Reprinted from CHICAGO INDUSTRIAL PROPERTIES, August, 2004

The Matrix
A closer look at the logistics equation

The Matrix? No we're not talking about a futuristic blockbuster movie about alternate realities, but something a little more practical: the complex, often delicate mix of factors that need to be computed in order to select the right location for a new logistics warehouse/distribution center.

So, what do we mean when we say logistics? The more expansive definition is the management of product movement, information and capital from the source of the raw materials through assembly, manufacturing, and distribution to the retail exit point. By now, the primacy of logistics as the key buzzword in the warehouse/distribution center is self-evident. All of us have heard about globalization, the importance of product cycle time and supply chain optimization and how it'll soon be cheaper to buy a head of lettuce from China than from Arizona.

This ironclad case in favor of logistics is bolstered by CoreNet Global's landmark report, Real Estate 2010, which describes corporations today—the IBMs, the Dells, the Boeings—no longer makers of their primary products, but integrators of products and systems made by networks of business partners. It's a fundamental shift in the way business is done and clearly one that makes logistics—the traffic of these products and systems between suppliers, integrators and customers—invaluable.

The Matrix Decoded
So what is the logistics matrix? It's actually a series of matrices. The structure of a typical supply chain today usually includes five distribution hubs to serve the United States, organized around the nation's population centers, and rail and road infrastructure with intermodal hubs being a locus of concentrated activity. To service this, it is clear that logistics has become an extraordinarily sophisticated function akin to a science.

"The number one logistics factor is the customer. Where do they need to be?" says Ann M. Drake, CEO of DSC Logistics, a Des Plaines-based third party logistics and supply chain management company. "During the

solutions development phase, you have to look at where their manufacturing points are, where the products are going, how much product, and what the future is going to look like-acquisitions, divestitures, new product lines, new suppliers. We utilize this information in a series of computer models to aid us in developing the solution: how

many centers are needed, what kind of transportation modes should be involved on the inbound and the outbound side, as well as the handling and storage configuration.

"The second part of the matrix is logistics megatrends and here it's simple - Asia, Asia, Asia," says Drake who cites the Pacific Rim as the epicenter of the global supply chain. "Add to that the enormous customer base in the Northeast and you start to isolate some key places to locate the nodes of your supply chain. Obviously port areas like Seattle, Long Beach, and Jacksonville are tremendously important. From here, you move to the population centers.

"Intermodal transportation is No. 3," continues Drake, "and how to maximize it for companies given the mega distribution trends. You cannot overstate it: Intermodal—along with technology and collaboration with our supply chain partners—has really allowed us to contract the product cycle times every year since transportation deregulation 20 years ago.

"Wal-Mart is another trend," says Drake. "With its sheer size, this single company—and others like it—has consolidated the distribution patterns for finished goods in the United States."

The Real Estate Matrix
What's clear is that real estate professionals must also employ a matrix of different factors when making their site selection decisions about where to build their next warehouse or where to take their clients to.

At a time when logistics hubs are routinely between 700,000 and 1 million square feet, a set of real estate factors have come into play that address the best way to mitigate the costs of building, carrying and staffing a facility on this scale.

It is for this reason that major warehouse/distribution hubs have increasingly pushed out to the remote suburban and even rural communities. Whether it's Ottawa or Manteno, a number of Illinois farming communities have come to the fore of the logistics revolution, spearheaded by probusiness municipal governments and economic development agencies.

The expected things come into play in the real estate matrix—labor, infrastructure, interstate access, intermodal—but, all things being equal, the factors that often seal the real estate deal are land cost and incentives.

Take, for example, the fact that land in a remote community may cost $10,000 to $20,000 per acre as opposed to $100,000 per acre in Bolingbrook. On top of this, the community may provide a tax abatement from 25 to 70 percent of the tax burden for the first three to 20 years. The consequent tax reduction works out to as much as 50 cents per square foot per year in savings. For a 1 million square foot building, it works out to $5 million over 10 years.

Now, some may argue that drayage costs may negate the advantages of relocating to a remote area.

"Generally speaking, transportation is three to four times the operating cost of warehousing," says Drake, who cites the need to balance the two factors in achieving the proper mix of savings and efficiency.

Let's go back to our hypothetical example: If, for example, you must absorb $100 per container in extra shipping costs to compensate for being in a remote community, you could still transport 5,000 containers before using up the tax savings.

There's no doubt that the right matrix of factors is critical and that service providers must attend to the continual flux in the industry. Corporations still perform 80 percent of logistics activities internally. In comparison, 3PL's (e.g. iLogistix, Freeport Logistics, Ryder, e-Channel), provide 20 percent of all logistics in the country but are poised to capture 40 percent in the next three years.

With this enormous growth taking place and the sizable shifts in demographics underway, there is no doubt that the matrix will change continually.

Pat Gallagher is a senior vice president of The Alter Group in change of the company's industrial developments nationwide. Most recently, he led the company's entry into the California market with two mega-sized distribution centers totaling more than 1.4 million square feet. In addition, he is responsible for Interstate Transportation Center, a 200-acre, $100 million masterplanned warehouse/distribution park in Rochelle, north of the new Union Pacific Global III intermodal yard.
© Copyright August 2004. Chicago Industrial Properties. From Our Editorial Board, Patrick Gallagher. All rights reserved.

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