Pressure to improve customer service and in-stock rates is pushing more companies to abandon the "consolidation" model in favor of a flexible, agile network of regional distribution centers.
By the end of the 20th century, inventory had become about as welcome to most corporate comptrollers as a telecom analyst at an ethics convention. Though acknowledged to be a necessary evil, it was still viewed as that balancesheet line item that tied up a lot of the corporation's cash and required a lot of expensive space to house. To tame the inventory monster, U.S. business went into overdrive, striving to keep inventories lean, operating in just-in-time (JIT) mode and consolidating distribution centers.
At least, that's what we thought. But the reality is, well, something completely different. Warehouse space actually stands at an all-time high. "Today, there's more square footage of warehouse space than at any point in U.S. history," Ted Scherck, president of the Colography Group, told a session at the annual Council of Logistics Management conference.
Scherck's assertion is corroborated by an analysis conducted by warehousing provider ProLogis of the 42 major markets in which it competes. That study showed that warehousing space increased to 3.4 billion square feet in 2002, up from some 3.1 billion two years ago. "The occupancy rate has likely declined in the last two years," says John Siebel, president and COO of North America at ProLogis, "but the gross square footage has increased."
The hard truth is that although inventory reduction receives a lot of lip service, inventory levels in many industries have stayed the same or increased over the long term. That trend is particularly evident with finished goods. "Management has cleaned up [its] production and ordering processes for raw materials, but [it has] less control of finished goods," says Jim Ginter, professor of marketing at Ohio State University's Max Fisher College. Ginter, who headed up a study that examined various types of inventories across major industries over a 20-year period ending in 1999, adds that the apparel, grocery and medical products industries,in particular, recorded inventory increases. By contrast, real decreases were found in finished-goods inventories for electronics and computers, due in large part to the supply chain model made famous by Dell.
Also contributing to the more-not-less inventory phenomen on may be the proliferation of product varieties offered in recent years. Plus, vendor-managed inventory, JIT and other drives to improve the supply chain management process at many companies have, as Ginter puts it, placed "power increasingly downstream, at the retail level, nearer to the customer." This means inventory gets thrown back upstream. And it has to be warehoused somewhere.
When "pull" is the trigger
Another development that is helping kick regional warehousing into high gear is the growing popularity of "pull" demand chains, whereby stock replenishment is triggered by consumer demand (i.e.,sales) rather than, say, manufacturers' promotions. It's pretty much a given that if this model is to succeed, inventories need to be maintained close to their point of sale—which typically means in regional warehouses.
One company that has adopted this strategy is Best Buy, the nation's largest consumer electronics retailer. Best Buy has gone to great lengths to minimize its response time when a need is defined at the store."If we had a great day of sales," says Chas Scheiderer, Best Buy's senior vice president of logistics,"we need to get products back on the shelf."
Although it's a national retailer, Best Buy relies heavily on regional distribution,distributing products to stores from six general merchandise DCs (distribution centers) around the country, with an additional East Coast facility slated to open in the first half of this year. These facilities all support the continually expanding roster of Best Buy stores—there were 538 at press time—as well as the Musicland group of stores, which include Sam Goody, Suncoast and Media Play. Best Buy distributes media such as CDs and DVDs from a dedicated entertainment facility in the Midwest. In addition, it operates several other DCs that are dedicated to large - ticket items such as appliances and big - screen TVs where deliveries are cross - docked, moving swiftly to stores or directly to customers.
To guarantee the best possible ground service, Best Buy uses a dedicated fleet through a long - term agreement with a truckload (TL) carrier that picks up shipments from vendors and delivers products to the stores on a twice - weekly basis with room to tweak deliveries as needed. It also uses contract carriers as needed or inselect markets on a regular basis.
Going postal
Another high - profile company that has become a convert to regional distribution is Amazon.com. As a renegade dot-com startup in the mid 1990s, Amazon.com used one Seattle-area facility to serve the country as the first online bookseller.
Over the last few years, however, as its business model has morphed from that of a dot-com fulfillment company to that of a giant retailer, Amazon.com invested in state-ofthe-art DCs and boosted its product mix. The company now sells not only books, but also apparel, toys, electronics and even hardware, whether via marketing agreements, partnerships or acquisition.
Today, six Amazon.com DCs dot the country, including a large facility in Nevada and two in Kentucky. (Amazon.com shuttered its Seattle DC in early 2001.) "We try to perform mathematical modeling to determine which are the fastestmoving products and which DCs those products should be in," says Carrie Peters, an Amazon.com spokeswoman.
"All DCs are located close to airports or transportation hubs," Peters adds, which allows the e-tailer to ship items within 24 hours of order receipt. It makes no guarantees, but most items are received by the customer within two to three days via its carrier partners UPS and the U.S. Postal Service (or via FedEx if the customer requests premium delivery service).
Down the road
The shift toward regional distribution has implications for the trucking industry as well.An analysis by the Colography Group reveals that shippers are pulling back on their use of long-haul less-than-truckload (LTL) moves. Though the long-haul segment is experiencing only moderate average annual growth and intermediate-distance moves of 600 to 1,800 miles are actually declining, short-haul LTL moves of 600 miles or less (in one-way movements) are seeing high growth rates.
At the same time, companies are moving consolidated or truckload shipments along longer-haul routes, according to year-over-year trend data from a study conducted annually among several hundred large shippers by the University of Tennessee, Georgia Southern University and Cap Gemini Ernst & Young. Mary Holcomb, associate professor of logistics at the University of Tennessee, suggests that improved supply chain management, primarily stemming from the use of transportation planning and load optimization software, is driving the trend. Another contributing factor may well be the increased use of third-party logistics providers (3PLs), which are masters of load consolidation.
Ultimately, Scherck of Colography Group sees more companies developing what he calls "an optimal mix of strategically located inventory and short-haul distribution." He cites the example of a large home-products retailer that keeps fewer windows and doors in stock than it used to. But that doesn't mean it has cut back on its use of warehousing space. Instead, it relies on direct shipments from its DC to the consignee." It's true that efficient supply chains change the number, location and physical layout of storage space," Scherck notes, "but this does not mean that storage space goes away."
Jeremy Van Puffelen grew up in a family-owned contract warehousing business and is now president of that firm, Prism Logistics. As a third-party logistics service provider (3PL), Prism operates a network of more than 2 million square feet of warehouse space in Northern California, serving clients in the consumer packaged goods (CPG), food and beverage, retail, and manufacturing sectors.
During his 21 years working at the family firm, Van Puffelen has taken on many of the jobs that are part of running a warehousing business, including custodial functions, operations, facilities management, business development, customer service, executive leadership, and team building. Since 2021, he has also served on the board of directors of the International Warehouse Logistics Association (IWLA), a trade organization for contract warehousing and logistics service providers.
Q: How would you describe the current state of the contract warehouse industry?
A: I think the current state of the industry is strong. For those that have been focused on building good client relationships over the years, I think it’s a really exciting time. Coming out of all the challenges of the past few years, I think there’s a lot of opportunity for growth and deeper partnerships. It’s fun to see the automation and AI (artificial intelligence) integration starting to evolve [in a way that’s] similar to what we saw with WMS (warehouse management systems) in the early 2000s.
Q: You are now president of your family firm. Is it an advantage having grown up in the business as opposed to working elsewhere?
A: I definitely believe it was an advantage growing up in the business. Whether it’s working with family or someone else in the industry, there’s always an advantage when you have mentors[to guide] you. I’ve been blessed to have several mentors, some in the industry, others just in life, and I’m thankful that they were willing to mentor me and that I was willing to listen to them.
Q: What are the biggest challenges currently facing 3PLs, and how are you addressing them?
A: Labor and legislation are both tough right now. The two seem to have a lot to do with each other, and it can make it tough to find and retain people. So I think we’ll see more and more automation of processes industrywide.
Q: Third-party service providers often must handle a wide variety of products for a lot of different clients. Does this variety make it difficult to invest in automation and other new technologies?
A: It can make things more difficult when looking at certain automation, but it’s in the “difficult” that a lot of opportunities lie. It would be tough to find a single solution that fits every client’s needs, but there are always opportunities to improve in certain areas. It just takes a bit of vision and commitment, and a willingness to invest in your own long-term success.
Q: As a 3PL, what do you look for when selecting the clients you work with?
A: Quality relationships that will last a long time. When both parties are happy and working together in the same direction, everyone wins.
Q: You’ve been a board member of the International Warehouse Logistics Association since 2021. Why is your involvement with this organization important to you?
A: I think it’s important to understand what’s happening in the industry. IWLA is a great resource for staying up to date and getting a solid education when it comes to the latest logistics trends. I also think it’s important to give back and pass along what we’ve learned to those just getting started in the business. As important as it is to have a mentor, it’s just as important to mentor and help others.
“While there have been some signs of tightening in consumer spending, September’s numbers show consumers are willing to spend where they see value,” NRF Chief Economist Jack Kleinhenz said in a release. “September sales come amid the recent trend of payroll gains and other positive economic signs. Clearly, consumers continue to carry the economy, and conditions for the retail sector remain favorable as we move into the holiday season.”
The Census Bureau said overall retail sales in September were up 0.4% seasonally adjusted month over month and up 1.7% unadjusted year over year. That compared with increases of 0.1% month over month and 2.2% year over year in August.
Likewise, September’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.7% seasonally adjusted month over month and up 2.4% unadjusted year over year. NRF is now forecasting that 2024 holiday sales will increase between 2.5% and 3.5% over the same time last year.
Despite those upward trends, consumer resilience isn’t a free pass for retailers to underinvest in their stores by overlooking labor, customer experience tech, or digital transformation, several analysts warned.
"The 2024 holiday season offers more ‘normalcy’ for retailers with inflation cooling. Still, there is no doubt that consumers continue to seek value. Promotions in general will play a larger role in the 2024 holiday season. Retailers are dealing with shrinking shopper loyalties, a larger number of competitors across more channels – and, of course, a more dynamic landscape where prices are shifting more frequently to win over consumers who are looking for great deals,” Matt Pavich, senior director of strategy & innovation at pricing optimization solutions provider Revionics, said in an email.
Nikki Baird, VP of strategy & product at retail technology company Aptos, likewise said that retailers need to keep their focus on improving their value proposition and customer experience. “Retailers aren’t just competing with other retailers when it comes to consumers’ discretionary spending. If consumers feel like the shopping experience isn’t worth their time and effort, they are going to spend their money elsewhere. A trip to Italy, a dinner out, catching the latest Blake Lively and Ryan Reynolds films — there is no shortage of ways that consumers can spend their discretionary dollars,” she said.
Editor's note:This article was revised on October 18 to correct the attribution for a quote to Matt Pavich instead of Nikki Baird.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
A real-time business is one that uses trusted, real-time data to enable people and systems to make real-time decisions, Peter Weill, the chairman of MIT’s Center for Information Systems Research (CISR), said at the “IFS Unleashed” show in Orlando.
By adopting that strategy, they gain three major capabilities, he said in a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI.” They are:
business model agility without needing a change management program to implement it
seamless digital customer journeys via self-service, automated, or assisted multi-product, multichannel experiences
thoughtful employee experiences enabled by technology empowered teams
And according to Weill, MIT’s studies show that adopting that real-time data stance is not restricted just to digital or tech-native businesses. Rather, it can produce successful results for companies in any sector that are able to apply the approach better than their immediate competitors.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modelling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”