80% of the value and cost of a supply chain network is locked in at the design stage, making supply chain network design critical5.
While there are many complex facets to supply chain management, geographical and locational decisions underpin many of them. In turn, this directly flows into real estate considerations and ultimately the demand for property. Interestingly, while real estate costs are small compared to other costs through the supply chain, estimated at around 5%-10% of total supply costs, the ongoing costs for erroneous location decisions are much more considerable not least for the flow-through cost on transportation, inventory holdings and labour availability.
Given the increasing cost of industrial property, to rent or buy, and the ongoing costs associated with erroneous supply chain design, the fundamental issues in network design are what types of facilities are required and where should they be located? To answer these questions, three key issues need to be considered:
- Network configuration – is dependent upon several factors, not least the footprint required for fast and efficient material and product flows as well as required storage capacities. Pressure on lean supply chains drives the need to consolidate the number of facilities to build scale. In contrast, an agile network will be designed across a greater number of facilities.
- Facility location – will have the biggest impact on local real estate demand. Understanding lead times is a significant driver of location requirements. It is essential to understand how much inventory needs to be held in relation to the consumer compared to the production facility. The growth of eCommerce, especially B2C, has had a dramatic impact on this as well as growing requirements for reverse logistics.
- Building specifications – the pace of innovation has meant that specifications for prime-grade logistics buildings continue to advance. Minimum ceiling specifications are getting higher to allow for automation which in itself allows for greater storage density, thereby reducing warehouse footprints. Building specifications should follow the needs of the customer, business requirements and facility processes, flows, layouts and automation not the other way around.