Strengthening your supply chain one link at a time.
Okay, you’ve crunched the numbers and the optimal location for your next warehouse is Somewhere, PA. However, there are factors extraneous to the network model that could impact the decision. Can Somewhere’s labor market support the needed headcount especially during peak times? Will you have to pay a premium for that labor? Is there existing warehouse space in Somewhere or land to build a greenfield warehouse? Is there an inventory tax in PA? Are there any incentives to set up shop in Somewhere or to locate in PA? Maybe Somewhere isn’t the optimal location! These factors, considered outside a network model, play an important role in the decision-making process.
I’ve been a network modeler for over 15 years and one practice I’ve found useful to clients is to provide alternative solutions to the optimal location. A typical network model will include inbound and outbound transportation costs as well as facility costs on some level (certainly labor and lease costs), and an approximation of inventory holding costs. Providing alternatives, usually three to five, to the optimal location allows you to keep multiple states in play from a site selection perspective. “Beyond the model” factors could trump variances in logistics costs among those locations, thereby suggesting a new optimal location. The factors outlined below can also be a pragmatic tiebreaker should a few different locations be virtually tied in terms of logistics cost comparisons.
The model provides a “target city”, but ultimately much more pragmatic site selection factors dictate the precise location. Additional investigation should always be performed rather than simply accepting that the optimal location derived from the network model is the correct answer.
—Dan Gunter, St. Onge Company
