Warehouse space, by the drink
Unlike other segments of the logistics field, warehousing has avoided the dreaded fate of "disruption" from newfangled business models. Since people began erecting physical structures to store stuff, capacity has been leased under multiyear contracts with fixed rates, terms, and conditions negotiated up front. Long-term deals foster security, stability, and strong customer-provider relationships, the maxim has held.
While long-term deals aren't going away, there may be room for an alternative approach. And it has come from a Seattle-based startup called Flexe Inc. Founded in August 2013, Flexe has created a spot market for warehouse space in an effort to exploit inefficiencies in a static environment. Flexe's platform matches companies with excess space or periodic vacancies with those who need space quickly, usually for a short time period, but who don't want or need the obligations of a long-term lease.
Today, the Flexe marketplace consists of more than 85 warehouses in 20 cities in the U.S. and Canada. The company doesn't operate any warehouses, and there are no leases involved; each facility is operated by the business with the available space. Flexe markets and advertises the space, defines the scope of each party's responsibilities and liability through a uniform contract patterned after standards developed by the International Warehouse Logistics Association (IWLA), and deploys cloud-based software that manages delivery scheduling, inventory tracking, and billing, among other tasks. A prospective user can name its price for the specific services it wants to take advantage of. The provider's proposal, once submitted, is non-negotiable. The user pays Flexe, which then cuts a check to the provider minus its commission.
Flexe's customers include third-party logistics service providers (3PLs), manufacturers, retailers, and wholesalers, all of which could be on either end of the transaction depending on the circumstances. What they have in common is that they work with a flexible and scalable model that, until now, has been largely alien to warehousing. The typical duration of a transaction on Flexe's platform is four to six months.
FOR WINE TOOLS FIRM, ROOM TO BREATHEOne of those customers is True Fabrications, a 12-year-old Seattle-based manufacturer and wholesaler of wine gifts and accessories, which has been with Flexe for about two years. Dhruv Agarwal, True Fabrications' co-founder and managing director, said the company made Flexe its sole warehouse partner after running out of space in its own facility and growing tired of competing for a fixed amount of excess capacity made available by its former vendor, a 3PL. The problem was especially vexing during the holiday season when True Fabrications generates about 40 percent of its revenue and its demand for warehouse space spikes.
Agarwal also saw little value in committing to a fixed long-term lease when it was impossible to predict where his business would be by the end of the contract term. Add to that the millions of unoccupied square feet available in the Seattle market, and, to the company, the move was a no-brainer.
Agarwal said the Flexe model offers True Fabrications a wide range of warehousing options at a competitive price. It can view its nationwide inventory flow from a single software platform. Rather than building and operating a larger warehouse of its own, True Fabrications leverages other people's space and shifts around labor and inventory when it's needed. "The cost that [the platform] is showing to us is similar to what it would cost if I had my own warehouse, only I don't have to sign a lease," Agarwal said.
A NEED FOR FLEXIBILITYKarl Siebrecht, Flexe's co-founder and CEO, is an IT guy and not a warehouseman. So he approached the issue from a different perspective. Siebrecht discovered that virtually all warehouse space came to market in "big fixed chunks" and as part of long-term leases. Even subleases rarely ran less than a year, Siebrecht found. At the same time, millions of square feet nationwide sat unused and burned up capital. Providers of space, he reasoned, would rather have some cash flow for their assets than none at all, and would be willing to structure deals of a short-term and flexible nature.
Meanwhile, users who find themselves short of capacity for any number of reasons, or perhaps want to capitalize on a quick-hit opportunity in a market, would want a bit of warehouse space for a short-term ride. Bringing surplus capacity to those who needed it fast seemed to be a natural fit, Siebrecht believed.
It is impossible to quantify how much warehouse space across the country is unoccupied on any given day. Flexe last spring conducted a survey (albeit from a small sample size) of businesses that operate as users and providers of space. About 20 percent said they "always or often" needed warehouse space on short notice, while 60 percent answered that they needed it "sometimes." In addition, 40 percent said they frequently have excess capacity available.
Not everyone is enamored of the concept, however. Jack Rosenberg, Chicago-based national director, logistics and transportation, for Colliers International, a real estate advisory firm that manages about 1.7 billion square feet of industrial property worldwide, said the Flexe model would be "disruptive to 0.001 percent of the market." He said most lessors could not justify the costs of insurance and deal documentation for arrangements of a short duration. In addition, short-term deals don't compensate the lessors for the risk of having a recalcitrant tenant that doesn't vacate on time, or the potential for a fire or a hazardous materials spill, he said.
"Very short-term requests are common for TV shoots, advertising stills, video shoots, and movies," Rosenberg said. "My clients don't want the bother." In response, Siebrecht said the contract's language addresses as many negative scenarios as can be imagined. He added that Flexe does not accept transactions involving hazardous materials storage.
Dale S. Rogers, professor of logistics and supply chain management at Arizona State University and an adviser to Flexe, said the model best functions as a supplement to a company's existing warehouse infrastructure and not as a stand-alone operation. "It won't replace the traditional warehouse network. But it gives you the flexibility to do certain things" such as penetrating a hot market on a moment's notice, he said. For his part, Siebrecht said Flexe's customers are best served "putting a flexible and elastic capability on top of an existing infrastructure."
Rogers added that negative comments from industrial developers are rooted more in their disdain for short-term arrangements than in Flexe's strategy and tactics. "No industrial property developer wants to work with short-term leases where they have to turn over property so rapidly," he said. "They want the predictability and security that come with long-term arrangements."
"LONG-OVERDUE" MOVEShanton J. Wilcox, vice president of supply chain management for Capgemini Consulting N.A., said Flexe is no different from companies in other industries who create "secondary markets" to inject liquidity into an otherwise illiquid asset. For example, in the auto leasing business, a secondary market exists for one party to assume a car lease from another, Wilcox said. The same principle applies in high-density urban areas like New York, Chicago, and San Francisco where apartment subleasing is commonplace, he said.
Wilcox added that the time and conditions are right to apply the same model to the warehousing sector. "I would say that it is long overdue in this area," he said.
