Wednesday, July 26 2017
Warehousing and distribution oriented operations are experiencing an incredible transformation that is impacting different operating characteristics and pushing the envelope of overall facility utilization. Perhaps the greatest impacts and changing characteristics of the warehousing and distribution industry are the predominance of eCommerce business models and the modern-day expectations of businesses and consumers for next-day delivery service for most everything. In many of the traditional large distribution hubs around the U.S., buildings are getting bigger, staffing requirements are generally going up, and the need to be close to either major population centers or an air cargo hub are critical. While many traditional warehousing operations continue to operate with perhaps little change, a smaller but highly-disruptive segment focused on eCommerce and customer fulfillment needs is driving huge change into the market, from both a design and operational perspective, and major implications of these changes are the focus of this article.
Real Estate Trends
The development pipeline remains robust. As of Q2 2017, NGKF was tracking 52 mega projects in the U.S. A mega project is defined as an individual industrial building of 1,000,000 square feet or greater.
Some of the building boom can be attributed to the need for higher cube buildings and the fact that buildings less than 40-foot clear are nearly obsolete in the world of eCommerce for items such as apparel, electronics and other consumer products, let alone businesses leading in the eCommerce segment such as Amazon and Walmart. The need for height comes as operations move from high bay racking solutions to maximizing the number of mezzanines available to essentially pick and pack product. A 36-foot clear height building set up with three levels of mezzanines would only allow for eight feet between floors, which including structural support, is not realistically achievable. A 40-foot clear building set up with three levels of mezzanines will allow for 10 feet between floor levels, which is a reasonable solution even with the required structural support, but employees working in that environment may feel a bit cramped. The need for buildings with clear heights exceeding 40-foot clear may not enable a significant increase in product capacity, but could yield advantages by providing a more comfortable and sustainable workplace environment for employees, which may be more important to some companies than others.
Companies can meet this expectation in one of two ways—either a multi-facility network with critical goods and components duplicated and located in numerous facilities near the end customer or market, or through a single, centrally-located operation with access to critical supply chain partners for overnight delivery to a majority of the U.S. market, typically UPS, USPS, and FedEx type solutions.
Companies with broad retail store networks will continue to deploy the first approach with multiple logistically-efficient warehousing solutions for a large portion of their business. Many of these same companies also deploy an eCommerce specific facility in a single location or a few key markets that can provide more effective customer solutions in terms of time to market. The eCommerce model also provides an opportunity for new entrants to the retail and customer service markets for those companies that cannot reasonably deploy more than a single solution warehouse and effectively manage the costs and inventory associated with multiple warehouses. Companies can build a following and build a brand from a virtual online store and occupy a single warehouse to service their entire customer base. Again, the herding effect of this model results in increased competition for labor in those markets that can support the supply chain needs.
With only a handful of markets able to accommodate the core operational characteristics of air cargo and cherished late-night cut off times for next-day service, some markets are seeing continued growth in operations but are also experiencing more challenging labor dynamics.
The combination of an increased number of operations in a market along with a much higher labor requirement at each facility is leading to labor availability challenges and potentially hefty wage increases in many markets. Some distribution-saturated markets have seen hourly wages increase of nearly two dollars per hour for warehouse employees over the past 18-24 months, or 8-10 percent annualized increases. Some markets simply don’t have the labor resources to support the exploding growth in distribution markets. However, in a just-in-time mentality with an immediate need to meet customer demands, many companies are evaluating existing building solutions or find themselves at the whim of developers who have speculative buildings to house their operational needs. This is only increasing the labor challenges associated with the industry today. As developers see low vacancy rates and increasing lease rates, they would be foolish to miss out on the market conditions and so additional square footage and market capacity is constructed, but often in the same locations that are struggling to support the businesses that are already there.
Another growing trend in the warehouse operational profile is the growth of 3PL service providers operating the warehouse for a company and providing a leased workforce in turn. As companies seek to optimize the management and staffing of their distribution facilities, this is an increasingly-popular solution to manage the ever-increasing challenge of attracting and retaining labor and talent. More sophisticated companies that hold a building lease directly and outsource the labor to a 3PL can leverage and utilize their actual building as an employment attraction and retention tool to aid in the development of company culture and potentially reduce other labor challenges, such as turnover and absenteeism.
Consider two warehouse operations in proximity to one another: Company A and Company B, that offer similar wage and benefits packages for their employees. In many markets, these employees will change places of employment for an hourly difference of $0.25 or $0.50 an hour. However, if Company A can provide a competitive wage, and facility amenities such as improved lighting, seasonal air conditioning, and food services, plus cultural amenities such as effective shift management, training opportunities, and on-site health services, these amenities may provide the differential between experiencing a 15 percent rate of turnover versus something more ruinous like 50-75 percent turnover in a market.
This means buildings are not only getting larger from a cube standpoint, but are also evolving in their ability to store product and comfortably house more than 1,000 employees daily, often 24 hours a day.
In addition to the changing investment and labor dynamics, consider the design differences for restrooms, lockers and food courts that were never contemplated for a warehouse employing 50 to 100 full-time employees but can be a major challenge if not designed, and located properly, to support thousands of employees. To top it off, how do you accommodate site access and parking for not only your trucks and delivery services, but also more than a thousand employees coming to and from the site each day? The overall site acreage is increasing on a per-building basis and potentially reducing the total buildable footprint that a developer/owner may have to drive profit on a project.
Accommodating truck traffic, trailer storage and multiple shifts of employees can result in acres and acres of asphalt, which also has impacts for on-site storm water management, local traffic control, and neighboring land uses. Companies may well find that the ability to have public transportation accessible to the facility may also provide a differentiation when it comes to attracting and retaining the required labor.
Location Strategy Best Practices Approach
Consumers demanding and flocking to what is essentially on-demand services represent a larger and larger component of today’s retail and consumer environment. Perhaps someday the evolution of robotics in the workplace will replace an even larger component of the required work done by the people in this industry. Until then, current trends are such that more and more people are being sought after to support this explosive growth in eCommerce oriented warehousing activities.
Several best practices can support a smarter, more efficient deployment for warehousing needs:
After that, labor costs can easily exceed real estate (leasing) costs by three to five times. The recurring costs of labor can also vary greatly with local competition, and will rise faster than facility costs as operational throughput is increased. The magnitude of these differences, and the associated risks, must be well considered and modeled before a location decision is made.
There are many considerations to incorporate into warehousing and distribution location decisions. Having a well-grounded strategy and a well-rounded team of internal and external advisors with expertise in supply chain, human resources, real estate, finance, tax, legal, and public relations can lead to a better decision, made faster, and with a higher probability of success upon execution.