Same-day delivery, sustainability, and increasing regulation will all have an impact on the warehousing industry, but cost will still be a key factor for most companies.
John H. Boyd (jhb@theboydcompany.com) is founder and principal of The Boyd Co., Inc. Founded in 1975 in Princeton, New Jersey, and now based in Boca Raton, Florida, the firm provides independent site selection counsel to leading U.S. and overseas corporations. Organizations served by John over the years are many and varied and include The World Bank, The Council of Supply Chain Management Professionals (CSCMP), The Aerospace Industries Association (AIA), MIT’s groundbreaking Work of the Future Project, UPS, Canada's Privy Council and most recently, the President’s National Economic Council providing insights on policies to reduce supply chain bottlenecks.
For such a well-established industry, warehousing is experiencing a great deal of change of late. In fact, our firm, which helps companies select the best sites for their businesses, views distribution and warehousing as being at the leading edge of a number of trends affecting other key sectors like manufacturing, information technology (IT), sales, customer service, and even the head office.
Among the leading-edge trends that are forcing companies to re-examine their warehousing and distribution center (DC) operations, three in particular stand out: same-day delivery, sustainability, and increased regulation.
Article Figures
[Figure 1] Cost to operate a distribution center in the U.S. WestEnlarge this image
The push for same-day delivery
U.S. society is hungry for instant gratification. To satisfy that hunger, Amazon.com is on a quest for the "holy grail" of distribution—same-day delivery. The online retailing giant's efforts can be seen in its recent decisions to locate warehouses in large and highly concentrated markets like California, New York, and New Jersey in spite of less-than-stellar business climates and high operating-cost structures. Facing increased taxes from cash-poor states and the coming of a national Internet sales tax, the Web merchant has shifted its DC site selection strategy from locating its fulfillment centers in low-cost, small-market cities in the hinterland to one focusing on proximity to major U.S. population centers. By doing so, the company has set the stage for offering same-day or next-day delivery to a major segment of the U.S. market.
Other companies in the booming e-commerce sector, all wanting to advance their case against brick-and-mortar retailers, will be following Amazon's lead. Look for more DCs sprouting up in states like New Jersey, Florida, Illinois, Texas, and California in 2014.
Green leads the way
In the past decade, sustainability and "green" principles have increasingly crept into the mission statements and core values of many corporations. Those ideals are having a direct impact on where DCs are located, what activities they perform, and how they operate.
For example, sustainability and green goals are driving forces behind the growing trend of locating new DCs close to intermodal terminals. Locating DCs near a rail terminal can help shippers reduce their carbon footprint by making it easier for them to incorporate more rail transportation into the supply chain. Rail is recognized as being considerably more "environmentally friendly" than over-the-road trucking. Consider the fact that on average, rail can move one ton of freight 476 miles on a single gallon of gas. This is the equivalent of your SUV getting over 250 miles to the gallon. The U.S. Environmental Protection Agency (EPA) estimates that railroads account for less than 10 percent of all transportation-related CO2 emissions while also alleviating highway congestion. Rail could get even cleaner if BNSF Railway continues to move from diesel to liquefied natural gas (LNG).
The green movement is affecting not only the location of distribution centers but also what activities they perform and how they operate. For example, Boyd Company clients Hewlett-Packard (HP) and Dell have increased the reverse logistics activities at their distribution centers. They are now receiving and processing more outmoded electronics and print cartridges at their DCs in an effort to reduce the environmental impact of their products. These efforts minimize the amount of waste that ends up in landfills and help customers dispose of unwanted products in an environmentally sound manner.
The pressure of new regulations
Another trend affecting distribution center operations is the increase in legislation and regulation. For example, current legislation affecting the trucking industry might tilt the scales even more strongly in favor of distribution centers using intermodal services and locating near rail terminals. Regulations such as the driver hours-of-service rules and mandatory electronic on-board recorders (EOBRs) are helping to drive trucking costs upward. Trucking companies will also be hit hard once the Affordable Care Act takes effect and health insurance premiums start to rise. The Teamsters are especially upset that multiemployer, or "Taft-Hartley," plans that cover unionized workers in the transportation industry will likely have higher premiums because the Affordable Care Act does not include tax subsidies for them. Given the rise in costs and the pressure on margins, Boyd Company is projecting over-the-road trucking costs to increase by about 6.3 percent in 2014. That's up from a projected 5.5-percent rise in 2013. As labor and fuel expenses push overall trucking costs higher, more and more companies are choosing to use less costly intermodal services and locate their DCs closer to intermodal terminals.
One regulatory act that is receiving keen attention among our logistics clients is the U.S. Food Safety Modernization Act (FSMA). This law will have major implications for any company that's involved directly or indirectly with our nation's food supply. To comply with FSMA, food companies will have to produce a written food-safety plan, specific to each distribution center, that outlines hazards, prevention, monitoring, verification procedures, and a recall plan. Moreover, the U.S. Food and Drug Administration (FDA) will want to see proof that food was transported at the proper temperature throughout its journey. Both transportation companies and distribution centers will need a product-tracing system that is capable of tracking temperatures.
Compounding the difficulty of FSMA compliance is the lack of vertical integration within the U.S. food supply chain, which is made up of multiple enterprises like producers, packers, transporters, processors, distributors, wholesalers, and retailers. Rarely are more than a few of these enterprises controlled by a single entity. However, in order for FSMA compliance to work, there needs to be a certain level of supply chain integration among these enterprises. Our firm is forecasting that the intermodal sector will assume a leadership role with respect to FSMA. We believe that intermodal players will be able to build upon their experience dealing with multiple supply chain parties to oversee this level of integration.
As the intermodal sector assumes this leadership role, those DCs that handle food will see an advantage to being located close to an intermodal facility. Indeed, it's important to note that perishable goods like produce, ice cream, frozen pizza, and fresh fruits and vegetables are now moving intermodally at record levels.
Costs still rule
Although regulation, sustainability, and same-day delivery will all have an impact on the warehousing industry, the overriding issue confronting our distribution center clients has to do with cost containment. Bottom-line economics still rules the warehouse site selection process given spiraling fuel costs, a softened U.S. economy, continued uncertainty in Europe, and an ongoing credit crunch that is expected to stretch into 2014. For many of our DC clients, improving the bottom line on the cost side of the ledger is far easier than on the revenue side.
Even within the same U.S. region, operating costs for a typical DC can vary greatly by geography, and a less-than-optimum location will result in higher costs that could compromise the company's competitive position for years.
Figure 1 illustrates how DC operating costs can vary within the U.S. West, a high-growth region for new facilities. This 2013 analysis includes all major geographically variable operating cost factors, such as wages, benefits, real estate, property taxes, utilities, and shipping. The chart shows, for example, that annual operating costs for a representative 500,000-square-foot DC employing 175 nonexempt workers range from a high of US $20.7 million in Los Angeles, California, to a low of $14.1 million in Quincy, Washington, a spread of $6.6 million, or a 31-percent differential.
In many cases, energy and construction costs contribute greatly to the differences in annual operating costs. For example, annual costs for land and warehouse construction in the most expensive location, Los Angeles, total $6.6 million, while those costs would be $4.2 million in the least expensive location, Quincy, Washington. Similarly, energy costs in Los Angeles total $2.3 million per year but only $713,000 in Quincy.
It's often possible for companies to address cost containment through their efforts to respond to the three key trends discussed in this article. For example, locating close to intermodal terminals will help not only with sustainability efforts and compliance with food safety regulations but also with reducing shipping costs. Similarly, locating in Quincy, Washington, as opposed to Los Angeles could be not just cheaper but also greener, as the area has a green energy source: low-cost hydro power from the Columbia River.
In today's increasingly complex operating environment, distribution centers that can find ways to effectively respond to these and other industry trends while also containing costs are the ones that will find themselves on the path to future success.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.