Network Strategy Beyond the Model – Making it Real

St. Onge Company Links Supply Chain Blog
Strengthening your supply chain one link at a time.

Network Strategy Beyond the Model – Making it Real

Okay, you’ve crunched the numbers and the optimal location for your next warehouse is Somewhere, PA.  However, there are factors extraneous to the network model that could impact the decision.  Can Somewhere’s labor market support the needed headcount especially during peak times?  Will you have to pay a premium for that labor?  Is there existing warehouse space in Somewhere or land to build a greenfield warehouse?  Is there an inventory tax in PA?  Are there any incentives to set up shop in Somewhere or to locate in PA?  Maybe Somewhere isn’t the optimal location!  These factors, considered outside a network model, play an important role in the decision-making process.

I’ve been a network modeler for over 15 years and one practice I’ve found useful to clients is to provide alternative solutions to the optimal location.  A typical network model will include inbound and outbound transportation costs as well as facility costs on some level (certainly labor and lease costs), and an approximation of inventory holding costs.  Providing alternatives, usually three to five, to the optimal location allows you to keep multiple states in play from a site selection perspective.  “Beyond the model” factors could trump variances in logistics costs among those locations, thereby suggesting a new optimal location.  The factors outlined below can also be a pragmatic tiebreaker should a few different locations be virtually tied in terms of logistics cost comparisons.

  • Labor availability (and wage rate) varies by market as well as for a metropolitan region whether you locate north of the city or east of the city.
    • If the decision is to relocate a warehouse, can the current labor force be maintained?
    • Severance costs could be a factor in cases where existing warehouses are eliminated from the network.
  • Finding an existing building that meets your needs in the second or third alternative location could outweigh the costs to build a greenfield warehouse in the optimal location.
  • Taxes on inventory could negatively impact one location vs another in high dollar inventory industries since approximately 11 states currently impose this tax.
  • Incentives may be garnered as a reward for bringing jobs to a state or local municipality.
  • Other factors to consider outside the model are:
    • Proximity to UPS/FedEx hubs and cut-off times for the various locations under consideration (primarily in networks with high volume of parcel shipping).
    • Rail access if bulk shipments are feasible as well as inter-modal shipping.

The model provides a “target city”, but ultimately much more pragmatic site selection factors dictate the precise location.  Additional investigation should always be performed rather than simply accepting that the optimal location derived from the network model is the correct answer.
—Dan Gunter, St. Onge Company

Enter your email to subscribe to "Links":


St. Onge Company is Proud to Have Been Ranked Among the Highest-Scoring Businesses on Inc. Magazine’s Annual List of Best Workplaces for 2023

We have been named to Inc. Magazine’s annual Best Workplaces list! Featured in the May/June 2023 issue, the list is the result of a comprehensive measurement of American companies that have excelled in creating exceptional workplaces and company culture, whether operating in a physical or a virtual facility.

From thousands of entries, we are one of only 591 companies honored.

Click here to see our listing!