With transportation representing the biggest cost factor in the domestic supply chain, retailers are locating their inland distribution facilities as close to rail ramps as possible, an industrial real estate executive says.
For many years, large retailers focused primarily on the cost of land and rent when choosing a site for their distribution warehouses, said Brian McKiernan, vice president development at CenterPoint Industries.
CenterPoint got its start in Chicago, and the Chicago area is still the most important location in CenterPoint’s extensive industrial real estate portfolio. CenterPoint operates two large industrial real estate developments near Joliet, Ill., one with access to a rail logistics hub operated by BNSF and a second with access to a Union Pacific logistics hub.
McKiernan, in an address Tuesday to the Los Angeles Transportation Club, discussed the decision by Wal-Mart to locate its large Midwest distribution center at the CenterPoint development served by BNSF as an example of the cost savings inherent in making transportation the primary factor in site selection.
Wal-Mart’s strategy in the past was based on securing cheap land and financial incentives from local development agencies interested in attracting enterprises that created jobs, McKiernan said. Wal-Mart could have realized those benefits if it had chosen to locate its Midwestern distribution center at a site nine miles from the CenterPoint property.
Instead, Wal-Mart focused on the long-term transportation savings of locating at the CenterPoint site where land is more costly and no financial incentives were available. With transportation accounting for more than 50 percent of the logistics cost, and facility rent less than 5 percent, reducing the trucking costs became Wal-Mart’s primary objective.
The nine mile savings in drayage distance from the rail ramp to its distribution facility saves Wal-Mart $100 on every container move. Given Wal-Mart’s volume at the distribution center, that saves the large retailer millions of dollars a year, every year, in drayage costs, McKiernan said.
Although the price of oil remains volatile, the long-term direction of oil prices is upward, so locating import distribution facilities close to seaports, and inland warehouses close to rail ramps, is a good hedge against rising oil prices, he added.
While there are a number of popular inland distribution sites such as Dallas, Memphis, Kansas City, Ohio and Atlanta, Chicago remains the Holy Grail for retailers who ship through the nation’s top two gateways, Los Angeles-Long Beach and New York-New Jersey.
In addition to its proximity to the population density in the Midwest for imports, Chicago also offers large grain exporters the opportunity to secure containers that have been emptied of their consumer merchandise so they can be reloaded with grain exports destined for Asia and other large markets, McKiernan said.
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