
In US$
In US$
In US$
In US$
In US$
In US$
In US$
In US$
In US$
In US$
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
... %
100%
Risk factors
A Political risks
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How changing supply chains impacts location choices
Table 3: Continued
Location categories
Relative weight
B Economic risks
C Financial risks
D Legal risks
E Transparency risks
F Security risks
G Natural disaster
risks
Source: © Buck Consultants International
Figure 5 Cost-quality-risk matrix
© Buck Consultants International
Page 228
Location factors
Relative weight
B1 Development economy
B2 Inflation
B3 Budget balance
C1 Financial risk rating
C2 Currency convertibility
C3 Exchange rate stability
C4 Total (foreign) debt
C5 Banking system
D1 Permits
D2 Breach of contracts
E1 Corruption
E2 Bureaucracy
E3 Ethical behaviour of firms
F1 Religious & ethnic tensions
F2 Terrorism
F3 Armed conflict
F4 (Organised) crime
F5 Social unrest
G1 Climatic catastrophes
G2 Hydrological catastrophes
G3 Meteorological events
G4 Geophysical events
G5 Health hazards/pandemics
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Low/medium/high
Buck
activities and (types) of locations. In this way
the corporate real estate and site selection
strategy is aligned with the company’s busi­
ness and supply chain strategy.
Location decision
The next question is how to make the best
location decision. The Buck Consultants
International location decision model
focuses on three types of factors:
•• cost factors: all factors that have a cost value
and can be expressed in dollars, euros,
British pounds, yen or any other
currency;
•• quality factors: all factors that determine
the quality of the business environment
for a specific project;
•• risk factors: factors outside the hands of the
investor/end user that determine the risk
profile.
Table 3 shows a listing of all cost, quality
and risk factors that could be included in a
site selection study for a DC. Cost factors are
shown in US$, quality factors are assessed by
all locations using a scale from 1 (very poor)
to 5 (excellent), while risk factors have three
scores (low/medium/high). As shown in
Figure 5, the results are brought together in
a cost-quality matrix, in which the upper
right cell is the ideal combination of low
costs and high quality of the business
environment.
CONCLUSIONS
This paper has shown how business strate­
gies give direction to the supply chain strat­
egies and how a chosen supply chain strategy
determines the number, size, activities and
location profile of DCs. Eighty per cent of
the value chain’s life-cycle costs are locked
in at the start with the footprint of DCs (and
production plants). In addition to the foot­
print, a company locks into local labour
pools, local real estate markets, local trans­
portation infrastructure etc. It makes the
location choice regarding a DC even more
important as there is a direct link to the
three drivers of shareholder value: growing
rev­
enues (due to geographic expansion),
costs and capital deployed. The location
decision can be well prepared by using a
cost-quality-risk model in which all relevant
cost factors, quality of the business environ­
ment factors and risk factors are brought
together in a cost-quality-risk matrix, which
easily shows the trade-off between the three
categories.
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