By Angelos Angelou, Founder & CEO, AngelouEconomics, AngelouEconomics.com
How eCommerce is Changing the Face of Warehouse Operations
If you’ve ever spent more than ten consecutive minutes on social media, chances are you’ve stumbled across that most venerable of internet tropes, the “Only ‘90s Kids Will Remember” or “Kids Today Will Never Understand.” Half nostalgia, half curmudgeonly griping, these memes are a throwback to an era where the internet was dial-up, Blockbuster was a thing, and MTV actually played music videos. There’s usually an implicit message of smug intergenerational superiority running just beneath the surface.
However, a very real truth underlies this strain of internet humor. The past several decades have brought with them a dizzying amount of social and economic change, the effects of which have yet to be fully realized. Among the greatest of these upheavals has been the dramatic reshaping of one of societies’ core functions: how we buy things.
At the risk of being cliché, kids today won’t understand what it’s like to order from a mail catalogue; to fill out an order form, and write a check, and then wait with bated breath for your product to arrive sometime within that nebulous window of four to eight weeks. Or *gasp* having to find a store in the yellow pages and then figure out how to get there on a map. Nowadays, ordering is as easy as tapping a smart phone, and practically everything under the sun is less than 48 hours away. This is not a bad thing. To the contrary, it speaks to improvements in efficiency, ingenuity, and consumer satisfaction that are the finest virtues of American capitalism. It has also necessitated a seismic shift in the nature of the warehousing and distribution sector of the economy.
Now, in truth, it’s not like modern warehouses are unrecognizable as such. Many of the business fundamentals today are the same as they were when the Romans built their Horrea Galbae way back in the first century BC. That is, large amounts of industrial square footage are a must, and access to a robust transportation network (typically multi-modal) is likewise essential. Being located reasonably close to the desired customer base also helps.
Beyond that, however, the rise of eCommerce has pushed the industry increasingly away from a wholesale model and towards a consumer on-demand model à la Amazon Prime. This in turn has driven several significant changes to how America’s warehouse and distribution network operates.
First, the industry at large has grown substantially over the past decade. According to the Bureau of Labor Statistics, private employment within the “Transportation and Warehousing” sector grew by 15.2 percent between 2007 and 2017, and currently accounts for nearly five million jobs. For comparison, total private employment nationwide grew by only 7.4 percent over the same period. Growth within the more niche “Warehousing and Storage” sub-sector has been even more pronounced. The last ten years have brought an 18.8 percent increase in the number of warehousing establishments (compared to 10.1 percent for the whole U.S.), while private employment has skyrocketed an astounding 54.7 percent. In short, the unique demands of eCommerce have increasingly brought about warehouse-intensive operations, and the jobs have followed.
The good news is that this industry is thriving in various regions across the country. Of course, New York and Los Angeles, as multi-modal transit hubs with access to huge populations, are the two dominant industry centers. They are not the only industry centers, though. The fact that warehousing and distribution deals in physical goods, as opposed to something like finance or software development, means that a certain amount of geographic dispersion is essential. Miami, Atlanta, Dallas, and Chicago have thus all developed into major distribution hubs in their own right. Furthermore, even smaller cities like Boise, ID and Lubbock, TX and Scranton, PA have significant operations, if not necessarily the raw employment numbers.
Looking past this broad-spectrum growth, the second major change to the industry—and foremost in terms of lasting effects—is the rise of automation. As with other sectors of the economy, the automation revolution within warehousing and distribution has been fast, furious, and multi-faceted. Likewise, the woes brought on by more computers and robots are the same as everywhere else; high costs and the loss of low-skilled jobs are perennial topics of conversation.
To truly get a sense of how automation is changing the industry, it is probably best to start with a close look at the grandfather of eCommerce: Amazon. The online retail giant has never been one to shy away from innovation, and that is definitely the case with their fleet of Kiva Automated Guided Vehicles (AGVs). Standing just 16 inches tall, the robots help streamline warehouse processes by picking up goods from various places in the warehouse and bringing them to a centrally located human worker. It is estimated that Amazon has deployed more than 45,000 AGVs in 320 warehouses. Other reports indicate that they’re growing their fleet by 15,000 robots a year.
At first glance, it may be hard to identify the true-value added of these machines. After all, they’re just moving something from point A to point B, right? Well, kind of. But by automating the warehouse picking process, they’re drastically reducing the chances of costly human errors, i.e. shipping the wrong product. They’re also reducing the physical strain on workers who previously had to run around the warehouses themselves. All told, the AGVs have increased the labor productivity of their partner humans by as much as 20 percent.
Naturally, the Kiva AGV is not the only warehouse robot in the game. The t-Sort Automatic Mobile Robot provides a mobile, modular, and scalable parcel sorting technology that its manufacturer claims costs half as much and uses three-quarters less space than traditional sorting technologies. The Celluveyor (winner of DHL’s 2016 Innovation Award) is an omnidirectional conveyor system that allows operators to move items simultaneously and independently. Opex’s Sure Sort robot…you get the idea.
The point is, automation solutions come in all shapes and sizes. The bigger point is that the industry is eagerly adopting these technologies nationwide, using them to solve problems they may not have even known they had. To put things in perspective, a recent study from the Peerless Research Group found that 42 percent of warehouse companies were increasing investments in 2018 (up seven points from 2017) while just nine percent are holding off on investments all together (down seven points from 2017). When asked about what these companies were actually investing in, several automation solutions made the short list of key purchases. For example, 14 percent indicated they were purchasing AGVs, up from just eight percent in 2017. The share of companies investing in other robotics (25 percent) has likewise doubled between 2015 and 2018.
It should also be noted that automation within the warehouse industry is not just limited to robots and the physical movement and packing of goods. Information technology tools such as warehouse management systems and warehouse control systems are also an extremely important part of the automation revolution. In fact, Peerless’s research found that these were among the most popular investments being made, with roughly half of all respondents indicating that they plan on purchasing such systems. An additional 57 percent of companies expect to have implemented automated order-cycle tracking by 2020. And none of this even touches on the truly drastic waves of change coming down the road, e.g. the prospect of self-driving trucks and Artificial Intelligence management systems and the like. Given another 50 years, who knows what disruptive innovations will once again upend the industry.
But to bring it back to more contemporary matters, the third major change that needs to be addressed is the increasing trend towards urbanization. Traditional industry wisdom has been to, as much as possible, keep major operations away from urban cores. With floor space being such an integral aspect of warehousing, real estate prices detract substantially from the bottom line. Avoiding high-density, high-cost areas was an easy way to keep costs down. Except now that’s changing. Despite tight vacancy rates and surging leases for industrial space, the last several years have seen a multitude of new warehouses and distribution centers crop up in both port cities like Los Angeles and New York and inland hubs like Dallas and Chicago.
There are several factors that help account for this real estate rush in high density areas. For one, new regulations as well as an aging (and shrinking) labor pool for qualified drivers are pushing up the costs of long-haul transportation. Increased urbanization in general also means that a greater share of potential customers are now located in cities. And then there’s the Amazon Effect, AKA the Need for Speed.
Among the myriad ways that Jeff Bezos and Co. have reshaped the retail landscape is how they’ve altered consumer expectations for delivery times. Before Amazon Prime, orders could take weeks or even months to be fulfilled. Now standard delivery times are measured in days if not hours. It is hard to overstate how quickly this has shaped consumer attitudes towards shipping times. In 2017, roughly half of all eCommerce shoppers expected the option for next-day delivery, and a full quarter said they would be willing to pay extra for same-day or instant delivery. To put it another way, success in the cutthroat world of modern eCommerce means companies need to be able to fulfill orders quickly. That in turn means they need to be located near their customers, skyrocketing rents or not.
With all of that said, companies are implementing some innovative strategies to reduce the burden of high real estate costs, with perhaps the most promising of these being the advent of multi-story warehouse structures. Bluntly speaking, building a two-or-three-story warehouse isn’t easy. Or cheap. The weight of stored materials, the need for unobstructed floor space, and the requirement to load and unload from trucks have all conspired to make warehouses one-story affairs since pretty much always. Major multi-story warehouses are really only an innovation of the last two decades. Japan, as one of the world’s most densely-populated major economies, was unsurprisingly an early pioneer of such projects. Now those designs are coming to America.
In April 2017, multinational logistics real estate developer Prologis broke ground on their Georgetown Crossroads project, the first multi-story warehouse in the United States. Located just two miles from the Port of Seattle, the three-story structure will provide nearly 600,000 square feet of warehouse space and two levels of loading docks. Seattle isn’t the only target of their ambitions, either. They are also pursuing projects in San Francisco and the Bronx, the latter of which faces at least two rival multi-story projects. Skyrocketing industrial leases and the need for rapid eCommerce fulfillment are cited as the driving factors for all of these undertakings.
Though perhaps the most intriguing, Prologis and its multi-story competitors are hardly the only ones capitalizing on the boom in urban warehouse space. In Oakland, for instance, developer CenterPoint is building 440,000 square feet of distribution warehouses directly adjacent to the city’s port. The Dallas-Fort Worth region has likewise seen a slew of new warehouse developments to include a 1.9 million square-foot development off I-45. And in Chicago, an industrial building boom is breathing new life into the local economy.
Chicago. New York. Los Angeles. Seattle. Dallas. The common thread of all these developments is, quite obviously, that they are all in major urban centers. Indeed, with the warehousing and distribution industry so driven by external factors—access to population centers, transit hubs, and ports of entry, among others—there is very little subjectivity at play in these location decisions. This can be discouraging to community leaders and economic development professionals trying to carve out their slice of the eCommerce warehouse boom.
But while the cutting-edge, million+ square-foot projects might be out of reach for many rural communities, that doesn’t mean small and mid-size cities have nothing to gain. As mentioned above, smaller regional distribution and fulfillment hubs have and will continue to crop up all over the country; Amazon alone has fulfillment centers in locations as diverse as Hebron, KY, Stockton, CA, and Troutdale, OR. Moreover, communities can take tangible steps to attract such developments in the future.
Many of the amenities that appeal to logistics developers are straightforward enough: sound transportation infrastructure, zoned and shovel-ready industrial land, a business-friendly permit process, etc. That aside, one area of particular interest to the industry is the issue of workforce readiness.
As warehouses have continued to automate and adopt more complex processes, the requisite qualifications of their labor force have also grown more demanding. Finding and retaining skilled workers has become increasingly problematic. In many respects this is a cycle that has played out many times in many industries, but the problem seems particularly acute within the warehouse and distribution sector; as recently as 2016, a full 41 percent of warehouse managers reported the recruitment and retention of skilled workers as one of their top concerns. Any community that is able to alleviate these concerns with a robust and certified workforce readiness program would standout to potential developers as they scout locations for their next project.
All of this is to say that, as they say, the times they are a changin’. The technologies, strategies, and work force of the U.S. warehousing and distribution industry have all been transformed over the past two decades and will doubtlessly continue to shift in the decades ahead. If there’s one aspect of the industry that can forever more be taken for granted, though, it’s this: when you order that must-have motion-activated toilet nightlight at 2 AM, you can have it on your doorstep by the time you wake up.