By Don Moss, Senior Director and Grant Miller, Senior Director, Colliers
From surplus inventory to a shortage of microchips, building materials and consumer goods, companies are wrestling with how much is enough inventory and how to protect yourself with unplanned disruptions.
In November 7th issue of the Wall Street Journal Alistair MacDonald and Georgi Kantchev write, “Gilead Sciences Inc. said it was significantly increasing its inventory of auxiliary products and tools, like syringes, glass vials and filters, which were suddenly in shortage during the pandemic.”
“If you don’t have them, you can’t make the product,” said Ken Kent, who manages manufacturing operations at the U.S.-based pharmaceutical company. Previously items like syringes were “kind of ubiquitous,” he added.
“Accountants love [just in time], but the end, buyers don’t like it. I call it just-not-in-time,” Mr. Kent said.
So how does a company manage supply chain issues with weather phenomena’s, a truck driver shortage, and a lack of warehouse space.
As mentioned by Gildead Sciences Inc., most businesses have not escaped supply chain challenges over the previous 12 months. When everyone expected COVID-19 to slow demand, it accelerated demand to a point where supply chains were stretched to their limits. But it not just COVID—the winter storm of 2021 reduced Texas’ capacity to refine petroleum, which created a ripple effect for a reduced ability to manufacture nearly all paints. Major manufacturers of cushion foam were also hit by a hurricane, causing multiple industries to temporarily shut down for repairs, which has exacerbated the shortage due to high demand. Currently, many companies, both large and small, continue to have threats of shortages or product delivery delays. The point to understand is while one event can cause a shortage, multiple events can cripple a supple chain.
Industry and retailers alike are having to throw out the old and embrace new strategies to keep their supply chain from completely failing. According to a recent Wall Street Journal article, companies on the S&P 500, excluding sectors that have few physical stockpiles like finance, increased their inventories by an average of 15 percent in the second quarter versus the comparable period in 2019, according to S&P Global Market Intelligence. Those inventories were 53 percent higher than the ten-year, pre-Covid quarterly average.
Supply chains had been operating digitally for several years but were starting the process of using block chain, artificial intelligence (AI), and the Internet of Things (IoT) to help keep the process moving ever more smoothly. No one expected how quickly COVID and a series of weather events would accelerate the digital transformation and turn the “just-in-time” model upside down.
Logistical Hotspots — Uncharted Territory
New considerations are in the mix as companies determine where to locate their next facility. Companies are starting to ask themselves, where is the best logistical hotspot? Access to both U.S. and world markets, utilities, workforce, higher education, real estate or sites, and state/local incentives all play a role. Below, we expand on a few of these factors that make up a logistical hotspot and how organizations can capitalize on them.
Infrastructure Diversity—Transportation and Access to Markets
Diversification of how goods are transported is paramount when evaluating a new location. The United States is part of a global economy, where access to ports is critical in moving goods on a global scale. Interstate accessibility is the first consideration when moving products across the country. However, access to a seaport means access to world markets.
New inland ports are continually developing and offer another avenue of diversification in moving products via rail, which connects cities to ports and other parts of the country. Additionally, the process of moving freight by air cargo has increased and provides additional diversification within the supply chain. While transport by air might not be the preference for every industry, consideration should be given to airports that can accommodate that service for future options.
According to The Balance Small Business article, “Transportation costs can be a significant part of a company’s overall logistics spending. With increases in the price of fuel, the proportion allocated to transportation can be upward of 50 percent. This cost is passed on to the customer and the price of goods continues to rise.” Therefore, companies need multiple avenues for moving products. In fact, many larger retail chains are booking their own private cargo ships to ensure their selves are not empty for the holiday season of 2021.
Access to Population Centers
Ecommerce demand, fueled first by COVID then by the Delta Variant, completely transformed and jump-started the ecommerce industry ahead five years in just one year’s time. Therefore, to be considered a logistical hotspot, a location must be near or just outside of larger population centers. Consumers currently and will continue to require increasingly shorter delivery times for both goods and meal delivery. The only way to solve this customer demand is for companies to locate facilities near these population centers.
There are high barriers to entry for locating large, complex distribution centers or food commissaries within the middle of actual population centers. Nonetheless, companies must consider locations where access to population centers is uninhibited. The ability to deliver goods in a fast efficient manner is critical. More important and increasingly challenging is finding a site where you can recruit sufficient labor. Looking for sites with an outflow of workers and access to public transportation is becoming increasingly important as a selling point to recruit employees.
The availability of land for development is also an important element to the definition of a logistical hotspot. Developable land opportunities have become increasingly scarce within the traditional logistical locations. Add to land constraint challenges, permitting delays from local, state and the federal level and there is an increasing challenge for new facilities.
Occupiers are demanding taller ceiling height, greater floor thickness and wider column spacing to allow for the increased use of automation within the facility. Sites are also required to have the ability for additional trailers, delivery trucks and vans. This is in addition to auto parking, which will accommodate multiple shifts. All these requirements have multiplied in a span of time just under 24–36 months.
Newer and more modern facilities are warranted to accommodate what occupiers now need to compete. In addition to the availability of land within proximity to major population centers, requirements for utilities must also be considered. All newer facilities have Early Suppression Fast Response Sprinkler Systems or ESFR. This type of sprinkler system requires a large amount of water on standby both in terms of pressure and flow capabilities. Many sites do not have adequate water supply, so upgrades will be needed. Next, sites must have ample, redundant electrical service. Given the concern with climate change, some companies that have carbon-neutral goals will require the ability to track their use of green energy from a smart grid.
As important as utilities are to a site, communication between a company’s various locations is critical to tracking inventory. Sites without access to multiple fiber providers are not viable options for logistical hotspots.
One additional note along the lines of land availability is understanding the entitlement process, as costs and time to take a site through the entire process continue to increase. Understanding the process and expectations along the way will lead to success.
Getting land ready for development takes time. Governmental organizations on all levels are experiencing labor shortages of their own which is doubling if not tripling permitting times. Early preparation is key to moving a site forward. Determining the size structure for a site, along with future utility needs and necessary permitting is vital. In additional, understanding what road improvements a transportation department will require.
Access to Workforce
Understanding the ability to recruit workers is also key to becoming a logistical hotspot. For ecommerce companies, this is especially important as recent studies have shown that these types of organizations utilize three times more labor than traditional warehouse operations. Furthermore, studies have determined that turnover rates at ecommerce facilities are four times higher than at traditional warehouses facilities. It is critically important that companies understand the labor force in a particular market or submarket before choosing a location.
Research into demographics, population growth rates, commuting patterns, and access to public transportation is critical when choosing a location. According to a study done by the Center for American Progress (CAP), cost estimates for a warehouse worker are around 20 percent of an annual salary. Therefore it is necessary to conduct a qualified labor study to understand which types of jobs will be utilized in the new operation. Those job profiles must match with the current labor shed or labor submarket in the short list of sites. Companies should ask themselves, are those skill sets available? What other companies are competing for the same type of skills? Will a new employer to the area have to pay more or increase its benefits to attract the necessary skills to keep an operation in business?
In an article in The New York Times, Peter S Goodman and Niraj Chokshi titled “How the World Ran Out of Everything”, they point to the Toyota model of “Just in Time Manufacturing” which while innovative did not account for a severe global disruption. They go on to state, “some experts assume that the crisis will change the way companies operate, prompting some to stockpile more inventory and forge relationships with extra suppliers as a hedge against problems.” If companies are to be successful in this post pandemic world, understanding where to find qualified and skilled labor underscores the need for extensive research before entering a labor market. Access to workforce training and higher education through technical schools and universities will be more important going forward.
Long range planning will become more and more critical as land constraints will begin to hamper the ability for large distribution centers and commissaries to locate near major population centers. Therefore, allowing enough time for entitlement of sites to obtain the right zoning, utility extensions, driveway permits, and redundant fibers will be key to finding successful logistical hotspots.
Don Moss specializes in industrial real estate, site selection, incentive negotiations and economic development consulting. As part of a combined 30 years of site selection, economic development, product development and brokerage experience, Don brings to Colliers International 15 years of brokerage experience, 15 years of local economic development experience and 6 years of development experience constructing industrial parks and buildings.
Grant Miller, SIOR is a top industrial real estate broker based in the Charlotte, NC office, having begun his real estate career in 2001. Grant focuses his expertise on all faucets associated with industrial | corporate real estate and enjoys creating solutions and solving issues pertaining to his client’s needs. Throughout his career, he has been involved in hundreds of transactions totaling more than 20 million square feet.
Grant and his business partner, Don Moss, have been recognized as Top Producers within the Charlotte office in 2013, 2015 – 2016 and 2018 – 2019.