How changing supply chains impacts location choices

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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: rene.buck@bciglobal.com

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 rev enues (due to geo-graphic 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

Corporate Real Estate Journal Vol. 4 No. 3, pp. 223–229 © Henry Stewart Publications, 2043–9148

René Buck

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chains, while customer intimacy leads to responsive supply chain set­ups.

Different supply chain set-ups

Within a supply chain strategy the focus should be on the strategic network design.

It is estimated that 80 per cent of the value chain’s life­cycle 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

Table 1: How business strategies drive the supply chain strategy Product leadership Operational excellence Customer intimacy Customers’ perspective Customers’ perspective Customers’ perspective

• ‘They’re the most innovative’ • ‘Constantly renewing and creative’ • ‘Always on the leading edge’

• ‘A great price’ • ‘A no-hassle firm’ • ‘They never make mistakes’

• ‘Their services are unique’ • ‘Exactly what I need’ • ‘They’re very responsive’

Internal perspective Internal perspective Internal perspective

• Focus on continually introducing new products into the marketplace • ‘Product is king’

• Focus on cost and quality • ‘Process is king’

• Focus on identifying, understanding and serving customers

• ‘Customer is king’

Supply chain characteristics Supply chain characteristics Supply chain characteristics

• Short pipeline

• Focus on eliminating tiers from the chain

• Robust

• Capable of dealing with high volumes

• Focus on cost

• Flexible

• Individualised solutions • Linked to customer process

Agile Lean Responsive

Source: Buck Consultants International

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costs. In the network design a company has various basic supply chain strat egies 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.

Figure 2 Case study of an FMCG company

Figure 3 Case profile of Medtech

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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 e­com merce; •

• ever­shortening product life cycles; •

• growing pressure on the financial impact of supply chain performance;

• 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, 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

Local market volume/local SKUs Low High

Ability to forecast accurately Low High

Required market responsiveness Low High

Transport intensity Low High

Product value density High Low

Labour intensity High Low

Number of global suppliers High Low

Importance of consistent quality High Low

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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$ 1.1 Job title A 1.2 Job title B 1.3 Job title C

In US$ In US$ In US$ 2 Transport cost In US$ 2.1 Inbound transport costs; from (air)port to

distribution centre (DC)

2.2 Outbound transport costs; from (air)port to DC

In US$ In US$ 3 Warehouse costs In US$ 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

In US$ In US$ In US$ In US$ In US$ 4 Cost of capital In US$ 4.1 Inventory costs In US$ 5 Investment

incentives and grants

In US$ 5.1 Capital grants

5.2 Employment incentives 5.3 Training grants 5.4 Other incentives In US$ In US$ In US$ In US$ Quality factors A Infrastructure & accessibility

. . . % 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 . . . % . . . % . . . % . . . % . . . % B Labour characteristics

. . . % B1 Availability of logistics personnel B2 Productivity and loyalty B3 Unemployment B4 Multilingual skills . . . % . . . % . . . % . . . % C Customs . . . % C1 Time to obtain licences/rulings

C2 Flexibility and business orientation customs

. . . % . . . % D Language skills . . . % D1 English language speaking skills

D2 Other language speaking skills

. . . % . . . % E Labour regulations . . . % E1 Working schedule flexibility

E2 Hiring & firing regulations E3 Turnover of labour E4 Works council involvement

. . . % . . . % . . . % . . . % F Facility & sites . . . % F1 Availability of pre­built facilities

F2 Availability of suitable land pots F3 Building permits/timing

. . . % . . . % . . . % G Business climate . . . % G1 Corporate tax rate

G2 Ease of doing business

G3Quality and reliability of telecommunications . . . % . . . % . . . % 100%

Risk factors

A Political risks A1 Government stability/democracy Low/medium/high A2 Geopolitical conflicts Low/medium/high A3 (Tax) policy consistency Low/medium/high A4 Immigration policy Low/medium/high

A5 Strikes Low/medium/high

(Continued)

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Table 3: Continued

Location categories Relative weight Location factors Relative weight

B Economic risks B1 Development economy Low/medium/high

B2 Inflation Low/medium/high

B3 Budget balance Low/medium/high

C Financial risks C1 Financial risk rating Low/medium/high C2 Currency convertibility Low/medium/high C3 Exchange rate stability Low/medium/high C4 Total (foreign) debt Low/medium/high

C5 Banking system Low/medium/high

D Legal risks D1 Permits Low/medium/high

D2 Breach of contracts Low/medium/high

E Transparency risks E1 Corruption Low/medium/high

E2 Bureaucracy Low/medium/high

E3 Ethical behaviour of firms Low/medium/high F Security risks F1 Religious & ethnic tensions Low/medium/high

F2 Terrorism Low/medium/high

F3 Armed conflict Low/medium/high

F4 (Organised) crime Low/medium/high

F5 Social unrest Low/medium/high

G Natural disaster risks

G1 Climatic catastrophes Low/medium/high G2 Hydrological catastrophes Low/medium/high G3 Meteorological events Low/medium/high G4 Geophysical events Low/medium/high G5 Health hazards/pandemics Low/medium/high

Source: © Buck Consultants International

Figure 5 Cost-quality-risk matrix © Buck Consultants International

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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 cost­quality 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 life­cycle 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 cost­quality­risk model in which all relevant cost factors, quality of the business environ­ ment factors and risk factors are brought together in a cost­quality­risk matrix, which easily shows the trade­off between the three categories.

Figure

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