Supply Chain Bottlenecks Creating New “Logistical Hotspots”
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. 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 always important 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 thebalancesmallbusiness, “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.”1 Therefore, multiple avenues for moving products are important to a robust supply chain.
Access to Population Centers
E-commerce demand, fueled by COVID, completely transformed and jump-started the e-commerce 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. Access to transportation — including interstate-quality roads — is of paramount importance. Additionally, access to public transportation is becoming increasingly important as a selling point to recruit workers.
Add the availability of land for development purposes to the definition of a logistical hotspot. As land opportunities continue to become scarce within the traditional logistical locations, the new hotspots must be able to support new development. As the supply chains change, newer and more modern facilities are warranted to accommodate what occupiers now need to compete.
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.
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. Preparation is key to moving a site forward. Determining the size structure for a site, along with future utility needs, is important. Most transportation departments will give you an idea of road improvements they will require.
Access to Workforce
Understanding the ability to recruit workers is also key to becoming a logistical hotspot. For e-commerce 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 e-commerce facilities are four times higher than at traditional warehouses facilities. It is critically important that companies understand the labor force in the area before choosing a location.
Research into demographics, population growth rates, commuting patterns, and access to public transportation is paramount when choosing a location. A qualified labor study will go in depth 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?
While supply chains had already started the digital transformation in adapting to automation, AI, and the IoT, COVID and recent weather events have further accelerated this transformation. 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.
Land constraints will begin to hamper the ability for large distribution centers and commissaries to locate near major population centers. Therefore, allowing time for entitlement of sites to obtain the right zoning, utility extensions, and driveway permits, and getting redundant fiber will be key to finding successful logistical hotspots.
Source: Grant Miller, Partner, Colliers International & Don Moss, Partner, Colliers International, Area Development, “Supply Chain Bottlenecks Creating New “Logistics Hotspots””, Q3 2021, https://www.areadevelopment.com/logisticsinfrastructure/q3-2021/supply-chain-bottlenecks-creating-new-logistical-hotspots.shtml