Real Estate Analysis

Everyone knows that it is important to get a regular checkup from the doctor. Just get a quick and easy assessment of where they stand as far as the basics are concerned. In the best case, the doctor will give them some tips on how to do better. Worst case the doctor tells them there is something wrong and tells them what they have to do in order to get healthy again. It's common sense to keep tabs on where you stand.

The same should be true of your real estate portfolio. Real estate is a constantly shifting arena: prices fluctuate daily, buildings are built and knocked down, the demographics of a region change. Whether you have one location or a hundred it is a good idea to make sure that you are in good positions that are not hurting your business. Just like for your own health, it's important to get checked out by someone who is an expert in the field.

When the topic of a real estate analysis comes up most people in business think they can do it themselves. However, where would you start in order to figure out if you are doing the best you can be? A surface look would point at cost per square foot as the key factor of whether you are doing well or not. If you know the market rate for your area and are at or below that then you are doing well, right? Not necessarily.

If that isn't the decision point, what is? To really understand how your portfolio stacks up you need to look at a diverse set of metrics that includes: square feet per seat, cost per person, average churn cost per year, and common/shared space allocation. Then you need to benchmark this against your industry competition. Why does all this come into play with your portfolio? Isn't this an HR issue? It's important because the real estate cost is the effect of HR and Real Estate not being in alignment which is often the case.

If you have a high square footage per person, regardless of if your lease rate is at or below market you are overpaying for your space. You have too much of it. If your churn rate (or cost to alter the space with changing business conditions) is above your competitors then you may not be in the right type of space. If your shared space doesn't meet the needs of your employees then you may not have an effective workplace strategy in place (which ties directly into real estate).

Is it possible to do this evaluation internally? Absolutely, but there is a reason that most companies do not perform this level of analysis on themselves: it requires a specific type of expertise and knowledge that is outside the core competency of the business and is not performed on a regular basis. If this sounds like something that may help you then look into it. An inefficient office is a terrible drain on the bottom line and it may not even be noticeable if you don't know where to look.

Benchmarking

The year has only just begun but there is already a new hot topic that is flying around among our clients and it will probably be one of our focuses for the year: benchmarking. Interest in this topic is being driven by clients trying to get a handle on what they are doing right, what they are doing wrong and what is the magnitude of those things.

Reports are flying around newspapers and business circles of the economy turning down. This situation leads to companies looking toward ways to improve what they are doing today in order to weather the storm they see coming. Cutting costs is always an initiative on the table but it becomes more important as short-term growth projections are cut. Costs exist across the board but largely fall into a few large buckets: overhead, distribution, manufacturing, and real estate.

Benchmarking comes into play because it allows you to look at people in similar positions as you and helps you identify your strengths and weaknesses. Costs are then cut by focusing on strengths and improving weaknesses. By driving more of your focus into your strongest areas you focus on hitting your higher margin zones that carry less risk. Improving weaknesses shores up the resources to focus on the better areas.

So why is benchmarking the way to go? Let's look at Southwest Airlines and how they benchmark airplane turnover - the time it takes to clean and refresh between flights. When they benchmarked themselves against their competition they couldn't find anyone who was doing it better than them. Instead of turning their focus onto other areas they decided to take the benchmarking to another level and focus on other groups that performed similar operations. Now they benchmark their airplane turnover against the likes of NASCAR pit crews.

The operations being compared are the same processes on different scales and in different environments. But when you are already best in your industry it makes sense to innovate and compete with groups outside of your specialty. If it seems like you've reached the top you probably haven't looked around to see the other mountains around you that go higher yet. There are always ways to improve, some just have yet to be put in place in your industry.

This leaves us with improving the weaknesses. Most companies are lagging behind in some core area. Either their percentage of overhead is too high or their inventory turns are too low or their transportation rates leave something to be desired. It's hard to have an expert around to diagnose every problem. Sometimes it's important to step back and see what you're missing and why it's happening.

If you operate a call center that uses 250 square feet per person then you are using more real estate for that function than most of your competitors. The lease cost associated with that extra space is a cost that you have to pay every month. It may be possible to consolidate another group in with that call center and get rid of real estate that you don't really need.

Benchmarking gives you the final advantage of knowing what to look at long term and the ability to track progress. Improvement is a long-term activity that should be constantly moved towards. If it's not part of your corporate culture it probably should be.

Changing the Supply Chain Game

Let's take a look on the inside today and evaluate how well we are playing the game we are in. What I mean by this is that we need to look into the puzzle pieces of our company to make sure everything is still working the way it was intended. Seth Godin talked about "Changing the game" for your business to out-maneuver the competition. Similarly, you should change the game internally to avoid creating long-term bad habits.

Everyone knows by now that metrics are the keys to understanding how things work. If you are curious as to how well your car is running you track the miles per gallon it is using, how many dollars per month it is costing in maintenance and how comfortable the ride is. Using those metrics you get a pretty good feel for if your car needs work done or if it is time to trade it in for something newer. The same applies to your supply chain where you should be constantly tracking your metrics. What metrics matter most in your supply chain? How about:


SF per Area (Receiving, Putaway, Picking, etc)
Workers per Area

Pallet Product In
Carton Product In
Each Product In

Pallet Product Out
Carton Product Out
Each Product Out

Operating Hours to Date
Orders Out

Utilities Cost
Admin/Overhead Cost

Why are these the important metrics for your warehouse? They tell you just about everything you need to know about your suppliers, your customers and yourself. These metrics will let you know when situations change and you need to adapt. Look at these numbers on a either a bi-weekly or monthly basis. If you evaluate daily or weekly there will be too many fluctuations to see clear trends. More than monthly and you won't be able to react or understand the changes. Let's look at each of the metrics so that we can see why the metric is important.

Square feet per area and Workers per Area go hand in hand. You should already be allocating work hours by department so that you can understand where your costs are coming from. This is an extension of that. If there is a change in the number of Workers per SF in an area then it is time to evaluate what is going on in that area.

Monitoring the way product comes in and out gives you an understanding of supplier and customer trends. If there is a shift to in type of units inbound there may be a need to change the storage methods to accommodate the new size. You'll have the data to go to the purchasers or suppliers and ask them about the change so that you can adapt to meet it or explain why it isn't going to work. You will be able to meet with them before you get overwhelmed by the change. On the customer side you can begin to pre-work items to meet expected customer demand. If customers are ordering cases instead of pallets, there may be the wrong allocation of forklifts and order pickers to meet the change.

Orders Out and Operating Hours tells you how many orders per person-hour are going through your facility. This is the high level facility efficiency. If this changes downward then there is probably over-staffing. An upward trend should coincide with changes made to improve efficiency. If an upward trend suddenly occurs it gives reason to look at the staffing throughout each area.

Utilities and Admin costs help you understand and plan for operating costs. Seeing the trends in these costs will help you understand the economic conditions around your business. Spiking admin costs without the resulting improved orders should be a call to scale back. Utilities that are trending upward should be a sign to plan for higher future costs.

Knowing these metrics and charting them regularly will give you the tools to improve and monitor your supply chain. Using these metrics assumes that the operation currently in place is efficient and operates the way you want it to already. Monitoring the metrics of a poor operation won't help the underlying issues and will be of little value at all. If you need help in determining if your supply chain is in good shape our company can help.


Technorati Tags: supply chain, metrics, warehouse, consulting

Distribution Design Mistakes to Avoid

Distribution Centers (DCs) are some of the most important aspects of any supply chain. An effective distribution center can be the difference between losing money and making money. As we've discussed previously, Supply Chain health can often be overlooked. Without putting the correct processes in place the supply chain won't function correctly even if every aspect was well designed and implemented. But in order to even have a chance to run an effective supply chain, the design at each step must fit the purpose. The first cog to the supply chain is the DC.

Many DCs fail to even minimally live up to the high business expectations set for them during the initial strategy and planning stages. The issues that they face are varied but the symptoms are usually the same: low throughput, processing errors that impact service levels, inadequate inventory controls, poor productivity due to inefficient design. Many reasons exist for the struggle to open successful DCs. Most struggles can be associated to either lack of consensus on the plan, project plans run over budget and cannot be fully implemented or the proposed ROI for the design is inadequate to justify the project.

Beyond those, there are 10 common mistakes that should be avoided:

1. Incomplete Supply Chain Strategy
2. Lack of Financial Objectives
3. Overstated Inventory Levels
4. Failure to Utilize Postponement Strategy
5. Planning Without Data
6. Failure to Apply Lean Principles
7. Irrational Demand Buffering
8. Ineffective Space Utilization
9. Poorly Designed Value-Added Services Operations
10. Misapplication or Lack of WMS Technology

Ultimately a Distribution Center is a large machine where each part must work together. If even one part is incorrectly designed or fails to perform correctly the entire operation will suffer. Information and products must flow between areas seamlessly or it will back up and cause havoc.

Look at receiving docks in DCs. It is a fairly straight forward area where product comes in and relatively few tasks must be performed. A truck backs up to the dock and product is unloaded either manually or with some sort of fork lift. There may be a quality and count verification once off the truck, but for the most part the product is now ready for putaway into the storage area. Too often the receiving dock gets clogged with processed inventory that has not been put away. Usually this also means that orders cannot be placed against that product. The backup is usually caused by pickers focused on filling orders in hand and forgetting the putaway process. Eventually no more product can be received if nothing else is putaway simply because there is no room to put anything else.

The best way to avoid design mistakes is to always design with a process flow in place for facility operations. Before you can design a receiving area you must know what tasks will be performed there, what the putaway strategy will be and how many people will be in the area. It is not possible to design an effective storage area without knowing the picking processes and technology that will be used.


Technorati Tags: design, warehousing, process

Decision Windows

You have a decision to make and there are a lot of variables that come into play. Scenarios keep running through your head showing the outcomes of the various options you are still weighing. Days pass as you agonize before finally making the call. Implementation plans are put together, conference calls are held to discuss the strategy and time is tight to pull everything together.

A company is relocating to a new facility. Their lease is up at the end of January and they have to be in a new location before then. Everything needs to be in place to assure that there is no downtime to their clients and that they stay within a known budget. They know 18 months before the lease expires that the change is coming. Everything should be fine....not exactly.

Knowing something is going to happen and making it happen are two completely different things. This company did not start looking for a new site until 8 months before they had to be out. Ten months came and went with almost no action. Ten months when they could have been looking for the perfect building, negotiating the perfect lease and working with supplier and vendors ahead of time to get the best pricing possible for their move. They finally signed a site and then realized that they had no plan in place. Their method of putting the plan together? Call up four or five vendors and see who comes in with the lowest priced plan and see if they could make it work. Don't worry that the vendor doesn't have all the details, they say they can make it happen. RFPs went out 5 1/2 months before lease expiration. Bids came back 4 months before.

Lead times for materials run at 2 months currently, installation will take another 2 weeks, moving their product has to occur over weekends and there will probably be four weekends or more of moves and plans still haven't been approved or evaluated. Even with the best coordination they will be getting in with no time to spare and probably quite a few new gray hairs on their managers' heads. Regardless of whether everything works out in the end for this company there were serious flaws in their decision process.

One of topics that comes up a lot here (one of my favorite subjects) is Decision Making. There is a science to making the correct decision for your company. Decision making is a process, not an action. The result of the process is an actionable plan to make something happen. Whether you are trying to decide strategic direction, choosing a new facility location or making personnel decisions there are always pros and cons. Good managers are the ones that look at and balance all of the criteria to reach a decision that maximizes benefits.

Great managers make the same decisions at the right time. They make the right decision either without hesitation that costs time and money or delay the decision until a more appropriate moment. Making a facility decision two years before a lease is up does not make sense. Situations will change during the next two years and the decision will lose value as time goes on. Every decision has a window of the appropriate timing it must be made in. There can be tremendous benefit to bringing in help to make the best decision. Outside observers can strip away the biases and faulty assumptions inherent to being to close to the situation.

Do you account for decision windows when making the big decisions? Sometimes a day's delay can be the difference in whether the decision was good or bad. Nothing occurs in a vacuum when it comes to business. Not even decisions.


Technorati Tags: decisions, decision making, consulting, timing

Supply Chain Importance

Do you have someone that keeps their finger on every layer of your supply chain? A Chief Supply Chain Officer (CSCO) so to speak. If your business involves moving a product(s) to an end user there should be someone in charge of supply chain health. Ignoring the supply chain is quite possibly the number 1 way to add unnecessary cost to products, force you to lease more real estate than necessary, and eat away at overall profit margin.

Supply Chains are not sexy things. They are composed by your greedy suppliers, transportation companies that find new ways to make your life difficult, buildings that are ugly and expensive, workers you wouldn't want to associate yourself even when you are at work, and equipment that just keeps sucking down your money. This is the last way you should envision your supply chain. In the end there are three types of supply chains. Those that:

1) Put you ahead of your competitors, reduce your costs, and make you a superstar to your customers.

2) Keep you in the race with no advantages.

3) Drain your money, make your customers hate you, and put you out of business tomorrow.

More companies than not fall into that #2 category. Probably 80% of all supply chains exist because they have to. They have minimal thought put into them and simply operate on their own. 10% fall into the superstar category and 10% fall into the quickly going out of business category. How many companies realize they are in the wrong one? Probably not many until it is too late.

Designate a person who is in charge of keeping the supply chain healthy. This person should understand the workings inside your distribution centers, know the suppliers and track product and order lifecycles. Processes should be in place to track the key metrics around these areas. If you do not have anyone who can do this, it may be time to look for outside help. There are many consultants or consulting companies willing and capable of assisting you in your evaluation of what you have and what you need. Do not be afraid to bring someone in, the future success of your company could be at stake.


Technorati Tags: supply chain, consulting, distribution

Strategic Facilities and Operations Assessment

Aging infrastructure and stale business practices can weigh down a company's operating flexibility. More than just a tactile look at what is going on, a company needs to look at the way they are doing business and validate that the core assumptions they are operating under still apply. A building built in 1920 could be fine for some companies but completely inappropriate for another, even a competitor. It comes down to the principles that are grounding your business.

Any assessment should start in the boardroom with the executives. Brush off the mission statement and business plan and see if they are still applicable to the way things are truly running in the day to day operations. Compare it to the competitors and see if it could relate to any of the competitors business plans. If there is any misalignment, sit down and figure out why things are no longer the same. Rewrite the business plan and mission statement if necessary. Make sure that these get distributed through the layers of your company; your people need to know how things should be done and that their executives are staying ahead of the curve.

Next, evaluate the organizational structure to make sure that is supports the business. Often times groups will spring up out of momentary business requirements and never disappear when those requirements change or go away. A good organizational structure will have a clear role for every group. It will also be apparent how the groups will interact and support each other. Organizational structures and the related Org Charts should not be considered fixed entities. As business changes and evolves these need to change and evolve with it. The organization as a whole is simply the chosen method for executing all requirements for performing business functions.

With the business plan and org chart in place, take a look at the facilities and infrastructure. The environment where work is performed is as important as the actual plans. If you have created places where no one wants to work or your employees can't be productive evaluate ways to resolve the situation.

We were working with a client on assessing their facilities two months ago and they were trying to figure out why their work force was older than their competitors and why they couldn't retain young employees. Their problem was entirely related to their space. They had 1970s style workspaces and cubicles, their buildings were former military grade construction (almost no light or design elements), and their technology was completely out of date. Some employees were still using 15 year old beige analog telephones! Older employees didn't mind the setup because it was the environment they had come up in, but young employees essentially refused to work there. Fortunately their lease was nearly up and moving to a new space with new furniture was an option.

The last step of the assessment, after all the changes have been made and communicated, is to put in procedures to create continual improvement. This is not related to six sigma, this is reevaluation. Over the course of a year after all these changes have been made, you will probably notice reduced operating costs through reduced turnover, higher margins and increased productivity. Without continual improvement these costs will begin to increase again until it is necessary to perform a full assessment again. The cost of making all the changes necessary for realignment is not insignificant but they typically pay for themselves in a relatively short time frame.


Technorati Tags: facilities, assessment, org chart, consulting, operations

Site Selection (How It Should Be Done)

One of the most important decisions that a business needs to make is where they will locate their facilities. Traditional Site Selection firms take a limited cross-section of markets into consideration that varies from industry to industry. Call Centers can only go to these markets, Technology companies can only go to these, and Transportation companies to another set. Their process is driven by past successes within a certain industry or where the majority of companies in a given industry are located.

Unfortunately, past success is not a reliable indicator of future success. Many traditional call center markets are becoming oversaturated to the point where turnover is beginning to damage the bottom lines of companies located in those markets. Technology companies are becoming centralized in such a way that incentives decrease in value because a market no longer needs to draw these types of companies. But the biggest problem with traditional Site Selection is that it does not accurately account for the fact that a company can exist in multiple industries at one time. Where should the research center for a company doubling in size every year that is an outsource provider of IT services to the Healthcare industry be? It falls under research, IT, and Healthcare.

The ideal process for site selection should start by evaluating the internal facts about a company and what their needs for the new site are. Then it should look at a completely blank map and evaluate the relative characteristics of each and every city or county with a labor force capable of supporting their facility. If a non-biased, full geographic approach is not used there is no way to verify that the best site was chosen.

If you are currently going through a site selection process either internally or with an outside consultant you should stop and analyze the approach taken to finding the correct location. If there are only a few options on the table why aren't other cities included? If your team tries to tell you that it is too expensive or impossible to evaluate every market in the US then they aren't really performing site selection are they? There are firms capable of looking at every market across the board to find the best one for you. The amazing thing is that these firms are also charging less for their services because they are leveraging available technology to decrease their costs and increase their accuracy.

The non-biased approach allows emerging and non-traditional markets to enter consideration in the Site Selection process. Many times these markets offer aggressive incentives to bring in new businesses. These markets have the same infrastructure, labor force, and financial costs as traditional markets without the intense competition for land, labor, and attention. If traditional site selection processes were used by everyone then Austin, Texas wouldn't be what it is today and many other mid-size markets wouldn't be getting the attention they deserve for having wonderful demographics and superior infrastructure.



Technorati Tags: site selection, consulting, decision making

What is Knapsack and Why We Use It

Knapsack problems are a type of problem that involves deciding which of a number of items should be placed into a limited amount of space. The problem type gets its name from trying to fill a backpack (knapsack) with items needed to go camping. In the classic scenario the items are a compass, matches, map, portable grill, food, clothes, tent, books, hunting equipment, etc. Each of these items has an assigned weight and value to the packer. If only 30 pounds can be held in the backpack which items should be chosen?

The problem boils down to a cost/value association in it's simplest form. Matches have a value of 10 and a weight of almost nothing, while a book has a relative value of 2 and a weight of maybe 2 pounds. It's a fairly simple decision to pack the matches before you pack the book. More decisions fall under this philosophy than realized. Anytime there is a choice between two items there is a potential knapsack problem.

Why am I explaining this? Well, not all problems are that cut and dry. Think about a distribution center and deciding the storage medium that should be used. It's a form of knapsack problem with several expandable size bags. Each rack type is a knapsack (Pallet Rack, Carton Storage, Floor Storage, Bin Shelving, etc.) and each item needs to be placed into one. Imagine the costs involved: real estate, labor, material handling equipment, cost of the storage medium. They all vary by rack type. The Value of each item is how quickly it moves through the warehouse (lines per day and seasonality). Now run this evaluation over 5,000+ SKU types. Not a simple problem anymore but it can make a big difference in the effectiveness of your distribution center or distribution network.

Thinking in terms of Knapsack provides definition to problems that previously would not have had much form. It allows an evaluation method for each of the options that must be considered as long as there is an ability to assign a Cost and Value. Cost could be anything from money to size to weight to business flexibility. Likewise, Value could be money, growth potential, profit potential or speed. Assuming that a very reliable and understandable Cost and Value are assigned to each decision variable, a solution can be reached.

Obviously not all problems can fall be solved using Knapsack and not all solutions reached by using this method will be optimal. There are some grey areas around the theory. For certain Cost/Value ratios it is better to not fill up the bag than to continue filling it. Some decisions allow you to pick an option multiple times with decreasing value each time (if you want to pack three books and two boxes of matches). However, it provides the framework to begin thinking through some of the decisions facing you today. Making decisions is one of the most difficult jobs in business and sometimes it is near impossible to make them without outside help. The cost of making a bad decision usually outweighs the cost of bringing in help to make the right one.



Technorati Tags: knapsack, consulting, decision making