LAB Cargo Group

03.02.2023

U.S. economic headwinds drive warehouse management strategy reviews

According to Transport Intelligence, the global market for contract logistics is expected to “grow at a 2021-2026 CAGR of 3.7%, reaching a value of €m 286,066.3.” Despite the growth prospects for logistics services that include warehousing, transportation, distribution and inventory management, the challenging global economic situation, burdened by the ongoing repercussions of the COVID-19 pandemic and of the Russian-Ukrainian conflict, has stretched industry’s resilience thin.

The economic uncertainty of these times is significant, particularly in the U.S. The U.S. Federal Reserve has been methodically raising interest rates throughout 2022 in its efforts to combat decades-high inflation, now sitting at 6.5% from a year earlier. The increases are intended to deliberately curtail investment and spending to slow the economy, cool markets, and push down prices.

In fact, U.S. economic growth has begun to slow somewhat, with its Gross Domestic Product in the fourth quarter of 2022 coming in at 2.9%, down from 3.2% in the third quarter. However, many economists expect a recession to begin sometime in 2023 given the lag effect introduced by successive rate hikes. The U.S. Federal Reserve’s median projection for the U.S. unemployment rate is 4.6% for 2023, up from its previous estimate of 4.4%.

How is the current economy impacting warehousing?

The latest round of mixed economic news comes at a time when warehouse inventories are still near historic highs. Whereas the quarterly vacancy rate for U.S. industrial real estate remains at historic lows, ticking up to just 3.2% in the fourth quarter, according to Cushman & Wakefield as reported in the Wall Street Journal. Meanwhile, global supply chain disruptions continue to force businesses to review their strategies.

Faced with a challenging business environment, import team members, operations personnel, and transportation managers routinely gather to conduct warehouse optimization audits. While the experts review a multitude of factors when analyzing warehouse optimization scenarios, three areas stand out for consideration:

1. Warehouse locations

When reviewing complex facility siting decisions, planners can start with the simple question of where they are sourcing their materials and/or final products from and, once ready, whether those products can be efficiently shipped to customers when and where they are needed. Current global conditions have complicated supply side sourcing considerations. Geopolitical activity, such as the war in Ukraine, and the constantly changing landscape of regulations and tariffs, require supply chain managers to remain vigilant for changes that require supply chain strategy shifts. Planners need to consider whether a sourcing change is in order and whether the current facility locations are still suitable from a transportation costs perspective. Or, in reviewing the demand side of the equation, has the target customer base shifted in any way that would change facility siting needs in terms of transit times and/or costs?

Customers that are happy with a 10-day shipping deal at lower costs can often be served from a different locale, compared to customers who expect delivery in 48 hours or less.

A significant planning factor is also determined by who is paying for and managing the outbound freight. A warehouse serving business- to- consumer might need to be closer to end customers due to outbound freight cost and transit time factors. Conversely, a warehouse serving wholesale customers might need to be closer to the port of entry since the retailer is responsible for moving the outbound freight.

2. Batch size

Several factors come into play as businesses consider their business strategy, market conditions, and operational environment. For example, if resiliency is prioritised and there is concern about the possibility of West Coast labour disruptions, businesses may want to establish a continuity plan for additional warehouse coverage near alternative gateway locations. Planners also need to consider whether falling consumer demand will result in changes to Stock Keeping Units (SKU) counts, requiring a strategy adjustment to meet targeted customer population coverage rates. High SKU counts also make multiple locations difficult given the requirements of paying for, and managing, multiple inventories replicated across multiple locations.

3. Contract/lease obligations and flexibility

If inventories continue to increase as consumer demand softens in the months ahead, planners might find themselves in need of adding short-term contracting options to their mix of agreements to meet current expansion needs. The New York Times reported that consumer spending has slowed in the fourth quarter from the third quarter pace. Ecommerce sales have drifted down to levels just three percentage points above pre-pandemic buying patterns.

If businesses do find themselves in need of a new lease, they need to be prepared for increased real estate costs. According to commercial real estate brokerage firm Newmark, warehouse rents have grown nearly 24% over the past two years, reaching 9.56 USD per square foot in the second quarter with some key markets exceeding 15 USD per square foot. Given existing market rates, some enterprises are positioned to sublease their space at a profit to free them up for strategic moves to markets where real estate, labour, and transportation costs are lower.

Planners need to review their contract and lease obligations; and make new arrangements, if needed. As always, they need to consider scalable options that don’t require a commitment to buy today, for a peak they are projecting three years out.

4. Network fulfilment enabling enhanced customer experiences

New business models, built with customer experience delivery as a core strategic advantage, have raised the bar on customer expectations by significantly altering their fulfilment supply chains. Alongside, new consumption trends in favour of faster delivery, seamless fulfilment across channels, and tech enabled multi-channel inventory are driving businesses to reconfigure their logistics. This can be done by enabling faster reach to the end consumer, accelerating retail inventory replenishments, and improving working capital optimizations. This setting is changing the profile of warehouse-footprint from traditional, consolidated, large national warehouses in favour of a distributed network of smaller warehouses offering supply chain resilience, speed to customer and better scalability. Due to this, companies at the forefront of these disruptions have started investing massively in building fulfilment infrastructure closest to their end consumers.

Looking out across the horizon

Pros and cons abound when it comes to putting together the best warehouse network for a particular business endeavour. Each piece of the puzzle affects the others. Where real estate prices may rise, so may labour, though shipping costs may fall.

Because of this complexity it is important to deeply consider all factors to formulate the questions that need to be answered by your service providers and stakeholders in a timeframe that enables you to act on the big picture.