This current economic boom is having a profound impact on the way companies warehouse and distribute their goods. The pressure for companies to keep up with demand, optimize their supply chains, reduce inefficiencies in their logistics networks, and shorten transit times for customers has been the main impetus for the increased warehousing and distribution activity most primary and secondary markets have experienced as of late.
Site Selection Group, a full-service location advisory, economic incentives and real estate services firm, works extensively with distribution center operators to identify the optimal locations for their facilities. This often involves the evaluation of complex factors like logistics networks, workforce characteristics, business environment, real estate and economic incentives. A large and important segment of this industry includes third-party logistics providers (3PL) that offer a variety of efficiencies and advantages to companies that opt not to manage their warehousing and distribution activities internally.
The real estate challenge 3PLs face as they consider new markets
Unlike most industrial site selection projects, 3PLs expanding their geographic footprint into new markets is typically prompted by a request from an existing customer. Due in part to protecting the overall business currently being done with the existing customer, the new volume required to justify a 3PL pioneering a new market might not be as high as most think. In fact, many 3PLs view this request as an opportunity to grow their customer base by capitalizing on untapped demand in a new market.
One of the major initiatives a 3PL faces when expanding into a new market is determining how to manage their real estate strategy. This requires the 3PL to conduct an analysis of market size, demand and penetration that is above and beyond the request of the new customer. The perfect real estate scenario for any 3PL expanding into a new market would be to only take down warehouse space as demand is converted to new customers. However, this is a tricky endeavor because, on one hand, the 3PL wants some immediate additional capacity to sell to new prospects and, on the other hand, it wants to preserve expansion space that can accommodate total market demand. Although engineering flexibility into the real estate portfolio can be done through a variety of lease mechanics, it requires the 3PL to have firm understanding of market potential.
Using predictive analytics to assess market potential
Having a solid understanding of market potential and convertible business is helpful to know when negotiating the lease that will house the initial business that justified expanding into the new market. Most 3PLs have traditionally relied on their business development and sales teams to assess these metrics. While these teams certainly have access to internal databases, industry insights and valuable anecdotal information, most have stopped short of using predictive analytics.
The utilization of predictive analytics in the site selection process is a concept that was pioneered by retail users. In its most simple form, retailers use a variety of correlation analyses to predict potential revenue at specific candidate sites. These correlation analyses are based on demographics, consumer behavior patterns, economic and income statistics, and similar data sets. They can influence the size, location and product offerings of new stores. These benefits are enabled by the ability to evaluate large, complex data sets of past industry performance to identify and quantify those geographic data points that will influence operational success.
Applying predictive analytics to the 3PL market
The concept of applying predictive analytics for 3PLs entering a new market is a practice that Site Selection Group has helped pioneer. Drawing a parallel on the retail site selection example, 3PLs can assess the impact of competitive presence, the growth of key industry segments, the dynamics of the local industrial real estate market, and the changing demographics on market potential, all while validating the results with past experiences in established markets. In an age of big data analytics and increased access to geographic data sets, this approach will soon become common practice for 3PLs.