All the right moves

at a glance
This article looks at the decisions a retailer and a manufacturer make in determining optimal sites for their distribution networks.

Filling and delivering orders quickly and efficiently built drug store giant Walgreen Co.’s (www.walgreens.com) reputation for service 100 years ago. That attitude is reflected today in the way it designs a distribution network to serve the nation’s largest drug store chain — 4,229 retail stores in 44 states and Puerto Rico.

The company operates a network of 12 distribution centers (DCs), and a 13th is under construction to serve expansion in Southern California. Each of these DCs serves from 500 to 700 stores, says Jodi Dalton, senior manager of real estate for Walgreens. She has helped site Walgreens’ latest DCs. At the heart of each of these rack-supported DCs is a 10-story automatic storage and retrieval system (AS/RS) with 48,000 pallet spaces. The 105-foot-tall AS/RS keeps each DC humming to provide a minimum of one warehouse delivery per week to each store; two per week for the 24-hour or high-volume stores.

Nearly as old as Walgreens, truck manufacturer International Truck and Engine Corp.’s (www.international- delivers.com) parts operation provides next-day service to over 1,000 dealer points, filling daily dealer stock orders from regional DCs or, in the case of slow-moving parts, from a central DC. In contrast with Walgreens, International is relocating facilities, not expanding its DC network. Some of its DCs are over 50 years old, according to Judy McLaughlin, manager of logistics planning.

Network optimization is done every five years, so International is completing relocation projects that were begun during the last round of planning. The size of the DC is determined by the area it serves, McLaughlin continues, with a goal of providing next-day deliveries in a 300-mile radius.

Like Walgreens, International doesn’t restrict orders to case lots, both will ship single items if that’s what a store or dealer orders. But unlike Walgreens, International’s DCs aren’t built around an expensive AS/RS. For the vehicle maker, whose International Harvester brand is the symbol of industrial equipment, manufacturing operations are the more capital-intensive real estate investment. International owns these manufacturing facilities and leases DCs.

With a price tag of over $100 million for each DC, Walgreens must plan its distribution network carefully. The 105-foot-tall rack-supported building sits on 100 acres, so it won’t fit on just any parcel. The material handling equipment is more than half the cost, according to Dalton. Land is a “drop in the bucket,” she says. So, when she looks at a prospective site, the tax status of the building and its equipment can carry more weight than actual property cost. Personal property tax on equipment is a concern for her and, to some extent, “a no-tax situation will overcome a poor location.”

That said, Walgreens needs space to operate and to expand. Each DC has a 48-door receiving wing and a 48-door shipping wing. Its private fleet is routed on 250-mile round trips delivering to stores. Transportation is a store’s largest operating cost, says Dalton.

With 48,000 pallet locations in the AS/RS alone, inventory is a concern, especially inventory taxes. Dalton and International’s McLaughlin agree they would love to get into states with no inventory tax. McLaughlin admits inventory carrying cost doesn’t factor as heavily into the siting decision, but it is worked into the network analysis.

Walgreens and International both use real estate consultants. They agree it is important to keep the company name out of the picture during the early stages of the selection process. Consultants help with some of the environmental survey work and details on labor availability, regulatory environment, union or non-union workforce, etc.

Walgreens hires all labor locally, so Dalton is very interested in the local wage rate. “We don’t want to be driving the wage structure,” she points out.

International has basic criteria for labor, including education. McLaughlin involves local management since it is relocating facilities rather than expanding. In addition to wage rates, she takes a look at unemployment rates.

Both Walgreens and International take soft issues into account — those affecting the people working at the facility. Local transportation becomes a factor for the work force as well as truck access. Public transportation, parking space, security, commute time and availability of dining and other services in the vicinity of the DC factor into the final decision.

Both Dalton and McLaughlin encourage visits to the target region. McLaughlin opens her search to a 50-mile radius and visits the communities and prospective sites. She notes the importance of entering the area quietly and without visible company logos. Dalton agrees, especially considering the size of the investment Walgreens’ name carries.

McLaughlin is conscious of the need to locate International’s DC within a 300-mile radius of the market is serves so it can provide next-day delivery, but she also looks at other capabilities. On the inbound side, intermodal is important, so she wants to see rail service and intermodal ramps. A portion of International’s transportation is dependent on air services — small package and heavy cargo — so she also looks at the proximity to parcel air hubs and air cargo capacity. The same is true of less-than-truckload terminals.

Private fleets figure into both Walgreens’ and International’s distribution, so highway infrastructure is an important factor in site selection.
International takes a team approach to site selection. Transportation, information systems, corporate, customer service, real estate, legal and other functional managers are involved in the process.

Even though much of her time is spent with real estate, taxes, and incentives, knowing how a facility will function is important to site selection, concludes Walgreens’ Dalton. The high-rise AS/RS model is of recent vintage, covering the last four Walgreen DCs. “It could change tomorrow,” says Dalton. She stays in close contact with the engineering teams who are reviewing the evolving technologies and designing for function. LT

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