The Importance of Real Estate in a Company’s Supply Chain
By Rob Wheeler
The separate functional areas of supply chain and real estate are working together like never before. What were once seen as two different domains within an organization are now becoming connected. Companies have realized that proper supply chain planning cannot take place without real estate considerations, and proper real estate decisions cannot be made without a complete supply chain plan.
The supply chain is the backbone of an operationally centered business. Looking at the various nodes of the chain—planning, sourcing, manufacturing, sales, fulfillment, distribution, and service—it is clear how important the supply chain is to the overall success of the organization. Conversely, the right real estate decisions are key to the success of the supply chain, as real estate is the very platform on which the supply chain strategy resides.
In both supply chain and real estate planning it is important to know where a company is now and where it is headed in the future, along with the driving factors that will either help or hinder opportunities for success. As a general rule, all supply chain decisions are made to reduce costs while better servicing the customer base and positioning the company for future growth. Understanding how the real estate and supply chain strategy support the company is, in the language of my trucking friends, where the rubber meets the road.
For all of the interdependencies between the two functions, there are only select times that decision makers can consider real estate and the supply chain simultaneously: when the supply chain network is rationalized, and when a particular site is selected. When the two are not rationalized together, there can be disconnects between the supply chain plan and the market realities of implementing the plan. This puts into jeopardy the objectives an organization is trying to achieve.
Some questions that should be asked when doing supply chain rationalization and site selection are:
-Does the current state of the supply chain support my corporate strategy?
-Are there opportunities to change the network footprint?
-Number of facilities
-Roles of the facilities
-Size of the facilities
-Owned versus leased
-Are there opportunities to change the way in which the network is operated?
-Company-operated or outsource to a third party
-Who controls the real estate in this arrangement?
-Flexibility of the network
-What is the current and future state of the transportation lanes?
-Surface
-Air Cargo
-Intermodal
-Ocean
-What current and future accessibility is required?
-Interstate
-Intermodal
-Seaports
-Airports
-What is the planning horizon?
-Implementation schedule
-Short-term solution
-Long-term solution
-A combination: flexible leases
-What real estate supports the requirement?
-Can an existing building accommodate the model?
-Will a build-to-suit be required?
-Does a network change support the future direction of the organization?
-Does change add value to the organization?
-Opportunities to increase revenue
-Lower operating expenses
-Lower assets on the balance sheet
None of these decisions can be made in a vacuum. It is important to note that when considering total supply chain operating costs, in most cases real estate makes up only a small percentage. Labor, transportation, and inventory carrying costs far exceed the cost of real estate, and making a bad real estate decision can drive up these costs. But making the right real estate decision directly impacts the ability to drive efficiency within the supply chain.
Currently the industrial real estate market remains soft nationwide. Now may be the optimum time to take a white board approach to supply chain design to fully optimize the network footprint. CresaPartners recently advised a multinational consumer packaged goods company during their supply chain rationalization and implementation, saving them a significant amount of money annually. This was accomplished while avoiding unnecessary capital expenditures and also steering clear of long-term commitments that would reduce their flexibility for future changes.
If you have questions on how this was achieved, or any other questions about the real estate and supply chain relationship, feel free to contact me at rwheeler@cresapartners.com.
This entry was posted on Wednesday, February 24th, 2010 at 9:00 am and is filed under Supply Chain. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.