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 Boyd over the years include The World Bank, The Council of Supply Chain Management Professionals (CSCMP), The Aerospace Industries Association (AIA), MIT’s 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.
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[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.
First, 54% of retailers are looking for ways to increase their financial recovery from returns. That’s because the cost to return a purchase averages 27% of the purchase price, which erases as much as 50% of the sales margin. But consumers have their own interests in mind: 76% of shoppers admit they’ve embellished or exaggerated the return reason to avoid a fee, a 39% increase from 2023 to 204.
Second, return experiences matter to consumers. A whopping 80% of shoppers stopped shopping at a retailer because of changes to the return policy—a 34% increase YoY.
Third, returns fraud and abuse is top-of-mind-for retailers, with wardrobing rising 38% in 2024. In fact, over two thirds (69%) of shoppers admit to wardrobing, which is the practice of buying an item for a specific reason or event and returning it after use. Shoppers also practice bracketing, or purchasing an item in a variety of colors or sizes and then returning all the unwanted options.
Fourth, returns come with a steep cost in terms of sustainability, with returns amounting to 8.4 billion pounds of landfill waste in 2023 alone.
“As returns have become an integral part of the shopper experience, retailers must balance meeting sky-high expectations with rising costs, environmental impact, and fraudulent behaviors,” Amena Ali, CEO of Optoro, said in the firm’s “2024 Returns Unwrapped” report. “By understanding shoppers’ behaviors and preferences around returns, retailers can create returns experiences that embrace their needs while driving deeper loyalty and protecting their bottom line.”
Facing an evolving supply chain landscape in 2025, companies are being forced to rethink their distribution strategies to cope with challenges like rising cost pressures, persistent labor shortages, and the complexities of managing SKU proliferation.
1. Optimize labor productivity and costs. Forward-thinking businesses are leveraging technology to get more done with fewer resources through approaches like slotting optimization, automation and robotics, and inventory visibility.
2. Maximize capacity with smart solutions. With e-commerce volumes rising, facilities need to handle more SKUs and orders without expanding their physical footprint. That can be achieved through high-density storage and dynamic throughput.
3. Streamline returns management. Returns are a growing challenge, thanks to the continued growth of e-commerce and the consumer practice of bracketing. Businesses can handle that with smarter reverse logistics processes like automated returns processing and reverse logistics visibility.
4. Accelerate order fulfillment with robotics. Robotic solutions are transforming the way orders are fulfilled, helping businesses meet customer expectations faster and more accurately than ever before by using autonomous mobile robots (AMRs and robotic picking.
5. Enhance end-of-line packaging. The final step in the supply chain is often the most visible to customers. So optimizing packaging processes can reduce costs, improve efficiency, and support sustainability goals through automated packaging systems and sustainability initiatives.
That clash has come as retailers have been hustling to adjust to pandemic swings like a renewed focus on e-commerce, then swiftly reimagining store experiences as foot traffic returned. But even as the dust settles from those changes, retailers are now facing renewed questions about how best to define their omnichannel strategy in a world where customers have increasing power and information.
The answer may come from a five-part strategy using integrated components to fortify omnichannel retail, EY said. The approach can unlock value and customer trust through great experiences, but only when implemented cohesively, not individually, EY warns.
The steps include:
1. Functional integration: Is your operating model and data infrastructure siloed between e-commerce and physical stores, or have you developed a cohesive unit centered around delivering seamless customer experience?
2. Customer insights: With consumer centricity at the heart of operations, are you analyzing all touch points to build a holistic view of preferences, behaviors, and buying patterns?
3. Next-generation inventory: Given the right customer insights, how are you utilizing advanced analytics to ensure inventory is optimized to meet demand precisely where and when it’s needed?
4. Distribution partnerships: Having ensured your customers find what they want where they want it, how are your distribution strategies adapting to deliver these choices to them swiftly and efficiently?
5. Real estate strategy: How is your real estate strategy interconnected with insights, inventory and distribution to enhance experience and maximize your footprint?
When approached cohesively, these efforts all build toward one overarching differentiator for retailers: a better customer experience that reaches from brand engagement and order placement through delivery and return, the EY study said. Amid continued volatility and an economy driven by complex customer demands, the retailers best set up to win are those that are striving to gain real-time visibility into stock levels, offer flexible fulfillment options and modernize merchandising through personalized and dynamic customer experiences.
Geopolitical rivalries, alliances, and aspirations are rewiring the global economy—and the imposition of new tariffs on foreign imports by the U.S. will accelerate that process, according to an analysis by Boston Consulting Group (BCG).
Without a broad increase in tariffs, world trade in goods will keep growing at an average of 2.9% annually for the next eight years, the firm forecasts in its report, “Great Powers, Geopolitics, and the Future of Trade.” But the routes goods travel will change markedly as North America reduces its dependence on China and China builds up its links with the Global South, which is cementing its power in the global trade map.
“Global trade is set to top $29 trillion by 2033, but the routes these goods will travel is changing at a remarkable pace,” Aparna Bharadwaj, managing director and partner at BCG, said in a release. “Trade lanes were already shifting from historical patterns and looming US tariffs will accelerate this. Navigating these new dynamics will be critical for any global business.”
To understand those changes, BCG modeled the direct impact of the 60/25/20 scenario (60% tariff on Chinese goods, a 25% on goods from Canada and Mexico, and a 20% on imports from all other countries). The results show that the tariffs would add $640 billion to the cost of importing goods from the top ten U.S. import nations, based on 2023 levels, unless alternative sources or suppliers are found.
In terms of product categories imported by the U.S., the greatest impact would be on imported auto parts and automotive vehicles, which would primarily affect trade with Mexico, the EU, and Japan. Consumer electronics, electrical machinery, and fashion goods would be most affected by higher tariffs on Chinese goods. Specifically, the report forecasts that a 60% tariff rate would add $61 billion to cost of importing consumer electronics products from China into the U.S.
That strategy is described by RILA President Brian Dodge in a document titled “2025 Retail Public Policy Agenda,” which begins by describing leading retailers as “dynamic and multifaceted businesses that begin on Main Street and stretch across the world to bring high value and affordable consumer goods to American families.”
RILA says its policy priorities support that membership in four ways:
Investing in people. Retail is for everyone; the place for a first job, 2nd chance, third act, or a side hustle – the retail workforce represents the American workforce.
Ensuring a safe, sustainable future. RILA is working with lawmakers to help shape policies that protect our customers and meet expectations regarding environmental concerns.
Leading in the community. Retail is more than a store; we are an integral part of the fabric of our communities.
“As Congress and the Trump administration move forward to adopt policies that reduce regulatory burdens, create economic growth, and bring value to American families, understanding how such policies will impact retailers and the communities we serve is imperative,” Dodge said. “RILA and its member companies look forward to collaborating with policymakers to provide industry-specific insights and data to help shape any policies under consideration.”