Reprinted from CRAIN'S CHICAGO BUSINESS, August 15, 2005

All Roads Lead to Chicago
Thanks to geography, foreign manufacturers and big-box retailers, the regional distribution economy is thriving.

To the south and west of the city, alongside six-lane expressways and at the terminus of transcontinental rail lines, the engine that drives Chicago's distribution economy is running all day and all night. Largely concealed inside windowless concrete buildings on the fringes of suburbia—and farther—the region's distribution industry has been thriving, adding 31% more space from 2002 through 2004.

At the crossroads of America's railroads and interstate highways, Chicago has long been a convenient holding pen for goods moving from one part of the country to another. And as much as the rise in offshore manufacturing and the expansion of national retailers have hurt many old-line Chicago businesses, the distribution economy has thrived on those trends, with big-box retailers and overseas manufacturers building ever larger, more sophisticated warehouses around Chicago.

"The manufacturing plants may have moved away, but you still have to serve that Midwest area," says Terry Harris, managing partner at Chicago Consulting, a supply chain design firm. "Chicago is a very effective place to put a warehouse."

Chicago is the second-largest warehousing and storage market in the country, behind New York/New Jersey. In 2004, warehousing accounted for $1.6 billion of the Chicago area's gross regional product and provided the foundation for billions more dollars in economic activity from trucking, wholesaling and construction.

Developers built 17.5 million square feet of industrial space in the Chicago area in 2004, a 15% increase over 2003, according to Rosemont-based real estate firm Colliers Bennett & Kahnweiler Inc. Nearly all of the new space is devoted to warehousing; 60% was built in the southwest suburbs along Interstate 55, ground zero for the warehouse boom.

The Rise of I-55
In 1990 the I-55 corridor around Bolingbrook and Romeoville had 8 million square feet of warehouse space. Today it has 50 million square feet. The expansion has brought thousands of jobs to Will County. The warehousing and transportation workforce in the county grew by 12% from 2003 to 2004 to about 9,000 jobs.

The construction frenzy continues as more companies search for space to handle the surge in imported goods from China, India and other far-flung locations. Buildings in older warehouse districts such as Bedford Park and Elk Grove Village are often deemed too small or inefficient to accommodate the huge inventory volumes that pass through new warehouses on their way to retail shelves in Chicago and all over the central U.S.

Do-it-yourself retailer Home Depot Inc. alone maintains four Chicago area distribution centers with 2.7 million square feet of total space.

"It used to be you were working on a big building if it was 250,000 square feet," says Elise Couston, a principal and industrial property specialist with real estate firm Paine/Wetzel Oncor International Inc. in Chicago. "Now, you start out with a 400,000- or 500,000-square-foot building."

The distribution economy has also become a hotbed of entrepreneurism. As warehouses grow larger, retailers and manufacturers have become less interested in operating them; they prefer to hire logistics management companies instead. Among Fortune 100 companies with warehousing and distribution operations, 82% hire somebody else. General Motors Corp., for example, uses 43 logistics management firms; retailer Wal-Mart Stores Inc. uses as many as 30.

"Because of globalization, the transportation problems and the distribution problems expand exponentially," says Evan Armstrong, vice-president of Wisconsin-based Armstrong & Associates, a supply chain consultancy. "That's why a lot of companies outsource to third parties."

Many of those firms have operations here. Revenue for those third-party logistics managers has grown by an estimated 14% a year since 1996. But with profit margins under pressure from competition and big-company cost-cutting, warehouse developers are likely to push farther west as land and labor costs rise along I-55.

Engine Works
For now, however, most of the action is along the I-55 corridor.

To get a closer look, we visited one of the region's biggest distribution center, DSC Logistics' one-million-square-foot-plus warehouse at CenterPoint Properties Trust's 2,050-acre industrial complex outside Elwood, 10 miles south of Joliet.

Built on the site of the former Joliet Arsenal, beside Burlington Northern Santa Fe Railway Co.'s 621-acre rail yard and near the junction of Interstates 55 and 80, the warehouse is as near as it gets to the beating heart of Chicago's—and the nation's—distribution economy.

Olive oil by gallon, mayo by truckload

After a six-day trip across the Atlantic Ocean and another three days on a freight train across the eastern U.S., a pair of containers packed with olive oil recently arrived for a short stay in a warehouse at the CenterPoint Intermodal Center.

Bound for Midwestern outlets of bulk discounter Costco Wholesale Corp., each of the 40-foot-long steel containers held 20 pallets stacked five layers high with white cartons of five-liter plastic jugs of Bertolli brand olive oil.

The wobbly cardboard sheet pallets were eased out of the containers with a forklift attachment resembling a large spatula. It took a lift operator about two hours to unload and log in a 20-pallet container.

"It's fun," says the lift operator, Maurice Temple, 34, of Joliet. Mr. Temple says he's never dropped a pallet in 18 years of warehouse work.

Later, other warehouse workers removed the jugs from the white cartons and placed them into dark green corrugated display cartons used by Costco.

Dutch consumer products conglomerate Unilever, whose stable of brands names includes Bertolli, Skippy peanut butter and Hellmann's mayonnaise, occupies 525,000 square feet of DSC Logistics' 1-million-square-foot-plus warehouse outside Elwood.

Unilever is DSC's biggest account in the warehouse, storing enough food products to supply an 18-state region from the Rocky Mountains to Ohio. DSC became one of the first residents of the center in June 2004. The company has a seven-year operating lease with Oak Brook-based CenterPoint Properties Trust, the warehouse's owner and developer of the park.

Since then the flow of goods has been constant and heavy. Unilever alone ships about 2.5 million cases out of the DSC warehouse every month and turns over its entire inventory 11 or 12 times a year. In a single week leading up to Memorial Day, DSC moved more than 4.4 million jars of mayonnaise—160 truckloads holding 27,648 jars apiece.

Stacking the odds for accuracy

Managing the supply chain for low-margin consumer products companies is a tough business. With the growth process around 10%, there is little room for error.

It takes 165 workers and 57 battery-powered forklifts to manage a 1 million-square-foot-plus warehouse around the clock. To make sure they don't lose a load of Yamaha Corp. guitars or Turtle Wax car cleaner, DSC Logistics slaps every pallet with a bar-coded sticker that functions as a street address inside the warehouse.

Hand-held scanners and computer terminals on forklifts enable workers to check their work orders against the boxes stacked on shelving racks that stretch 380 feet.

"It's kind of hard to mess up," says 24-year-old Ed Ambre of Aurora, a lead man at the warehouse. "It's not about how fast you can pick (items), it's the accuracy."

Will County: safe harbor

Geography and efficiency aren't the only incentives for foreign manufacturers to route their shipments through the CenterPoint Intermodal Center. The center is one of seven designated foreign trade zones in Illinois. That status allows companies shipping foreign-made goods or materials to the industrial park in Will County to pay far less in customs fees than would be levied at ocean ports and to sidestep much of the paperwork.

For each container unloaded at U.S. ports, the companies that own the imported goods must file voluminous transaction reports and pay a $485 fee. But in a foreign trade zone, companies are allowed to file a single weekly transaction report with a $485 fee for all shipments.

DSC Logistics, certified by the U.S. Customs Service as a foreign trade zone operator, can submit transaction reports on behalf of its foreign customers. That has helped DSC attract to Elwood customers like Unilever, which stockpiles imported olive oil, and Yamaha Corp., which warehouses Asian-built acoustic guitars and drum kits.
© Copyright Crains Chicago Business August 15, 2005. Focus: Distribution Economy, Bob Tita.

Contact us for more information.