The Coronavirus crisis has placed stress on supply chains as never before. Whilst most of the attention has focused on the response of the transport industry and the difficulties it has faced in moving product on an international and domestic basis, the warehouse sector has also experienced enormous challenges.
One of the features of the crisis has been the impact of erratic customer behaviour on supply chains causing an increase in volatility and unpredictability. This has meant that some product lines have seen extraordinary demand whilst the collapse in demand for many ‘non-essential’ items has led to previously ordered and shipped cargo piling up at many warehouses, ports and airports around the world. According to some sources the problem is becoming critical, with only a few weeks spare warehousing capacity left in some markets.
The problems were exacerbated by the phases in which the Coronavirus took hold in different locations. Demand for many Chinese made products in the West was still strong when the country exited lockdown in February/March. This led to a wave of products being shipped arriving a few weeks later just as demand in Europe and North America collapsed. In many cases, this has led to a huge surplus of inventory being held in warehouses, awaiting an upturn in consumer and business demand. There is no doubt that once lockdowns are lifted renewed economic activity will lead to some of these backlogs being drawn down, resulting in a surge in transport demand as goods are moved to end markets. This will be followed by short term over-capacity in warehouses due to a hiatus in replenishment due to many orders having already been cancelled with Asian suppliers.
However, the impact of Coronavirus on warehousing will be far from transient. This paper will deal with the longer lasting consequences of the pandemic and how it will accelerate a structural transformation in the way businesses deal with inventory. Many companies and executives are changing their view that ‘inventory is fundamentally evil’ (as espoused by Tim Cook, Apple’s CEO) to a far more nuanced analysis of its attributes – positive and negative. After all, holding inventory has proven to be a critical tool in supply chain managers’ strategy in keeping customers supplied during these times of social and economic disruption. Just look at the success the ‘high days of inventory on hand’ pharmaceutical sector has had in maintaining supplies of medicines to consumers and contrast that with the problems experienced in sourcing Personal Protective Equipment (PPE).
Nobody is suggesting a return to Just-in-Case manufacturing or building up large stocks of goods which could rapidly become redundant. Such a policy would mean commercial suicide in many sectors not least due to the compression of modern product life cycles. Nor is such a ‘blunt’ approach required. To a degree, the need for inventory is created by the uncertainty caused by imperfect supply chain and market knowledge. Visibility systems will play a fundamental role in addressing this void, allowing supply chains to become more agile – replacing inventory with visibility and the ability to make informed decisions.
This paper highlights twelve ways in which the warehousing market is set to undergo a transformation. Some of these changes will be driven specifically by Coronavirus; others will be trends that pre-existed the pandemic but which will be accelerated by the social and economics changes which it wrought.
1. LEAN to HIGHER INVENTORY
The first major trend – possibly the defining trend of the entire crisis – is that of increased inventory holdings. Warehouses are nodes in the supply chain where inventory builds up as in insurance policy against unforeseen peaks and troughs of demand. The more uncertain the market or the external environment, the greater the need for buildings in which to store goods and the services required to process, pick, pack and dispatch them. In the future there will be less LEAN and more safety stock. Of course, an economic downturn will mean fewer volumes overall in the short term, but the metric of inventory to economic activity will rise.
The increased levels of inventory will need more warehouse capacity in which to store them. This additional capacity may come from larger warehouses or from more warehouses or both. This will depend on individual sectors and the inter-relation of many of the dynamics addressed below.
2. IN-HOUSE to THIRD PARTY LOGISTICS
Following the crisis, manufacturers and retailers will be more likely to regard large numbers of warehousing staff on their payroll as a risk as much as an asset, especially with the ever present possibility that Coronavirus may return at some point. Many may be tempted to believe that this is a challenge it would be better for a third party logistics provider to deal with. One of the key strengths of 3PLs is their ability to manage large work forces and these challenges will only increase in the coming years from a health and safety perspective.
Third party providers also often have existing networks of facilities in multiple geographic locations. As detailed below, it may be that downstream distribution requirements start to fragment, with the growing importance of local and urban markets as well as the increase in protectionism. If this is the case manufacturers and retailers will not necessarily want to build their own networks of distribution facilities required to meet the needs of these markets, instead relying on logistics providers to do this for them.
3. DEDICATED to MULTI-USER
Market turbulence is a strong challenge to dedicated, long term warehouse operations which, to a large degree, work best in times of stability and predictability of demand. This may mean that there will be a move from dedicated facilities to multi-user operations. The new market environment will require greater levels of flexibility which allow manufacturers and retailers to ‘plug’ into existing warehousing operations. Short set up times, quick training of staff and off-the-shelf technology will be essential to allow customers to move into new markets as and when demand occurs. The growing requirement to serve smaller localized markets will also favour operations within existing distribution centres.
4. LONG TERM to SHORTER TERM LOGISTICS CONTRACTS
Fourthly, there will be a move from longer term to shorter term contract lengths. One of the challenges of a highly volatile market is that warehouse capacity is often secured by manufacturers and retailers on a medium- term basis (3-5 years). Some contracts are longer – up to 10 years. This may be satisfactory in a stable economy, especially in sectors such as consumer goods, where demand year-on-year for logistics services is consistent. However, if the market ‘new normal’ is wild variability then such a model will leave companies exposed to the risk of having too much (or too little) inventory as well as warehousing capacity located in the wrong markets.
5. GROWTH OF ON-DEMAND WAREHOUSING
As a follow up to this trend, for a niche part of the warehousing industry Coronavirus has presented opportunities – the so-called ‘on-demand’ sector including companies start ups such as FLEXE, Cubework, Stord, Stowga, W2G and Flowspace. I wrote about this sector in more detail in a whitepaper back in 2019 and the huge demand created for warehousing in some sectors by Coronavirus has led to more manufacturers, retailers and 3PLs making more use of short term and flexible warehousing capacity.
The business models of these companies varies, some, like FLEXE, offering a pay-as-you-go service, and others offering co-warehousing spaces. However, they all offer an alternative to the longer term lease options which take time to negotiate and lock the warehouse user into a solution which might become out-of-date almost immediately in these days of volatility and uncertainty. Another part of these companies’ offering is the technology infrastructure which allows for ‘virtual’ warehousing. That is, allowing the visibility to store inventory in multiple locations across a wider warehousing network.
6. LOW INVENTORY TO AVAILABILITY OF PRODUCT
Like many of the trends outlined in this paper, the growing priority for availability of product (as opposed to the minimization of inventory) has not been caused by Coronavirus, but it will be accelerated.
Amazon and other online retailing platforms have created a consumer ‘need’ for immediate, or near-immediate fulfilment of their orders. This change in consumer behaviour is not confined to the e-retail sector – it is influencing all of retail. The best example of this is in the US where Walmart is focused on matching Amazon’s ability to deliver in very short times scales. This has pushed up its inventory holdings as it increasingly holds stock in multiple locations, close to the end market. Whilst allowing the company to deliver on a very short timescale, this does mean that inventory levels have felt an upward pressure.
The Coronavirus lockdown of consumers has driven up e-commerce volumes (although not necessarily profits, as in the case of Amazon) and engrained customer expectations of the level of service. Many believe that this will now become the ‘norm’. If retailers are to match the service provided by e-retail platforms, they too will need to devise strategies that either increase the level of stock in store from which to make home deliveries, or develop a network of smaller, more local facilities.
7. INCREASE IN SPECIFIC E-COMMERCE/OMNI-CHANNEL FACILITIES
As mentioned above, Coronavirus has helped to accelerate e-commerce sales. The requirements of e-commerce warehousing are quite different from those of facilities serving grocery retailing, High Street shops or Department Stores. They must be designed for the fast flow of small, individual items often delivered by a variety of trucks and vans to the end-user. This is in contrast to the more infrequent delivery of consolidated items to a single store by truck and trailer. This means that warehouses are getting bigger as more room is required for the physical handling of so many smaller packages. Also, e-retail facilities are often open around the clock, picking and packing shipments for next day delivery.
Whilst the e-commerce model requires warehouses with larger footprints, it will also be the case that there will be more of them. Whilst some service levels – such as next day delivery - can be provided through the efficiency of transport networks from more centralized distribution facilities, same day or quicker deliveries need hyperlocal fulfilment centres. This will require many more satellite warehouses from which shipments of a limited number of SKUs can be dispatched on an on-demand basis.
8. GLOBAL/REGIONAL TO NATIONAL/LOCAL
Many supply chains involve the flow of containers from remote manufacturers based in Asia through ports in Europe or North America and on to distribution centres, from where the goods are distributed to other manufacturers or retailers. This entire process has come under scrutiny as various parts of the supply chain and the logistics which underpin it have failed at times over the last few months.
This has led politicians to call for the re-shoring of the production of essential goods (such as PPE and medicines). This argument has also been extended to the introduction of much broader industrial strategies which would promote the development of national supply chains. Hand-in-glove with this policy is protectionism. Relations between the world’s largest trading partners are as bad as they have been for many decades. US and China are in the midst of a protracted trade dispute and other major exporters to the US, such as Germany, will not be immune from ratcheting up trade tensions.
What is the impact of this on warehousing? Logically this should mean that there will be a migration of warehousing away from major shipping gateways to locations which are geographically more central and nationally based. Brexit will have similar results in the UK, as supply chain managers become wary of the risks involved in bringing goods through bottlenecks, such as the Port of Dover, from the EU. In the US, there will be a re-balancing of volumes away from West Coast ports in particular.
Of course, this will be a gradual process. Much of Europe’s and North America’s manufacturing capacity has been lost over the last two decades and before. Consequently any repatriation of industrial production is likely to occur slowly.
9. FROM CENTRALISED TO FRAGMENTED
Centralisation of warehousing has many benefits, not least the reduction of the overall inventory requirement within a supply chain by reducing levels of safety (buffer) stock required in individual distribution centres. However, by consolidating stock in a single (or at least fewer) warehouses, levels of external risk increase. These risks include:
• Fire or flooding
• Industrial action
• Natural disaster
• Disruption of transport and, of course,
The latter has had a major impact on many warehouse operations throughout the world. The industry is highly labour intensive and therefore susceptible to an outbreak of disease, especially in crowded warehouses. The reaction of warehouse operators has been to segment workforces and keep shifts separate as well as a host of other hygiene initiatives. However, as a response to Coronavirus, many may prefer to migrate to a greater number of smaller warehouse operations where outbreaks of disease can be contained and limit the impact of the spread of contagion on entire operations within the supply chain node.
10. FROM MARKET-WIDE TO CITY-FOCUSED
The significant drop in both CO2 emissions and those that effect human health (NO and particulates) during the Coronavirus crisis, will re-double efforts by campaigners to maintain much lower levels of pollution. This will encourage governments to move forward with diesel bans in urban areas, in effect erecting a barrier to the distribution of goods to urban markets direct from a regional or national-based logistics facility. To meet this dynamic, distribution networks will have to become more complex and multi-layered. National distribution centres will likely serve Urban Consolidation Centres (UCCs) at the edge of urban areas. Goods will then be transhipped for delivery to logistics facilities located in the metropolitan area or delivered direct to consumers, in both cases, on alternative fuel powered vehicles. Logistics facilities in urban areas will necessarily be smaller due to higher rent costs and often located in residential areas, limiting access.
11. INCREASING AUTOMATION
The threat of Coronavirus – or for that matter, any disease – will encourage warehouse operators to increase levels of automation within their operations. Once again this is not a new trend, but one which will be accelerated by the crisis. The low cost of borrowing money and government incentives for capital purchases will make the return on investment case attractive. Running contrary to this, in the short term unemployment levels and the migration of workers from the high street retail sector to logistics will make labour abundant and cheap. However, in the longer term the sector’s adoption of automated materials handling equipment and robotics is inevitable.
This will have implications for the design and type of warehouses. Few are up to the modern standard required for autonomous vehicles to move products around the facility (for instance, uneven flooring) and so there will have to be considerable new investment in the building stock.
12. MORE GREEN WAREHOUSING
Following the crisis, there will be renewed focus on sustainability, as mentioned above. The drop in carbon emissions during ‘lockdowns’ will encourage environmental lobby groups and governments to put in place policies which prevent (or at least slow) pollution levels from returning to their previous highs. These policies will be mostly aimed at the transport element of logistics (having implications for supply chains and hence the location and type of warehousing as detailed above in Point 10) but warehousing will also be expected to contribute. This will mean that new buildings will have to conform with increasingly proscriptive energy standards and good practices such as LED lighting.
Coronavirus will lead to many of the key supply chain trends of the past three decades being challenged. It certainly won’t result in a compete reversal of industry mantras, such as its focus on low inventory, but it will mean that companies take a far more nuanced or multi-faceted approach. Inventory has not suddenly become ‘good’. The more inventory held the greater the risk from redundancy, shrinkage and theft. In addition, the more cashflow tied up in inventory, the less can be invested in new product development or automation, for instance. Technology supporters will no doubt maintain that visibility will play a crucial role in allowing inventory levels to be constrained whilst ensuring customers’ demands for ‘instant’ fulfilment are met, especially in the e-retail sector. However, it is likely that this is only part of the solution. Inventory levels will inevitably rise as a response to the existential threat posed by supply chain risk, as laid bare by the Coronavirus crisis.
At the same time, it is likely that manufacturers and retailers will review the function of warehousing within their businesses. If they decide that employing workforces (which can often run into many thousands of staff) is just too much a risk, then 3PLs will receive a boost from out-sourcing. They will also want to leverage 3PLs existing networks and benefit from the flexibility which they can provide. On the other hand, contract lengths may be pushed down, as clients become wary of the risk posed by being locked into a solution which may rapidly go out of date. At the extreme end of the spectrum, on-demand warehouse providers will benefit.
In addition to this, investment in automation will increase as warehouse companies of all types use cheap money to improve the resilience and efficiency of their operations. This will require substantial investment not only in the robotics and materials handling equipment but also in modern warehousing stock. The development of modern warehousing to meet these new needs will also mean that buildings (and the processes within them) become more sustainable.
By Prof John Manners-Bell, chief executive of Ti, Honorary Visiting Professor at the London Metropolitan University’s Guildhall Faculty of Business and Law and an adviser to the World Economic Forum.