De-risking Supply Chain: 5 Major Takeaways for Warehouse Market

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July 02, 2020

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The current global pandemic has severely tested the resiliency aspect of supply chains, with delays and disruptions pervasive. Shutdowns in production across multiple industries and many regions have been a feature of much of the past three months, causing companies to rethink how they will deliver products in a reliable and cost-effective manner. In tandem, globalization continues to be under scrutiny, and trade volumes are down markedly, as reflected in port and railroad data. As all of these phenomena collide, the pandemic could be the catalyst for a complete rethink of supply chains as we know them.

 

For the immediate term, the focus for supply chain executives will be to de-risk the delivery of goods, with an emphasis on resiliency through a series of diversification strategies. The impact on warehouse markets will be varied and mixed.

1. 

Multiple suppliers, more of whom will be North American, could lead to more point-to-point delivery, reducing the need for larger hub-and-spoke distribution centers. This would drive the demand up for warehouse space in secondary markets, and down in some of the larger markets.

2. 

Increased transportation of goods moving in a north/south direction, and decreased west/east movement, increasing the need for distribution centers accommodating imports/exports from Canada and Mexico (NAFTA, and the about to be implemented USMCA will be an added tailwind).

3. 

To offset the almost certain higher manufacturing costs from reshoring, industrial production will become more automated, placing less emphasis on the availability (and price) of labor, and more importance on being located in key distribution hubs, as they relate to intermodal yards and the Interstate Highway System.

4. 

The reshoring of industrial production will create demand for traditional manufacturing space, a change from the heightened demand for warehouse/distribution and light assembly space seen for the past several decades.

5. 

Just-in-time inventory systems to be augmented (not replaced) by just-in-case supply chain management, will lead to increased inventories, and possibly more (smaller) regular deliveries (watch inventory-to-sales ratio currently 1.67/April 2020, up from a recent low of 1.34/June 2018).

Closing Thoughts

 

The now trending discussion on how manufacturing should be brought back to local shores, and the resulting impact on supply chains will undoubtedly lead to subsequent discussion how industrial markets will also have to adapt to new inventory flows. Not just where manufactured goods will be produced, but what type of buildings are required, the size of the building, the role of third-party logistics (3PL) companies, and the role of small-batch deliveries, will all be up for consideration.

As stated previously, globalization is showing signs of peaking and a move towards more regional trade looks ready to take its place. The transition from importing (from one region/country) and then subsequently distributing, to importing from a limited number of regional trading partners, augmented by domestic production, will present a host of challenges, and opportunities, for industrial
markets across North America.

 

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