Know Your Freight Costs

Warehousing and distribution continue to be the hottest sectors in site selection. In fact, when researching a five-state region for a client to determine the most active industry sectors, warehousing and distribution topped the list.

This location pattern is taking place nationwide. It is a trend that will continue as retail expansion drives more and more warehousing and distribution center locations.

The economic development world is paying close attention to this trend. What community wouldn’t want, for example, the location of a one-million-square-foot distribution center (DC) with its 600 to 800 jobs and $60-million to $80-million capital investment?

As you might expect, competition among communities for these high-profile facilities is fierce and incentive stakes are high.

Eager economic developers constantly ask, “what drives DC location decisions and how can my region do a better job of attracting good projects?” My answer: Understand the industry and sell toward your region’s strengths with the right tools.

Part of selling toward your region’s strengths means understanding the costs that drive location decisions.

These costs include:

• Labor
• Freight
• Land and building
• Taxes
• Utilities

Most economic development groups do a great job providing typical demographic information—work force, wages, taxes, and utility costs—to companies looking to locate. Many, however, do a lousy job of understanding and providing meaningful information regarding transportation costs, the second most important cost factor.

Granted, most large companies looking to locate a warehouse or DC will not turn to an economic development agency to provide a freight cost model. They do this internally, or turn to a professional logistics consulting company for the answers.

But, to compete effectively for a project, economic developers do need to understand freight cost modeling and the differences between their area and other competitor communities. For example, what costs do they need to make up through rate reductions or incentives?

Economic developers can learn all this and complete the modeling with the help of a good logistics/site selection consultant.

Many small distribution companies that have not done their own freight modeling, or need to verify their own model numbers, could benefit from the help of a savvy economic developer who understands and can provide freight cost modeling.

This professional consultation could mean the difference between winning and losing an important project.

The results of your freight cost modeling will reveal a number of factors that are valuable to economic developers helping companies seek or verify freight data and/or try to understand freight costs that they are competing against.

These factors include:

• Overall inbound and outbound costs vs. select competitors
• Total costs by mode
• Total costs by mileage range
• Weight and unit comparisons
• Insights into inbound costs
• Sales volume (units monthly/yearly)
• Mode volume and distances
• Mode rates
• Insight into outbound costs
• Mode mix
• Discount rates
• Sources, distances, and modes
• Sales allocations by region/mode
• Costs per pound/unit vs. competing regions

Along with model data, economic developers must have a good handle on other operating costs, and have the ability to display these costs in a spreadsheet and report format.

Data on competitors is also essential. Important comparison data includes:

• Wages and salaries
• Labor availability and quality
• Real estate availability and costs
• Taxes
• Utilities
• Cost of living/relocation
• Incentives

Armed with this valuable arsenal of information, professional economic developers are ready to go to battle to win the best DC prizes. Freight model tools may well make the difference.

A Model DC Model

What goes into a good retail DC freight model? Key components include:

• Service radius definition – generally in the 300- to 400-mile range
• Inbound and outbound ZIP code-to-ZIP code data
• Product volumes (cases, pallets, weight)
• ZIP code, latitude, longitude, city populations
• Rail, LTL, TL, small parcel freight rates

Inbound parameters include:

• Sales
• Transportation mode mix (rail, TL, LTL, small parcel)
• Distance from suppliers
• Units per mode
• Rates per mile

Outbound parameters include:

• Sales
• Mode mix
• Discount rates
• Units per mode
• Area allocation sales by mode
• Weight per unit
• Product classifications

Once the freight model is complete, and if the right questions are posed, this important data should be available from the company seeking the location.