re-inventing the public warehouse

Predictions of public warehousing's demise were rife a few years ago. But the industry has fought back by assuming a new, expanded role.

By -- Logistics Management, 5/1/2000

Reports of the decline of public warehousing have proven premature. Only a few years ago, many industry experts predicted that numerous for-hire warehouses would be forced to close their doors as manufacturers and retailers consolidated their inventory into fewer distribution centers.

But that hasn't happened. A bullish economy has resulted in the expansion of warehousing in North America. "As has been said a number of times, reports of our demise have been greatly exaggerated," says Kevin Michel, whose own public warehousing business-Michel Distribution Services in Bellcamp, Md.-grew 200 percent in 1999.

Yet the role of the public warehouse has changed markedly in the past decade. No longer are these centers used strictly for the overflow storage of parts, materials, and products. Today, public warehouses focus on moving inventory rapidly through the supply chain and performing crucial value-added services such as repackaging, light manufacturing, and bar-code labeling.

Indeed, the future of warehousing would be bright indeed if it weren't for one shadow looming large over the industry-a nationwide labor shortage. How warehouse operators handle that shortage could determine their future.

Predictions of Doom

Back in the '90s, corporations nationwide launched efforts to streamline their supply chains and trim inventory, leading to speculation that businesses would cut back their use of private, contract, and public warehousing. The public warehousing segment, which often provides space on a short-term basis without a formal agreement, seemed especially vulnerable. Historically, much of the public warehouses' business came from manufacturers that needed extra space to handle seasonal surges in inventories or excess production resulting from inaccurate market forecasts.

Certainly, the nation's manufacturers themselves believed that warehousing use was on the decline. When the Warehousing Education and Research Council (WERC) conducted studies of its members in 1993 and 1998, respondents to both surveys said they expected the total number of facilities in their corporate distribution networks to shrink, although respondents to the 1998 survey said they believed that actual warehouse buildings would become larger.

Both studies indicated that public warehousing would be hard hit. The 1998 study, for instance, reported that the use of public warehouses would decline from an average of three facilities used in 1998 to two by 1999. Manufacturers, in particular, said they planned to reduce the number of public warehouses they used from an average of 6.1 facilities in the fall of 1998 to 4.3 in the fall of 1999.

But statistics from the nation's leading trade association for third-party warehouses show that things are actually very different today. The International Warehousing Logistics Association (IWLA) in Park Ridge, Ill., a trade group that represents 560 third-party warehouses (both public and contract), reports continued solid growth. Kevin McNulty, IWLA's director of member services, reports that the total warehouse space operated by the group's members rose from 320 million square feet in Canada and the United States last year to 368 million this year. "Public warehousing is growing at 12 to 13 percent a year," McNulty notes. "And the contract side of the business is growing at 18 to 20 percent."

Likewise, CB Richard Ellis Inc., which provides consulting and financial services for the warehousing industry, reports that the total square footage of warehousing space operated in the United States has gone up in the past year. Industrial warehousing space in the United States rose from 104 billion square feet in 1998 to 106 billion in 1999, according to the firm. The vacancy rate was a mere 7 percent, adds John Porter, a senior vice president for the Global Logistics Group in CB Richard Ellis's Atlanta office.

The Surge in e-Fulfillment

Industry experts point to a number of reasons behind public warehousing's growth spurt. For one thing, the emergence of "e-tailers" has proved to be a boon to public warehouses. "We have 10 or more customers doing Internet business," says Chris Bender, president of the Bender Group in Reno, Nev., which provides public warehousing and trucking services in the western part of the United States.

Web startups that sell merchandise over the Internet and ship direct to the customer's door have sought out the expertise of public warehouses to fill online orders. "Public warehousing can offer e-commerce a turnkey distribution [solution] without any overhead and with people seasoned in the business," says public warehouse operator Jere Van Puffelen, president of Prism Team Services Inc. in Danville, Calif.

Although business-to-consumer Internet retailing grabs the most media attention, Michel says that the business-to-business side of electronic commerce has brought the most work to public warehousing-at least in his case. "We focus on high-speed fulfillment in business-to-business commerce," he notes. "When we get an order, it's got to get on the next airplane."

In fact, the industry has witnessed a surge of e-tailer interest in public warehouses during the first quarter of this year. "I get three to five phone calls a day from Internet companies," says Michel. "[The challenge is] trying to sort out the ones who are real. We have to look at them harder than the venture capitalists do."

Emphasis on High Turnover

Handling order fulfillment for online purchases is just one factor behind the upturn in the public warehouses' fortunes. Both the public and the contract side of the third-party warehousing business have benefited from the nation's economic boom and the current corporate emphasis on inventory velocity. A recent study conducted for WERC, Warehouse Inventory Turnover, found that respondents that only used third-party warehouses reported the largest increase in inventory turnover from 1995 to 2000-from 5.7 turns to 11 turns. (See Figure 1.)

Because of this focus on inventory turnover, public warehouses today find themselves storing and picking more cases than pallets and packing more small shipments than full truckloads. "The future of pallet in and pallet out' is not bright and rosy for public warehousing," says Steve Mulaik, director of the logistics systems practice at the Progress Group, a consulting firm and systems integrator in Atlanta. "Most of the growth is coming from pick and pack' or pallet in and case out.'"

On top of that, many manufacturers have begun mass customization programs, postponing final product configuration until the last minute. To handle this late-in-the-game final assembly, they're turning to public warehouses for assistance. "As the boundaries between manufacturing and warehousing fade, a lot more finishing and customization takes place in the warehouse because the wages are lower in the warehouse and it's a more flexible operation than the plant is," says Arnold Maltz, assistant professor of supply chain management at Arizona State University in Tempe.

As a result, workers in a public warehouse today might find themselves sewing labels into garments. Or they might be called upon to provide light manufacturing, handling the final assembly of a product and configuring it to the buyer's wishes just before it's shipped out the door. In short, public warehouses are now performing the time-consuming, labor-intensive final assembly work that the manufacturer wants to avoid. "They continue to get the stuff that no one else wants to deal with," says Mulaik.

Public warehouses also have joined their contract brethren in repackaging products to meet retailers' increasing demands for customization. For instance, they might receive cases of different types of product, break those cases down into units, and then reassemble the units into mixed cases of product that are repackaged for retail store shelves.

Many warehouses also build special displays to market the wares in stores, turning the shipping pallet into a point-of-sale display unit. "The club-store business wants to have certain markings for the club stores," says Van Puffelen. "That's something that public warehouses can provide-flexibility closer to the point of delivery than manufacturing can."

To provide this range of value-added services, Michel says, public warehouses have turned to information technology. The more sophisticated warehouses have figured out how to interface the internal warehouse management systems that oversee their operations with the customers' order-entry systems. "The people who are successful," he says, "have sophisticated systems and the ability to manipulate their systems."

The Labor Challenge

Even with this new role, public warehouses still see some challenges ahead. For one thing, the public warehousing industry-just like private and contract warehousing operations-faces a drastic shortage of quality workers. "They're singing the blues because they can't find people," says Thomas W. Speh, director of the Warehousing Research Center at Miami University in Oxford, Ohio. Adds consultant Robert Mann in the Atlanta office of Andersen Consulting: "A lot of warehouse managers lie awake at night worrying about where they can get employees."

To solve the problem, warehouse operators may be forced to offer amenities to attract workers. Robert Silverman, president of the consulting firm Gross and Associates in Woodbridge, N.J., says one of his company's Southern clients is even installing air-conditioning in a bid to lure workers to its facility.

Furthermore, public warehouses may be forced to invest in automated systems. The warehousing industry as a whole has steered clear of expensive technology with the exception of those storing high-margin items. But consultant Arthur St. Onge of the St. Onge Co. in York, Pa., says e-commerce may finally force distribution centers, both public and private, to automate such tasks as replenishment, picking, and packing. "If 20 percent of the goods are going to be sold online, it would take a million people to pick and pack those orders," he estimates. "There aren't a million people available to operate those e-commerce centers at the level of reliability that's expected, so you have to automate."

Although seldom deployed for cost reasons, special machinery to provide automatic replenishing and picking exists, says St. Onge. He notes that he's looking into adapting a Swedish robot developed for packaging for use as a picker in a startup private warehouse operation.

Even if the economy cools down, Mann believes that warehouses will have to consider increasing their levels of automation to cope with what he perceives as a permanent labor shortage. "Getting people to do warehousing jobs is tougher and tougher," he reports. "We're turning into a knowledge-based, service-based economy. The days of getting someone to lump boxes out of the back of a truck are long gone."

Busy Days Ahead

Although public warehousing faces the challenge of recruiting workers, the industry seems to have found its mission in the supply chain age: to be the place where product customization occurs. With e-tailers looking to public warehouses as possible fulfillment centers to handle Internet orders, public warehouses will remain pretty busy places in the near future-if they can find the workers. "Public warehousing will be around forever," says Bender, "because we offer a solution to [a business] that's changing so fast."

Figure 1. Although companies that use a combination of private and public warehouses still report the largest number of inventory turns, third-party warehouses have reported the biggest percentage increase (93%) during the past five years.

Source: WERC Study, Warehouse Inventory Turnover