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08/04/2021

Four Questions

Four key questions to ask when planning a new fulfillment center or DC
Steve Backman
Steve Backman

With online and omnichannel models becoming an increasingly pivotal piece of the retail puzzle for growing numbers of brands and businesses, fulfillment and distribution centers continue to grow in importance. 

As the industrial market continues its strong recent performance, space is at a premium. That means identifying, developing, and building these specialized facilities continues to not only become more challenging, but also more impactful. 

A new or redeveloped distribution or fulfillment facility is a big investment. For many retailers, this is a decision that they literally cannot afford to get wrong. Asking the right questions ahead of time is a prerequisite for both positive near-term outcomes and for sustained success.

From a retailer’s perspective, what should be asked in planning a new fulfillment or distribution center? Here is a guide. 

What will it cost?
This is the big one, right? What’s the price tag? The challenge, of course, is that with prime locations in high demand, rental rates are high. The combination of rising labor costs and soaring construction materials prices have contributed to the cost of new construction skyrocketing in the past year. 

Factoring in inflation, and the cost of building a new facility today is estimated to be from 30% to 50% higher than a few years ago. Given these financial dynamics, and the current state of the market, many retailers may be forced to make difficult choices about what they can—and cannot—afford to build right now. 

Higher costs may lead to necessary compromises about the size and scope of new builds. Surprisingly, however, cost might not even be the biggest question for many retailers.

Who is your customer?
This seemingly simply question has profound ramifications for everything from the type and size of facility you need, to the design and location of your fulfillment operations. Will you be shipping primarily to your stores and other brick-and-mortar locations, or directly to customers who are purchasing your product? 

The answer can dictate where you build, and whether your fulfillment or distribution center is a single large industrial-style operation or multiple smaller facilities. True commercial distribution centers shipping to brick-and-mortar locations are typically very utilitarian, prioritizing functionality by maximizing storage and efficiently storing and shipping inventory. 

In addition, they tend to have lower capital costs than true online fulfillment centers, which are often more automated, and have several design and operational elements that are more capital-intensive. Because many retailers are shipping to both brick-and-mortar stores and directly to customers, determining the right kind of fulfillment/distribution mix can be more of an art than a science. 

Once a retailer has a good handle on what their omnichannel mix really looks like, they can work with design and development professionals in this space to design and build a facility specifically designed to meet their needs for today and into the future.

What are your future needs?
It’s all too easy to get caught up in evaluating your needs today and to neglect longer-term planning when determining your distribution and fulfillment needs.

Does the facility have sufficient scalability and built-in flexibility to either expand or pivot to accommodate new operational realities in the years ahead? Can your space evolve to adapt to the growing priorities and preferences of customers, and to the shifting contours of an industry where change appears to be one of the only true constants? Making that determination means not only looking at the trajectory of sales for your own product, company and market segment, but also at how the delivery mechanisms for consumers and professional partners are likely to evolve in the years to come. 

It would obviously be unfortunate to find that you are under-sized and obsolete within two years, or that your mix of brick-and-mortar distribution versus online fulfillment is skewed. 

However, it can be equally damaging to overbuild, and to invest in a distribution or fulfillment facility that is more than you need. No one wants to be the equivalent of overambitious homebuyers in residential real estate, who buy “too much house” and find themselves underwater in a few years.

Who (and where) can you hire?
Finally, one often-underappreciated factor that needs to be accounted for before building a fulfillment or distribution center isn’t the price of products or property—but people. What does the labor landscape look like in your intended market? Have you done your research on labor availability to serve your facility? 

Automation may alleviate some of the labor-demand crunch for some retailers, but labor still matters. So, if you need to hire 1,000 employees, building in a market where qualified labor is scarce or pricey might not be the best idea. 

Location matters in other obvious ways, of course, most notably with access and convenience to highways and other transportation nexuses. In other words, it’s not just about how you can serve your location, but how your location serves you. Cost, efficiency, and operational mechanics are all impacted directly or indirectly by location. Understanding the interplay of those different dynamics is one of the biggest prerequisites for success in the development of your new retail distribution facility or fulfillment center.

Steve Backman is co-founder and partner at Phoenix-based BH DevCo, a real estate development company specializing in build-to-suit delivery for national tenants in the e-commerce distribution and delivery space. Connect with him directly at [email protected]
 

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