Customize Your Next Distribution Center - Warehouse Strategies for Los Angeles 

April 04, 2007 04:17

From the Desk of John Scatoloni,
 Managing Director, Encon Commercial

In the midst of a recent round of mergers and out-of-state consolidations across the warehouse distribution industry, and an anticipated drop in U.S. import growth, 3PLs are faced with securing long-term accounts and maintaining a competitive advantage. Los Angeles based Asian Pacific Container and Distribution, recently confronted these challenges with client demands to drive more freight through their Los Angeles distribution center. Albeit, growth is a positive challenge, the simple question of taking on more distribution space vs. increasing fixed costs, was a complex set of decisions that came down to choosing distribution center that met growth demands.

Encon Commercial real estate advisors provided a solution for Asian Pacific Container and Distribution's growth strategy by defining an upgrade in facilities at a substantial lower fixed cost. The Encon Commercial directive identified an ideal distribution center located in Chino, California, that provided lower lease rates for greater Los Angeles, and also maintained proximity to the ports of Los Angeles and Long Beach to take advantage of fierce competition in the shipping business and lower fuel costs. What can we learn from this strategic decision process and what valuable insight can Encon Commercial lend your company on your next expansion phase?

With respect to the big box space (100,000 square feet and up category), Asian Pacific Container and Distribution sought a DC that would handle larger volumes from fewer clients, and in some cases, the client's entire product line. To meet this demand, Encon Commercial directed the search to newer constructed free standing buildings, with a minimum height for 26 feet for rack-less stacking, a securable container yard and a handling environment located in a safe industrial park setting. According to John Scatoloni, Director of Encon Commercial Real Estate Service, "We find that clients of 3PLs pass concerns for a modern and well maintained facility directly to the 3PL warehouse, and the warehouse serves as an outsource for functions that manufactures once did themselves. This effect is even more apparent with the clients' demand for a 24-hour operation in conjunction with the recent "Pier Pass" initiative at Los Angeles ports, efficiencies in logistics and the demand to outsource warehouse handling altogether. We can safely say that 3PL's are now absorbing these demands directly from clients, and the DC itself is becoming a core competitive advantage."

What are the key components in a distribution facility that create a competitive advantage for a 3PL? Encon Commercial offers the following guidelines, "Scrutinize the warehouse layout and yard configuration, analysis the logistical through-put at the DC, and finally negotiate a financial commitment that offers flexibility." (John Scatoloni 2006). Since manufactures have already moved their manufacturing overseas, predominately China, and this shift in transpacific manufacturing has created a supply chain corridor between California and China's East Cost, 3PL warehousing is increasing the most visible component in the supply chain process that will showcase services and increase account activity.

Locate a DC that offers the following features, a newer construction with higher clearance, a free standing facility that offers at least twice the container storage stalls to dock locations and a rectangle warehouse layout that maximizes loading docks and number of bays. Plan for an internal increase of 1/3 floor space that incorporates rack-less operations for more product in staging. An adjunct to a better layout mentioned above is a smaller handling crew that translates into lower fixed costs, features that are increasingly turning larger accounts over to 3PLs and creating a more profitable scenario. Remember that clients are not only judging handling through-put but also the facility safety, cleanliness and image. Invest in a security system that keeps management eyes on all four corners of the premises, and a warehouse manager's office that maintains sight of the dock-line and point of entry at yard. "Sure, new facilities also exist closer to the ports with similar features, but those costs can be 40 percent higher than functionally similar buildings outside Los Angeles County. The solution is in finding a facility in a market such as the Inland Empire where lease rates for a newer and functionally similar building are significantly lower, however, close enough that fuel cost are not cost prohibitive" (John Scatoloni - Feature Substitution - Spring 2006).

Finally, a lease is a negotiated commitment with the landlord that will create or limit your flexibility for growth. After you have located a functional facility, keep the operational objective at the forefront in lease negotiations. Negotiate a tenant improvement package that allows for the most current features in-demand, including a dock package with pit levelers, additional yard and edge of dock lighting for 24-hour operations, and an office component designed for maximizing administrative needs such as will call facilities, a warehouse manager's office and an employee break room to name a few. Remember that you may trade security deposit for increased tenant improvements and subsequently burn off the security with performance. You can turn an "A" facility into an "A+" operation, by customizing the facility at the landlord initial expense and offset operation costs with free rent up and to tenant improvement completion. Look for a landlord that is willing to take on these improvements, which are inherently beneficial to both the tenant and the landlord in the long-run. Finally, chose a landlord that is open to upgrading space within their warehouse portfolio. Although this option will not terminate a lease it will allow leverage to increase size should clients offer up the opportunity to handle more product; essentially the main objective for Asian Pacific Container and Distribution.

The simple question of taking on more distribution space vs. increasing fixed costs is a comprehensive set of objectives, including warehouse layout, yard configuration, improving logistical through-put and negotiating flexibility into a lease. As for Asian Pacific Container and Distribution, Encon Commercial provided the ideal combination of a feature rich facility and a flexible lease commitment.