The future of warehousing and third-party logistics includes a healthy rate of growth and a more central role in supply chain management.
That was one of the conclusions of the 32nd annual State of Logistics report published by the Council of Supply Chain Management Professionals, sponsored by Penske Logistics with research conducted by a team from Kearney consultants.
Shippers had to be nimble in 2020 when Covid 19 wreaked havoc on the supply chain. They had to be ready to change on a moment’s notice when product ceased to flow, carrier rates soared and demand dried up in some cases and burgeoned in others.
The same ability to embrace sudden change and maintain a nimble and flexible management approach holds true this year, according to the report’s researchers and a panel of industry executives who took part in an online discussion.
“When you look at what worked and what didn’t work in the past year, it’s been all about which customers were the most nimble, who were willing to try something a little bit new and different, outside of the box or that they weren’t used to, even if it cost a little bit more,” said Matthew Hill, head of the North American import market for Maersk.
In 2020 transportation costs rose by 0.8%. This was far less than the 4.7% growth in 2019, or 10.4% in 2018, but certainly a contrast to an economy that shrank overall. The increase was driven by a 24.3% increase in the parcel and last-mile segment, as ecommerce and home delivery exploded.
Warehousing growth remained strong in 2020, the researchers noted. Many industry fundamentals were up from a record-setting 2019. Net absorption increased 11%, to 268 million square feet. Asking rents grew at a faster rate than the previous year, to $6.76 per square foot. While the vacancy rate was higher than last year, it was still remarkably low.
In short, ecommerce spurred continued high demand for warehousing space. Providers, especially of urban last-mile facilities, hurried to keep pace. The pandemic shifted many consumers to online shopping, which boosted needs for warehouse space. This effect outlasted the spring 2020 restrictions placed on physical retail stores.
Fourth quarter 2020 warehouse leasing volumes were 26.9% higher than 2019. Vaccine distribution added further pressures in early 2021, especially for cold storage. But even as vaccine pressure fades, other demands will keep capacity tight, the researchers believe.
“Ecommerce fulfillment centers are a special category of warehouse, ideally featuring high
ceilings and multiple mezzanine floors,” the report contends. “There’s demand for very large facilities (3 million plus square feet) and for downtown urban facilities.” Also demanded by customers are marked advancements in technology and sustainability.
With rising ecommerce and a new appreciation of the dangers of supply disruptions, businesses are expected to increase safety stock drastically, which will require a greater warehouse footprint, the researchers explained. “Greater inventory requires both more space and more management oversight.”
The continuing disruption experienced by the economy also creates more opportunities for 3PLs. In turbulent times, the deep knowledge and wide network of a 3PL become more valuable.
“Yet turbulent times place increasing pressure on the 3PL to have developed the right strategies in the past and to implement the right insights in the present,” the researchers stress. “In 2020 — and moving forward through 2021 – 3PLs that prioritized resilience will become the dominant leaders in the segment.”
Andy Moses, president of Penske Logistics, argues key to success in this area is the emergence of control tower technology, which helps manage the various silos in the supply chain that are organized around data and around visibility. “This is an area of development that I think offers broad promise.”
A supply chain control tower is a connected, personalized dashboard of data, key business metrics and events across the supply chain.
“For most shippers, the biggest barriers to building and offering control tower capabilities are in building an expansive network,” the report says. “Because 3PLs have already overcome those barriers, they are best positioned to implement successful control towers. As the world moves toward data-driven decisions, this will become a key strategy for 3PLs.”
One issue is that inventory ratios are now virtually one-to-one, and they’ve never been that low before, observed Kevin Smith, report panel chair and president of Sustainable Supply Chain Consulting.
That means that companies have about one-month of inventory. “Years ago, that would have been a problem because of lack of visibility to manage them properly. This is going to be a big challenge, but it is a challenge that the supply chain is up to,” he argued.
“I don’t think we should stay at one-to-one over the long term because it would hurt our ability to service customers and hurt the ability to give consumers what they want,” Smith says. “Right now, we seem to be doing good, but one-to-one is a scary number.”
Another challenge: The warehousing labor market has been tight for years, and Covid 19 made it worse. The report recommends that, beyond offering competitive compensation, warehouses could attract workers by emphasizing safety and flexibility brought to the fore by the pandemic.
“Warehouses vary in supplying PPE materials, enforcing enhanced protective measures, and offering flexible scheduling,” they said. “Enhanced training programs and standard retention strategies (tracking key performance indicators for retention, conducting robust exit surveys, and so on) can also help improve conditions for workers.”
Of course, the labor shortage also is accelerating the adoption of automation in warehouse and distribution operations. The warehouse automation market is seen growing at a CAGR of 14% to reach $30 billion by 2026.
“The pandemic may serve as a tipping point for warehouse automation. Fast-moving inventory requires more touches and using robots helps minimize employee interaction that spreads the virus,” the researchers point out.
Amid increased operational complexity, robots reduce losses related to employee turnover, they note. At large warehouses, shuttle systems and massive data analysis can improve productivity and the ability to flex labor.
At smaller warehouses, the researchers say improved technology is reducing the payback period for automated guided vehicles (AGVs) and autonomous mobile robots (AMRs).
“The pandemic accelerated a lot of trends that were already there. There will be more positioning of inventory closer to the ultimate consumer,” said Alan Shaw, executive vice president and chief marketing officer of Norfolk Southern. “There will be greater risk-aversion inventory stock outs than there was before and a greater focus on capacity.”