The Most Important Challenge in Locating a Retail Distribution Center

By: E Smith Realty Parnters

In the past when selecting a site location for a distribution center the first considerations would be inbound/outbound transportation costs, rental rates, number of existing buildings, price of land, taxes, incentives, and cost of labor. 

These are all very important but the availability, sustainability, quality and cost of labor has risen as one of the most impactful factors in site selections. This is especially so for retailers who experience a seasonal surge in the fall when they have the need for temporary employment.  As a supply chain executive mentioned recently “we can have the best building with the best automation but without a quality labor pool to accurately execute the picking/shipping we will fail.” This is further emphasized in an e-commerce fulfillment environment.

Some geographic areas are challenged by their recent success. For example, Indianapolis, Indiana, Columbus, Ohio, Phoenix, AZ and Louisville, Kentucky are strong locations from an inbound/outbound transportation perspective and therefore these areas have experienced significant growth for distribution centers. Unfortunately, this applies pressure to the availability of the applicable workforce and the ability to scale during a seasonal surge.

In addition, what is the true cost of that workforce? In site selection, the retailers cannot depend on public information to estimate labor costs. For example, public data might state $9.50 is the average rate but if all the nearby DCs in a large industrial park are paying $10.50 then employees you intend to pay $9.50 will not have a long tenure. Budgeting the incorrect labor rates could have a significant impact when evaluating the ROI on a DC site selection.

A developing issue regarding warehouse labor cost is the rise of the minimum wage.

  • Many states and municipalities are passing legislation to increase the minimum hourly wage above the federally mandated $7.25 to as much as $15.
  • Labor accounts for nearly 20% of total supply chain costs. Rising wages are having a significant impact on the bottom line.
  • A $1 per hour increase for a fulfillment operation with 500 employees will increase labor costs by ~$1 million per year.
  • A $1 million cost increase in the average 500,000 SF facility equates to a 37% rent increase.

Rising wages may encourage distribution users to seek new locations in neighboring municipalities or states with lower wage scales, or pursue automation alternatives.

When evaluating a DC site location, a retailer must create a team to truly understand and quantify the following:

  • Does the available labor pool match the required skill set?
  • Will the labor pool continue to be reduced/pressured because of nearby economic growth?
  • What is the true cost to hire and retain employees?
  • What are optimal commuting patterns?
  • Do the correct metrics exist for the retailer to hire a 4:1 ratio during the seasonal surge?
  • Are there competitive DCs in the area and building characteristics that influence employee retention?

E Smith specializes in distribution site selection with regards to real estate, labor, transportation and incentives. E Smith has an internal labor analytics team which can predict warehouse labor availability, sustainability, and cost (including peak).  For more information and assistance with distribution site selection, contact Brad Struck, President of industrial services.