Successful supply chains are the result of collaboration with supply chain real estate experts, who can provide in-depth, evidence-based analyses of current and future distribution strategy options.

In a new paper, Jones Lang LaSalle discusses the factors influencing the supply chain and presents effective real estate strategies for developing cost-efficient supply chain operations through network and location strategy.  

Green facilities are the future  

Beyond transportation, environmental concerns affect real estate requirements. Over time, more and more industrial developers are expected to move towards the Green Building Council of Australia's (GBCA) industrial rating tool to certify sustainability.

Smart facility design can help save energy and therefore reduce operating costs, which is a major priority. Building and retrofitting can reduce facilities' environmental impact through efficient lighting, for example, and electric HVAC and temperature control units.  

The 2008 Jones Lang LaSalle Survey of Industrial Occupiers revealed that 52% of industrial occupiers surveyed in Australia were willing to pay an additional premium of 1–10% in order to occupy a sustainable building in the long term.  

Environmentally Sustainable Design (ESD) is being increasingly recognised as an important issue within the industrial property industry, with 65% of respondents confirming an increase of awareness of ESD within their organisation over the last three years.

It confirms that the sustainability movement in the industrial sector in Australia is gaining momentum. Industrial occupiers see ESD measures as opportunities to minimise operating costs.  

The 'Green Star – Industrial PILOT' assesses the environmental attributes of new and refurbished industrial facilities against the eight categories of Green Star, plus innovation.

Categories include: management, indoor environment quality, energy, transport, water, materials, land use and ecology and emissions.  

The PILOT was launched on 2 October 2008 and is applicable to new industrial facilities, extensions to and major refurbishments of existing industrial facilities, provided that they meet the Green Star Eligibility Criteria and are not eligible for any other Green Star rating.  

The Green Star – Industrial rating tool will not rate the operation of industrial buildings and will not assess buildings based on the future use or potential processes undertaken within the premises.  

The Industrial rating tool will enable industrial building owners and developers to minimise the environmental impacts of their developments and capitalise on the environmental benefits of their initiatives and receive recognition for more environmentally sustainable design.  

In 2007, Jones Lang LaSalle published a research paper that looked at sustainability in the industrial property sector.

Titled ‘Greener Pastures’, the paper looked at the emerging shift towards sustainable development in the industrial sector and outlined the journey that owners and users of industrial property needed to embark on in order to commence reducing their environmental footprint.  

Post-9/11 security measures impact ports  

After the 9/11 incident, heightened security concerns at ports and throughout the supply chain led to the launch of Australian government initiatives intended to strengthen supply chain security.

Specifically, the Maritime Transport Security Act 2003 was promulgated to implement the International Ship and Port Facility Security (ISPS) Code in Australia (effective from 1 July 2004).

Some of the initiatives – such as the security scanning of imported containers – have the potential to profoundly impact supply chains and raise costs as a result of reduced container flow.  

Port and rail capacity approaching limit  

With container trade in Australia expected to more than double in the next 20 years, port operations are expected to reach the capacity of existing facilities within the next 10 years. Many of the major ports in Australia are undertaking expansion programmes aimed at expanding their capacity.  

• Third Terminal at Port Botany – Sydney Ports Corporation is undertaking a major expansion of its container port facilities at Port Botany to cater for long-term trade growth.

The expansion is one of the largest port projects to be undertaken in Australia in the last 30 years and will include five new shipping berths with container storage and depths of up to 16.5 m, the reclamation of approximately 60 ha of land and an inter-terminal road rail corridor.

The new terminal is expected to be open for trade in 2012. The federal government has also committed AUD 150 million in the 2009 Budget to improve landside access to the port, which will reduce vehicle congestion.

• Channel Deepening Project at Port Melbourne – This dredging project, which is scheduled to be completed prior to 31 December 2009, will facilitate the use of the port by ships with deeper draughts (up to 14 m throughout the port) to maintain competitiveness and improve efficiencies.
• Proposed Outer Harbour Port in Perth – The existing container freight port facilities in Fremantle may reach capacity within the next decade.

Several plans are being canvassed by the Western Australian government, including a proposed outer harbour port with land bridge or an alternative site proposed by a private consortium.

The limited capacity of existing ports to expand has stimulated planning and the exploration of emerging alternatives.  

• Enfield Intermodal Logistics Centre (ILC) – By 2016 when the ILC is operating at capacity, it will handle 300,000 TEUs per annum and operate 24 hours a day, seven days a week. The ILC will remove an estimated 80,000 truck movements from Sydney’s already-congested road network.
• Trade Coast Central – Located on the former Brisbane Airport site, this master-planned commercial and industrial facility will have excellent road, rail and air and sea access.
• Proposed Intertrade Industrial Park – Newcastle, NSW – This includes the redevelopment of the 150-ha former BHP Steelworks site with an intermodal and port support zone, a general industry precinct and a technology and commercial precinct.  

The growing importance of inland ports   There is presently a push by the government for greater freight movements via rail.

With this aim, the Australian government has provided around AUD 820 million in untied grants to the Australian Rail Track Corporation (ARTC), which is investing these funds on a range of projects on the Melbourne-Sydney-Brisbane rail corridor.  

Moving freight by rail reduces traffic congestion, fuel consumption and emissions. Over extended distances, railroads have many advantages over long-haul trucking, which has struggled with rising fuel prices, environmental issues, driver shortages and highway congestion.  

Rail transportation is becoming more efficient as train speeds increase as a result of investment in improved tracks and rolling stock.

Increasingly, railroads are transporting finished consumer goods between intermodal rail hubs known as inland ports.        

CASE STUDY

Enfield Intermodal Logistics Centre (ILC)  

This AUD 150-million intermodal terminal project is being developed by Sydney Ports Corporation (NSW government) on the 60-ha former Enfield Marshalling Yards site in the Sydney suburb of Enfield. Site works are currently underway.  

When fully operational, the ILC will include:   a 13-ha terminal catering for up to 300,000 containers per annum to be moved by rail to and from Port Botany; 9 ha of empty container storage; 50,000 sqm of distribution centre/warehousing; up to 44,000 sqm of light industrial development land.  

The development of the ILC will improve the supply chain by helping move more containers closer to their final destination by rail and will result in nearly 80,000 fewer truck movements per year around the already-congested roadways.

It will also help the NSW government to achieve its target of moving 40% of containers by rail.  

An interactive management system will be necessary   As the supply chain expands and the number of sourcing markets and destinations around the world increases, an interactive supply-chain visibility system to monitor the flow of products will be increasingly important.

Critical components of a successful supply-chain system will include a real-time environment, allowing for the continuous tracking of containers, visibility into the contents of the container, date-stamped data events and a system that is transparent to both suppliers and end-users.  

The connection between supply chain and real estate  

There is an inevitable connection between the supply chain and the real estate platform on which the supply chain strategy rests.

Two critical real estate strategies – successful network optimisation and site selection – can significantly reduce operating costs.   Although different in their methodologies, network optimisation and site selection work hand-in-hand to define a company's optimal distribution infrastructure.  

CASE STUDY

Schenker Australia Pty Ltd – optimising the real estate solution  

DB Schenker is one of the leading international providers of integrated logistics services. It has major clients in the consumer electronics market in Australia that have specific real estate needs to ensure goods can be delivered to customers in short time periods, with multiple daily truck movements around the metropolitan area of Sydney.  

 Schenker Australia Pty Ltd engaged the Corporate Solutions team of Jones Lang LaSalle to source and project manage a real estate solution that minimises freight costs and links to the major ring roads in Sydney, as well as Port Botany.  

 A site at Yennora was selected because of its strategic location with proximity to the rail line spur connecting the Sydney-to-Melbourne and the Sydney-to-Brisbane railways and Port Botany.

The new warehouse and distribution centre will position Schenker Australia Pty Ltd to shift freight consignments from road to rail, reducing polluting emissions and increasing road safety.  

 This decision was made with benchmark analysis of costs for labour, real estate, transportation and client location.  

The new facility will consist of two buildings—one with 20,000 sqm and the other with12,000 sqm—joined by a 3,800-sqm breezeway.

This will allow for 100% undercover operation from goods arrival to despatch. The site will include 13-m high roofing, 27 rear loading docks, 9 roller door accesses and ample truck hardstand area in a fully integrated and IT solutions-enabled hub.  

Network optimisation  

Distribution network optimisation is the process of evaluating a range of variables to determine the appropriate facility infrastructure to support a given supply chain strategy.

Factors that determine the structure of a supply chain network include the number of end-use customers, the frequency of purchase, the shelf life or obsolescence rate of the product and the physical characteristics of the product itself.

For example, the supply chain for a car manufacturer will differ radically from the supply chain for a frozen food packager.  

 In the capital budget planning process for a company's supply chain strategy, the senior management will determine the optimal network plan prior to making a significant investment.  

Once the basic structure of the proposed supply chain has been determined, network optimisation modelling typically compares general locations based on transportation cost, labour and facility costs within a 15–30-km radius, in addition to the capacity of labour and transportation with a specific marketplace.

Transportation is usually the largest location cost factor, and labour costs are frequently the next highest. As energy costs continue to rise, utility costs have gained importance in the selection process.

Providing adequate training, a high-value element in launching a modern facility, is another cost that is assuming increasing importance and is an area where cost cutting can lead to false economies.  

A well-thought-out distribution network strategy will address the following questions:            

• How many distribution centres should we have?
• Can we consolidate distribution centres?
• What is the role of each distribution centre?
• Have we properly sized the distribution centres? Which products should we inventory in each distribution centre?
• Which customers should each distribution centre service? Do we have enough flexibility to accommodate future customer demand?  

Once the quantity and general locations of the distribution centres have been defined, site selection, the next stage of due diligence, is required.  

Site selection  

Choosing the proper site for a distribution centre has developed into a specialised, scientific process that involves complex trade-offs of financial targets against marketing, environmental and labour cost considerations.

Key factors are transportation, labour, utility costs and available incentives provided by the government or developers.

Considerations also include customer service levels, infrastructure availability, proximity to qualified labour, variable operating costs, available real estate opportunities, available incentives and overall industry and business climate compatibility.  

Sub-optimal site selection can cause a number of problems that affect costs, from higher taxes and lower incentives to higher labour costs, insufficient labour capacity, increased transportation costs and lack of carrier availability.

Incorrect design of buildings in which to operate, such as wrong building size of ceiling heights, insufficient docks or inadequate space for trailer parking, will also adversely affect site efficiency.

Because long-term commitments are involved, the costs of poor decisions can be high, with limited scope to reverse errors in the short term.  

The site selection process should identify the potential incentives that figure in a company's decisions, such as tax abatements, corporate income tax credits and sales/use tax exemptions.

Consideration should also be given to land acquisition, site improvements, facility financing, power, relocation, infrastructure and hiring, among others.  

A supply chain strategy must deliver the right products to the right place at the right time.

Sounds simple, but in the next 20 years, as the supply chain continues to evolve and drive change in markets in Australia and around the world, this simple objective will present real challenges to achieve better and more efficient solutions in an increasingly competitive business environment.  

International case study – Macy’s: Network optimisation saves millions of dollars and reduces lead time  

The Macy’s department store chain had an opportunity to increase the efficiency of its distribution programme. With only one national distribution centre, which is located in Cherry Hill, New Jersey, Macy’s-branded Asian import containers entered at LA/LGB and were mini-land bridged across the country to New Jersey, where products were stored and then distributed upon demand to regional distribution centres, including facilities on the West Coast.  

The redesign of the Macy’s distribution network demonstrates the remarkable cost-saving potential of network optimisation. A post-distribution transload model with a West Coast facility located in Los Angeles receives Asian-produced products.

An East Coast facility in New Jersey receives goods manufactured from Europe, Central and South America and western Asia.

The flow of goods was accelerated and 14 days were removed from the supply chain, thus significantly reducing capitalisation of inventory – tantamount to tens of millions of dollars annually in cost reductions. Additionally, the Cherry Gill, New Jersey site was eliminated, which contributed to a saving of USD 11 million annually.  

The outstanding results of the network redesign are as follows: Lead time reduced by 14 days On-time performance improved from 46% to 99% Eliminated a distribution centre, resulting in USD 11-million annual cost reductions

Reduction of obsolete inventory Increased sales at improved profit margins Audit accuracy greater than 99.9%

More information: Nick Crothers National Industrial Analyst – Research Jones Lang LaSalle Australia +61 2 9220 8525 Nicholas.Crothers@ap.jll.com