How changing supply chains impacts location choices

Transcription

1 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 [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 rev enues (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 planning, implementing and controlling the efficient 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 revenues, 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 business strategy focuses, while it is acknowledged that successful firms have ingredients from all three: product leadership, operational excellence and customer intimacy. Table 1 shows that each of the three typical business strategies has different supply chain characteristics: product leadership asks for agile supply chains, operational excellence demands lean supply René Buck Corporate Real Estate Journal Vol. 4 No. 3, pp Henry Stewart Publications, Page 223

2 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 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 Robust Flexible Focus on eliminating tiers from the Capable of dealing with high Individualised solutions chain volumes Focus on cost Linked to customer process Source: Buck Consultants International Agile Lean Responsive 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. 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 Page 224

3 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 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) structure: one central DC (pictured in Figure 3); bulk distribution centre (BDC) structure: bulk distribution structure; regional distribution centre (RDC) structure: delivering to European customers out of three regional DCs. Page 225

4 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 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 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-com merce; ever-shortening 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, Page 226

5 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 1.1 Job title A 1.2 Job title B 1.3 Job title C 2 Transport cost 2.1 Inbound transport costs; from (air)port to distribution centre (DC) 2.2 Outbound transport costs; from (air)port to DC 3 Warehouse costs 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 Cost of capital 4.1 Inventory costs 5 Investment incentives and grants Quality factors A Infrastructure & accessibility B Labour characteristics 5.1 Capital grants 5.2 Employment incentives 5.3 Training grants 5.4 Other incentives 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 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 pre-built facilities F2 Availability of suitable land pots F3 Building permits/timing G Business climate G1 Corporate tax rate G2 Ease of doing business G3 Quality and reliability of telecommunications 100% Risk factors A Political risks A1 Government stability/democracy A2 Geopolitical conflicts A3 (Tax) policy consistency A4 Immigration policy A5 Strikes (Continued) Page 227

6 How changing supply chains impacts location choices Table 3: Continued Location categories Relative weight Location factors Relative weight B Economic risks B1 Development economy B2 Inflation B3 Budget balance C Financial risks C1 Financial risk rating C2 Currency convertibility C3 Exchange rate stability C4 Total (foreign) debt C5 Banking system D Legal risks D1 Permits D2 Breach of contracts E Transparency risks E1 Corruption E2 Bureaucracy E3 Ethical behaviour of firms F Security risks F1 Religious & ethnic tensions F2 Terrorism F3 Armed conflict F4 (Organised) crime F5 Social unrest G Natural disaster G1 Climatic catastrophes risks G2 Hydrological catastrophes G3 Meteorological events G4 Geophysical events G5 Health hazards/pandemics Source: Buck Consultants International Figure 5 Cost-quality-risk matrix Buck Consultants International Page 228

7 Buck activities and (types) of locations. In this way the corporate real estate and site selection strategy is aligned with the company s business 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 strategies give direction to the supply chain strategies 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 footprint, a company locks into local labour pools, local real estate markets, local transportation 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 environment factors and risk factors are brought together in a cost-quality-risk matrix, which easily shows the trade-off between the three categories. Page 229