The importance of transportation as a cost component is brought into sharper relief by recent statistics from establish/Herbert W. Davis and Co., said Peters. According to the company’s 2004 database, logistics costs as a percentage of sales hovered around 8.4 percent, breaking down into 3.3 percent

Mike Peters ProLogis

     Backed by experience dealing with challenges like that, Peters led this analysis of the transportation cost-vs.-service tradeoffs that companies have to negotiate in their efforts to optimize their distribution networks. But in his examination of a model that could have 24 different permutations, he was quick to point out its theoretical nature.

     A model will allow evaluation of alternative strategies, give you location guidance at the city level and provide you with the theoretical lowest-cost network, plus or minus 5 percent, said Peters. What it will not do is generate revenue from service improvement, allow you to set operating budgets from its findings or evaluate every possible distribution center location. On this last point, he noted that most models produce a list of 40-50 cities, but he urged those in the audience from secondary or tertiary markets to be proactive in making sure consultants are considering their communities.

     A network re-design can have a substantial economic impact, said Peters, resulting in a better assessment of total cost (not just rent); a beneficial slow-down in decision-making; and the strategic development of fewer, but larger, facilities for manufacturing. Indeed, aided by technology and process improvements, the issue of scale literally has taken on an added dimension.

     “You can now effectively run a 1-million-square-foot distribution center,” said Peters, whereas “it used to be inefficient at 250,000 square feet.”

     With that in mind, he examined a list of the usual suspects for a five-DC network, including the busiest spots of L.A. and Chicago. As the number of facilities increases, the Pacific Northwest enters the picture, followed by locations like south Florida, Denver, Indianapolis and Columbus. Peters made special note of the cost of drayage, which increasingly factors into any network design, no matter what configuration is chosen.

     “The cost of drayage increases significantly after you get 20 miles from the terminal,” he noted, taking the audience through a hypothetical case study that meant a $95 difference per load if the DC was 5 miles or 50 miles from the hub. Over the course of a projected 2,500 20,000-pound loads per year, that’s a difference of $237,500. And that is the type of difference that the modeling process helps companies discover in their efforts to make highest and best use of their transportation assets. -Adam Bruns