Jones Lang LaSalle advises RILA shippers to remain cautious

During the most recent recession, cost reduction was the operational mantra and a more lean and mean supply chain developed. Corporate and retail supply chains have experienced a period of stable freight rates, low interest rates and low real estate rents. And companies that successfully rode out the recession are now looking for better times ahead but they should be cautious.

A new report, Perspectives on Supply Chain, from Jones Lang LaSalle (JLL) says that the favorable economic conditions could present critical issues for the supply chain of the future. The release of the report coincides with the Retail Industry Leaders Association (RILA) annual conference convening in San Diego this week.

“Stable freight costs, zero interest rates and low real estate rents have been par for the course the last several years,” says Richard H. Thompson, Global Head of Supply Chain & Logistics Solutions at JLL. “The down economy created a fairly consistent operating environment. However with an economic upturn, we believe this will all change. Supply chain executives need to act now to manage rising costs in the future,” notes Thompson.

In an interview, Thomson adds that there were a few surprises in the research.

“The White Paper was based on our extensive work and interactions with corporate clients and their supply chain teams,” he says.  “What we found interesting was that companies are still focused on the “here and now,” and few are thinking about the “life after” in a world where the U.S. economy is back in high grow mode.”

JLL has identified five operational issues that companies should remain focused on as the economy continues to strengthen:
#1: Customer service expectations – means new warehouse networks. It is no longer competitive to offer delivery within 7-10 days as it was years ago. The new normal is next day and moving to same day. Using U.S. population statistics, a centrally-located distribution center would be (on average) 823 miles away from consumers. Operating 10 more regionally-specific distribution centers cuts the average distance to 183 miles. Operating 35 distribution centers cuts the average distance again to just 83 miles—and allows a retailers to reach 91 percent of consumers within one day, ground parcel shipping. Customer service demands are increasing and they are not willing to pay extra for expedited delivery.

#2: Interest rates on the rise – means lean inventories. Low interest rates have given logistics executives a reprieve over the last few years, drastically reducing inventory carrying costs. As the economy recovers and consequently interest rates rise, companies will focus more intently on “lean out” inventories in an effort to reduce carrying costs and obsolescence.

#3: Transportation Costs – means more focus on alternative modes. One concern keeping corporate supply chain professionals “up at night” is transportation costs. Today, as much as 75 percent of what “moves”, moves on a truck. Trucking costs are being driven up by a variety of new federal regulations which will impact capacity negatively. As the economy recovers, trucking capacity will tighten.  The faster the recovery, the faster it will tighten. Rail and intermodal options will become increasingly attractive alternatives to address both freight cost reduction goals and reduced trucking capacity.

#4: Rising real estate costs – means negotiate leases now. JLL recently named 2014 the “Year of the Distribution Center.” A positive sign for real estate investors, the U.S. industrial vacancy rate is at a cyclical low, year-to-date absorption is up nearly 30 percent from one year ago and speculative construction is steadily increasing across the nation. This is all good for landlords, but this spells increased costs and decreased flexibility for company supply chains.

“Now is the time to look strategically at your distribution footprint. Based on our research and current trends, the longer you wait, the more costly your real estate solution will become,” Thompson continued. These long-term decisions may include negotiating extended lease terms, making the move to more sophisticated space, expanding or consolidating, and/or making decisions on secondary and tertiary locations.

#5 Global outsourcing - means alternatives closer to the home. There are well known cost/service trade-offs when selecting global sourcing options. And as a result Thompson notes, “We are seeing global manufacturing companies adopt regionalized manufacturing strategies. They are looking to make/source products in the same region of the world that they are consumed. Being closer to the consumer reduces transit times, complexity, risk, cost and improves service.”