Monday, February 18, 2013

Site selection for huge retail operations

The long-tail concept suggest that over a period of time retail company can earn as much revenue from slow moving items as they earn from fast moving highly demanded items. Originally the term was introduced for the Internet-based companies e.g. iTunes or Amazon who can offer their customers such resources that are not available elsewhere. Since they are not into manufacturing and production, they are only affected by physical constraints of warehousing. After a decade, market competition has forced many brick-and-mortar companies to operate in long-tail environment and provide their customers with as much choices as they could. As a result there is huge number of slow-moving items with unpredictable demand that needs to be managed.

For me, the most impressive thing about Amazon is its orthodox business model. They hold about 80 enormous warehouses and fulfillment centers scattered around the world and maintain relations with hundreds of suppliers and manufacturers. Now they strive to provide same day delivery and pickup options whichever is more convenient. The question that stuck my mind is in regards to the strategy behind site selection that could optimize the service levels for such large businesses. 

The article Site Selection Decisions[1] is quiet interesting insight into factors that could help the business devise their strategy. Businesses need to consider regional factors such as population density and facility costs to decide the location of distribution center and storage conditions.

For manufacturing business it makes more sense to establish a facility in areas where raw materials are easily available or labor costs are low. On other hand the distribution businesses have mirror image for such decisions where site selection is derived by location of high-value customers. Where businesses see more prospective customers is indication of the potential expansion plans but optimizing the service levels considering the cost, number of facilities and distances becomes complex exercise. To reap more profits from best service and minimal time-to-market it is imperative to locate the business as close to major markets as possible. With this the rents of prime real estate in the regions go high.

The distribution center should minimize the distances, optimizing the fuel consumption so that cost on the transportation is reduced. As article mentions “volatile fuel prices make it more important for companies to develop solutions that offer not only reduced miles, but also provide mode options such as increased use of rail and rail intermodal.”

Labor cost and availability comes into play as well as serious consideration to local regulations also require close consider when choosing a facility location. The rise in value-added services and performance needs has increased the energy requirements for the warehousing capabilities. Therefor energy costs and reliability become an important part of the site selection decision. Further extension to that is running warehousing operations in environmental friendly conditions.

This process can become complex when there are many major and minor factors under consideration. What may be the challenges for companies dealing in long-tail environment and what other factors involved in their distribution center selection process where volume of items is large?


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