Site Seeing: How to Choose a Distribution Center

Medical Device & Diagnostic Industry Magazine
MDDI Article Index

An MD&DI  March 1998 Column

BOTTOM LINE

Determining the right size and locations for a distribution network can mean the difference between keeping customers or losing them.

For many years, purchasing professional Bob Davison exclusively used products from one well-known medical device company. He liked the quality of its products. He had a good relationship with its sales staff. He even liked its promotional materials.

But a few months ago, the brand-loyal Davison abruptly decided to switch suppliers.

"Every time I called up and ordered something, it would take too long to get here," he explains. "And even then, my order wouldn't always be right. I got tired of waiting. So, I found a supplier who could give me next-day delivery and get my orders right."

When choosing a distribution center site, consider the facility's size, location, quality, and cost-effectiveness. Photo courtesy of GATX Logistics, Inc. (Jacksonville, FL).

Although Davison's story is only a hypothetical example, it is a fact that an increasing number of customers are demanding better logistics service from medical product manufacturers. Some are even willing to switch suppliers if they don't get it. As a result, running a quality logistics process has become increasingly important for every medical device and diagnostic equipment company interested in growth. And while there are many components to such a process, logistics professionals say that one of the most important—and easiest to control—is selecting the distribution center or centers.

According to the American Warehouse Association (AWA), there are about 250,000 distribution centers located throughout the United States, totaling from 25 billion to 35 billion square feet. Not all centers are created equal; what constitutes a quality distribution center for one company could be completely inadequate for another.

With that in mind, here is some practical advice to help make the selection process successful.

THE IMPORTANCE OF DISTRIBUTION CENTERS

Before proceeding any further, it's important to define distribution center. A distribution center is any facility a company uses to facilitate the flow of its raw materials and finished goods. A center can range in size from a small corner of a public warehouse to a larger facility operated by the manufacturer or its contract logistics provider, and it can provide a myriad of services from basic shipping and receiving to custom packaging and special service parts orders. The discussion in this article will be restricted to outbound distribution centers, which usually deal with finished goods.

Distribution centers are important in any industry. However, they are especially vital in the medical device and diagnostic industry because health and equipment needs tend to be especially volatile. Unlike industries such as grocery or automotive, many medical device and diagnostic equipment manufacturers don't have the luxury of serving a mass market. Orders are often smaller, more individualized, and more last-minute in nature than in other business sectors. Moreover, professionals working in the medical device industry can't as readily predict exactly where or when their materials will be needed. One logistics professional summed it up well when he said the word emergency is more likely to be applied to a medical device than to a toaster or box of cereal.

As a result, inventory-reducing techniques that lower or eliminate the need for distribution centers aren't really an option in this industry. Instead, manufacturers need distribution centers that offer optimal reach and flexibility.

SELECTING A CENTER

Companies generally have two options when it comes to selecting a distribution center. The first is to purchase or lease a center and operate it with internal resources. The second is to use a center owned or leased by an outside provider who would also serve as the operator. Either way, the same basic issues must be considered.

The most important issue in warehouse management is deciding what constitutes timely delivery. Photo courtesy of Sonic Air (Scottsdale, AZ).

Define On Time. The first and most important issue is timing. The center or centers of choice must be able to get products to a company's customers in a timely fashion. What that means depends on a manufacturer's typical customer demands. For example, a company that supplies x-ray film to hospitals may find that its customers are happy to receive orders within a week (the current standard), whereas a company that sends out a lot of replacement parts for CAT scan machines may find that its customers think even 24 hours is too long to wait.

What constitutes timeliness also depends on the nature of the product and the potential consequences of late delivery. A short supply of some products, such as replacement heart valves, could turn out to be a life-threatening situation. As a result, meeting their manufacturers' on-time logistics needs would be a critical concern.

Determine the Optimum Size of the Distribution Network. Figuring out how many distribution centers a company should use is important for two reasons:

First, the number of centers needed could make a big difference in the locations a company selects as its distribution points. A manufacturer that decides it needs only one distribution center should probably place it in a major population center like Atlanta or a central city like St. Louis, whereas a manufacturer that opts for several centers might use more geographically dispersed locales like Salt Lake City, Seattle, and Grand Rapids, MI.

Second, the decision will affect the size of the distribution centers sought in each location. According to AWA statistics, the average company operates four distribution centers with an average size of 124,000 to 136,000 sq ft. Research also shows a growing trend toward using fewer distribution centers, each containing minimal square footage.

Unfortunately, no magic rule exists for determining how many distribution centers the typical medical device manufacturer should use. The decision depends on the manufacturer's customer service requirements, the cost of its products, the size of its logistics budget, its financial ability to support inventory carrying costs, and its own comfort level.

Choose Distribution Locations. Once a company has considered the issues of timing and number of locations, it is ready to move forward with the next step in site selection—choosing distribution locations.

As a general rule, medical device manufacturers will want to consider many of the same issues as other business sectors when selecting distribution locations. These issues include proximity to customers, the cost of reaching customers from a particular site, the potential quality of the workforce in a given area, access to a good selection of transportation providers (unless a company's entire market is served by an in-house fleet), and the quality of an area's transportation infrastructure.

In addition, medical device manufacturers should consider a few other issues, such as proximity to good air support. In contrast to the rest of the business world, which ships a very small percentage of its materials by air, some medical device companies use more air transportation than they do ground—or at least a more balanced combination of the two.

Although virtually every city or town large enough to have a distribution center will have an airport, there's a big difference between the number of small-parcel flights that leave each day from places like Bozeman, MT, and places like Chicago—and in what time those shipments go out. Companies that ship a lot of urgent orders should restrict their search for distribution centers to locales with major small-parcel hubs or headquarters.

Another issue to consider is weather. The more last-minute and urgent a manufacturer's orders tend to be, the more vital it is that at least one of its distribution locations be in an area where Mother Nature rarely if ever makes it impossible to get shipments out. This might rule out places like Buffalo or San Francisco as sole distribution sites.

Comparing site criteria can be a painstaking process that can take weeks or months. However, many site selection software packages such as OptiSite (MicroAnalytics, Arlington, VA) are available to help. These packages enable a company to pinpoint its optimum distribution locations based on a number of variables including product volume, location of origin and destination points, performance standards, and budget limitations. In addition, they can help a company compare any number of scenarios—such as a two-facility network versus a three-facility network—to help configure the network that will work best for its needs.

Manufacturers can purchase this software themselves or work with logistics consultants or providers who often have the software in place. Either way, it's money well spent.

Compare Individual Facilities. Once a company knows what locations it needs to distribute from and how large its facilities must be, the distribution center site selection process comes down to searching for and comparing individual facilities.

Some selection criteria may vary by company. However, virtually every medical device manufacturer should ensure its facilities have the following:

Distributor centers should have clean, well-sealed facilities. Photo courtesy of GATX Logistics, Inc. (Jacksonville, FL).

In addition, a facility's manager, whether an in-house employee or an outside provider, has a significant effect on the facility's efficiency. A few of the items manufacturers should consider if they are using a provider instead of keeping the operation in-house include:

Compare Costs. The next step in the distribution center selection process is often the most dangerous one, because it's where companies most frequently lose their strategic way. Although companies should always consider cost as a factor in choosing a distribution center, too many make the mistake of letting a seemingly good price get in the way of their good judgment.

For example, manufacturers may automatically assume that the lowest rent equals the lowest cost, but that's not necessarily true. Additional expenses like taxes, insurance, and utilities can make the total tab significantly higher. So can the fact that a facility is older, or odd-shaped, which research has shown isn't as effective as a rectangle because of travel distances within the warehouse.

Additionally, some companies choose a location in a less expensive, more remote area of town without factoring in how much more they'll have to pay in transportation costs.

Perhaps worst of all, some companies let price alone dictate where they place their distribution centers—and their customer service declines as a result.

To find the distribution center that is the most cost-effective for their companies, manufacturers must look at the big picture, factoring in all the potential costs and benefits. Based on these criteria, they may end up going with a very different facility than the one they originally might have chosen.

Be Willing to Compromise. Sadly, even manufacturers who conduct a textbook-perfect search for a distribution site don't always wind up with a perfect facility. This is especially true in popular distribution markets like Atlanta, Dallas, or Los Angeles, where larger facilities are in great demand, or in growing markets like Mexico, where particular kinds of facilities simply don't exist.

In such cases, companies have three options. They can look in another, comparable market; they can build a facility themselves, which is expensive and time-consuming; or they can use sophisticated computerized decision-support tools to make the best of their less-than-perfect facility of choice. Such software helps companies determine the best layout, the optimum methods of storage, and the most efficient number of shifts needed to get the best productivity out of the facilities they use.

Companies should also remember that their choice of facilities doesn't have to be permanent. By using a facility operated by a third party, they can buy themselves the flexibility they need to reevaluate and reconfigure their distribution center network as often as needed.

CONCLUSION

No matter how well a company chooses its distribution locations and individual distribution centers, it must never think its site selection job is complete. Good logistics is a process, not an event. A distribution center and network that does the job well for a device manufacturer today might not even come close to doing the job adequately tomorrow.

For this reason, many logistics experts recommend reevaluating logistics configurations and centers every couple of years. This may seem like a great deal of work, but considering the value a well-planned and executed logistics program can have, it is probably one of the wisest investments any company interested in progress can make.

Russ Dixon is marketing manager for GATX Logistics, Inc. (Jacksonville, FL).

Copyright ©1998 Medical Device & Diagnostic Industry