April 7, 2020
For industrial space users, the size of the operation isn’t the only factor in determining a facility’s location and size. The balancing act of customer expectations and holding down costs is also a key factor. Connect Media asked Todd Steffen, VP supply chain and logistics within the Occupier Services platform at Colliers International, for insights into managing growth through dynamic capacity planning.
Q: What factors come into play in dynamic capacity planning for an industrial space user? How can these requirements vary from user to user?
A: Companies are facing a constant increase in customer and consumer service expectations, while needing to drive down costs related to providing that service. Dynamic Capacity Planning allows a company to quickly compile and model the critical information to stay ahead of the curve on both service and cost management, and ensure adequate capacity to satisfy multiple commercial scenarios. These commercial scenarios may include consolidation, national or regional organic growth, or M&A.
When modeling dynamic capacity plans for an industrial user, the preferred approach is to account for as much of the total P&L cost as possible without including too granular a level of data. There are generally two types of constraints, throughput and storage, that are accounted for when modeling dynamic capacity plans. Dynamic capacity plans will inform the site selection process that will follow. The set of factors to evaluate and model when creating dynamic capacity plans include:
• Intended use of the facility – food grade, temperature control, e-commerce fulfillment, warehousing, etc
• Commercial & financial projections related to the Business Operation – sales by region, cost of capital, growth factors, M&A activity
• Labor – Quality, fully loaded and variable rates, availability, productivity
• Material Handling Configuration
• Trailer Parking
• Material Handling and Labor Productivity Assumptions
• Dock door count
• Clear height
• Inventory turns
• Product characteristics – value, size
These factors can vary widely from user to user depending on the intended use of the space, and the characteristics of the business operation occupying the space.
Q: Have these requirements become easier to model as more data become available, or more complex?
A: Depending on the availability and quality of data, predicting the required space for an operation has been accelerated and enhanced as we have been able to define the relationship between all the factors listed above, and model their relative impact on the overall P&L while evaluating various capacity scenarios.
Q: How is this capacity reflected in a space user’s P&L?
A: The capacity and related costs are reflected in a number of places on the P&L as follows:
• Rent for leased distribution capacity or depreciation for owned distribution capacity
• Utilities & Maintenance
• Property Taxes
• FF&E – Furniture, Fixtures, and Equipment
• In addition, to calculate a TCO (Total Cost of Operation) for a capacity scenario, also account for Labor & Transportation – costs may be embedded in COGS (cost of goods sold)
Q: What are the implications for industrial space owners, as well as brokers (whether representing owners or users)?
A: A clear understanding of the factors that drive a company’s dynamic distribution capacity plans have implications for space owners, tenants, and brokers. These implications include how quickly a site can be leased, how well a company can service its customers, the overall cost of operating the facility, and how much product can be stored in a given site.
For comments, questions or concerns, please contact Paul Bubny