Warehousing: Great expectations

A booming economy has helped warehousing grow despite businesses' attempts to curb inventory.

By James A Cooke -- Logistics Management, 7/1/1998

Despite gloomy predictions a few years back, the warehouse industry keeps on growing. Many had expected warehousing to decline as manufacturers and retailers reduced inventory safety stock, but that has not happened, thanks to a booming economy. If anything, contract and public warehouses have added more square footage and services as companies hand more distribution activities over to them. "You don't move stuff from production to consumption without stopping somewhere," observes Joseph C. Andraski, vice president of customer marketing operations at Nabisco Inc.

Warehousing services account for a significant portion of logistics expenditures in this country today. Cass Information Services in St. Louis, for instance, contends that businesses spent some $69 billion on warehousing in North America in 1997. That number includes estimated expenditures for private warehouses as well as public or contract facilities.

How does that translate to the individual warehouse level? A recent study by the Boyd Co. found the median operating cost for a U.S. distribution warehouse to be $13.3 million per year. That total included property taxes, physical plant operations, utilities, amortization, and labor. The figures in the study were based on a representative 350,000 square-foot facility employing 225 non-exempt workers and shipping to the North American market. Of all those factors, labor costs constituted the largest expense for warehousing operations, says John Boyd, president of the Princeton, N.J.-based site-location company bearing his name.

When it comes to the warehouses themselves, both public and contract facilities have increased the amount of square footage operated in the past few years, says Michael Jenkins, president of the International Warehouse Logistics Association (IWLA), a trade group based outside of Chicago. Of all the IWLA members, Exel Logistics of Westerville, Ohio, has the most total warehouse square footage. (See the accompanying table.) Jenkins notes that his group's members expect to add some 10- to 15-percent additional square footage in the next year.

Against All Odds

Warehouses continue to thrive despite well-publicized industrial efforts to pare down inventory. For instance, Andraski reports that the amount of inventory kept on hand by the U.S. grocery industry has actually increased to 106 days' worth of stock today from the 104 days reported five years ago despite the move toward Efficient Consumer Response (ECR), an industrywide initiative to reduce stock levels. The strength of the economy and the burgeoning number of stock-keeping units have led to supply buildups and offset inventory-reduction initiatives, he says. Andraski, however, cautions against interpreting this as evidence that ECR has not been effective. "Industries don't implement practices. Companies do," he says. "Those companies [that] employ ECR practices have lowered their inventories."

Jenkins, however, sees it somewhat differently. He contends that inventory-reduction practices have merely shifted the locations where supplies are kept and not decreased warehousing storage per se. "Whether it's JIT, ECR, Rapid Response ... none of these inventory-reduction initiatives has resulted in decreases in inventory," he says. "It has taken [inventory] from the retailer and pushed it out in the supply chain."

With increasing frequency, warehouse facilities are providing value-added services that go well beyond mere storage. "Value-added is growing dramatically," says Jenkins. "But the value added is different from several years ago." In the past, he notes, overnight delivery was considered an extra service for a warehouse to provide. Today, warehouses are more apt to engage in product-transformation services such as custom palletization, kitting, repackaging, or even final assembly of a product.

Location Trends

Besides seeking value-added services from warehousing concerns, corporations also have begun restructuring their distribution networks. Dale Rogers, director of the center for logistics management at the University of Nevada at Reno, for instance, has seen a trend toward supplier hubs. In that setup, a supplier establishes a warehouse near a manufacturing customer. The manufacturer then draws off supplies for production every hour from the warehouse adjacent to the plant. "The manufacturer doesn't own the inventory until it leaves the supplier's hub and arrives at the manufacturing line," he says.

Relocation consultant John Boyd adds that many companies serving national markets are shifting from a multi-facility distribution-center network to using one or two strategically placed facilities--generally in the middle of the country. On top of that, he says, companies relocating to Middle America frequently are opting to situate their distribution centers in small cities. "Smaller cities offer a lower operating cost structure, a more positive labor relationship, less expensive land, and communities wooing companies," he says.

In addition, the North American Free Trade Agreement (NAFTA) has started to affect corporate warehouse-location decisions. Now that NAFTA has opened up the U.S. borders to create a free trade zone that includes Mexico and Canada, Boyd says, companies are rationalizing their warehouse networks from that perspective. "A lot of Canadian companies are gravitating toward the States," he says.

Industry Challenges

Despite its continued success, the warehousing industry faces a number of obstacles to growth. The first and foremost is hiring and retaining top-notch personnel, whether managers or hourly workers. "People is a real big issue," says Thomas W. Speh, a Miami University professor who specializes in logistics and warehousing. "They're even paying bounties to find hourly people."

Furthermore, warehouses today are pressed to keep costs down. "There's continued pressure from the customer for cost savings," says Rogers.

Finally, customers are pushing warehouse concerns to offer more in the way of global services. Rogers says shippers would prefer to work with one warehouse chain that has either a branch operation overseas or a partner abroad. "A lot of companies are expecting some sort of global ability," says Rogers, "but we have few providers ready to do international stuff."

A Rosy Future?

As corporations embrace a supply-chain mindset toward doing business, many experts expect the warehousing industry to undergo fundamental change. Instead of serving as mere storage depots, warehouses will become stops where companies can undertake last-minute adjustments to tailor the product to suit specific customer needs. "It's a great place to do a lot of things such as labeling and packaging," says Speh. "Because of this emphasis on supply-chain management, the near-term future looks pretty rosy."

The Top 10 Contract Warehouse Operators

[Square Feet]

1) Exel Logistics 25,000,000

2) DSC Logistics 10,692,158

3) USCO Distribution 9,036,219

4) Kenco Group 8,112,000

5) Tibbet & Britten 6,976,000

6) Elston-Richards 5,827,200

7) Ozburn-Hessey 5,780,500

8) Warehouse Specialists 5,090,878

9) Metro Canada 4,983,885

10) Standard Warehouse 4,831,000