How E-Commerce is Changing the Way Companies Warehouse

In the creation of new warehousing and planning locations, the exponential increase in the prominence of e-commerce has added a new factor that company’s must consider.  Simply put, most existing warehouses are not designed for high levels of e-commerce.  Looking at the divide between warehouses built before and after the mid-2000s, we see older warehouses with lower ceilings and inadequate docking, while newer facilities have adapted to the new necessities for more and more e-commerce; three out of four warehouses that underwent new leases in the last two years were constructed during the previous five years.

In breaking down this new trend, it clearly also plays into finding optimal placement for any new warehousing locations.  Many older warehouses are located in the Northeast, primarily in New Jersey, where you can find warehouses of ages of almost 60.  However, in the South and West regions, it is much more common to find ages in the lower 20s.  These areas, such as regions in California, Las Vegas, and Phoenix, are all highly populated and have large amounts of developable land.  Thus, this makes them prime locations for warehouses needed to fulfill high volumes of e-commerce, while these older warehouses are more suited for heavy industrial plants and shipping/transport centers.

Nonetheless, factories built before 2000 still account for 89% of all warehouse space available in the US, so companies have been faced with a dilemma in how to proceed in obtaining adequate warehousing.  Colin Yasukochi, the CBRE Director of Research and Analysis, notes that with such a disproportionate ratio of old, outdated warehouses to new, modern warehouses, it is essentially becoming a race for companies to get any new facilities available.  In other words, those warehouses in inland California and Las Vegas are certainly in the most desired locations, but as those facilities are acquired, companies are moving into more remote areas.  Companies may be faced with deciding whether to renovate old warehouses in perhaps more central locations to be somewhat better suited for heavy e-commerce growth, or start from scratch in a remote location and create a facility optimized for e-commerce.  However, there are even more options and factors to consider.  For one, a significant number of retailers have filed for bankruptcy or closed a large portion of their stores, so these facilities would become vacant for other companies to convert to warehousing.  Furthermore, some companies, like Target and Best Buy, are utilizing their brick and mortar stores essentially as mini distribution hubs for online customers.  Finally, companies must factor in how automation, such as drones, will change the way distribution works, and be prepared to adapt to any developments in technology when they occur.

Ultimately, warehousing is becoming more complex thanks to e-commerce, and with record lows for facility vacancy last year (only 5.3% of total space in the U.S. was vacant), companies are certainly putting a lot of thought into which course of action is best.  I would imagine this decision is very closely related to a lot of the topics we’ve discussed in class.  Companies can perform extensive forecasting to come up with future estimates for demand and how each location would accommodate it with the required inventory, and then utilize breakeven analysis to find at which point one option is more profitable than another.

 

Sources:

https://progressivegrocer.com/most-warehouses-cant-handle-ecommerce

https://www.supplychaindive.com/news/warehouse-future-CBRE-ecommerce-2000-modernization/520706/

https://sharespost.com/insights/blog/urban-e-commerce-sales-are-booming-but-where-are-we-going-to-put-this-stuff/

11 thoughts on “How E-Commerce is Changing the Way Companies Warehouse

  • April 17, 2018 at 7:42 pm
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    I agree, as e-commerce has become a more crucial part of our daily lives, warehouses must adapt in order to keep up with changing consumer demands. Warehouses that were unable to adequately supply inventory to companies would lose business within the market. I never thought about the placement of warehouses and how important location was. In class, the phrase “location, location, location” was used and it makes perfect sense. Just like buying a house, determining the correct location for warehouses is a critical part of the supply chain. It was interesting to learn about the trend that warehouses are moving more towards the south and west regions, into highly populated areas.

  • April 18, 2018 at 11:30 am
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    I find it very interesting that warehouses themselves have to be physically remodeled to account for our current e-commerce trend. As brick and mortar stores continue to decline in numbers, the products from these retail locations need a new habitat to wait until purchase. I assume that contributes heavily to why companies need to boost their warehouse size significantly. Due to significant online traffic from every corner of the nation, I figure that there should also be a more diverse array of warehouse location or, like the article mentioned, a higher concentration of mega warehouses by ultra-populated regions in America. Further, I look forward to seeing how more autonomous distribution methods, which are in the process of development by companies like Amazon, will affect warehouse development and structure in the future.

  • April 18, 2018 at 3:56 pm
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    As you mentioned with drones, changing transportation in the future could have a major impact on companies’ location decisions in the present. For example, a company could assume the current climate to stay the same going forwards and choose to remodel an existing facility to bring it up to date. If, in reality, transportations costs drop due to technological innovation, this may end up being a bad idea in hindsight. Something as simple as driverless trucks could play a huge role. Without having to pay drivers for transportation, trucking costs will be significantly less, and thus a more remote, newly built facility may be a better option than remodeling an existing facility. Of course, the ability to make the right choice now all depends on forecasting for the future, which is easier said than done.

  • April 18, 2018 at 5:31 pm
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    This is a very interesting and relevant topic. Currently, we discussed a case in my Ethics class regarding e-commerce companies and how that factors into state-tax collection: https://www.thestreet.com/investing/wayfair-and-overstock-trade-up-as-high-court-hears-online-tax-case-14558964. As this article states, the current tax law requires companies that have a physical presence in a state to pay the state-tax on purchases shipped in those states. So as Justin said, warehouses that might be going up in inland California, for instance, would have to abide by these tax-codes. This is a very important factor to take into account when discussing Supply Chain location. California has a very high tax rate and with Silicon Valley and Los Angeles making up the state, a lot of e-commerce occurs within the state. Where possible, I think it makes a lot more financial sense to use brick and mortars already in existence as mini distribution centers. The companies are already paying state-taxes on their sales, so why not generate more revenue from them. While the Supreme Court decision is still pending, this is definitely going to affect how e-commerce websites make supply chain decisions in the future.

  • April 18, 2018 at 7:23 pm
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    It is very interesting to see the effect ecommerce has had on the market in general, and therefore the way we operate our businesses on the operations and managerial sides. Ecommerce is growing at a double-digit rate yearly, and with giants like Amazon, it’s not shocking that buying things online has become practically the norm. Even in my last personal blog post discussing H&M, although the companies sales were down, their online sales had jumped exponentially. As a result, it is important for companies to adapt to the current market.
    In particular with warehouse, the implementation of technology is essential to be able to survive in the growing competitive field. As Justin said above, the majority of warehouses in this day and age are incredibly “old” when it comes to a competitive standpoint. On a monthly basis there are new types of technology being released, and when that happens, firms need to be on top of it and able to implement the new pieces that can help them better their efficiency. But the most important thing is the initial layout of the building to begin with: all these old buildings may not really be conducive to today’s strategies (https://www.supplychain247.com/article/7_ecommerce_enabled_warehouse_best_practices/3pl_central). Facilities need to be designed in ways that work well with the implemented technology, and can be easily updated as time goes on. It will be interesting to see how things change in the future as a result of this issue.

  • April 18, 2018 at 8:14 pm
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    This is a very interesting article with even more interesting statistics behind it. I wrote a similar blog last week about a third party logistics company that connected the customers directly with the suppliers, eliminating the need for traditional retailers to warehouse massive amounts of inventory. It seems like the biggest factor that managers need to consider in making warehouse decisions is flexibility. While for a very long time, the traditional system of brick and mortar stores did not change significantly. However, the industry is rapidly changing, fueled by e-commerce retailers seeking more competitive advantages. For this to sustain, managers will want to make sure they have a high level of adaptability so that they can continue to fulfill customer demand. They should not only consider their current needs, but also how the business of retail could look in 10, 20, or even 30 years down the road.

  • April 18, 2018 at 10:01 pm
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    I agree with you, Justin. Changing supply chain locations can be tough. It takes a lot of capital and time, but sometimes it’s necessary. When a company’s warehouse is outdated and causes inefficiency, an update may be necessary. Moving to the West and the South gives companies are opportunity to build warehouses at a lower cost than in the crowded Northeast. By moving into remote areas away from headquarters gives a company a chance to increase margins if they can locate their warehouses in a strategic manner.

    While dealing with E-commerce, a company’s customer base is spread out, and the warehouse location doesn’t matter as much. For example, before E-commerce blossomed in the early 2000s, Vineyard Vines was a company with a staggering majority of customers based in the Northeast. Now, as the brand has expanded the customer base has grown nationwide. This, along with the increased use in E-commerce, the location of warehouses has become less important. So companies, who have expanded like Vineyard Vines, are moving manufacturing nationwide to increase margins by lowering their costs to produce.

  • April 18, 2018 at 11:02 pm
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    I think this is a very fascinating topic, as it is not often considered. With all the hype that is generated by the e-commerce revolution what is often focused on is how this might impact retailers but there are so many sides to this transformation. From the warehouses to the ways our roads and vehicles might need to be altered there’s little that these changes will not affect. I think that upgrading previous warehouse space seems like the ideal situation for the northeast. The current warehouses are most likely located in the most central and logistically optimal spaces. In the west and south, areas that are growing extremely quickly it may be wiser to construct new facilities given the more abundant space available.

  • April 18, 2018 at 11:20 pm
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    Warehousing is such a major component of business today. If you are not strictly in the service industry then your company uses some type of warehousing. Warehousing is not cheap. So as you mentioned, it is very important that they are efficiently used and located. The article I read about this topic talked about hiring. So as online ordering becomes more common and warehousing more intense, more people are needed to handle the new demand. Yet, companies have been slow to increase their warehousing staff. This puts a lot of pressures on current employees and forces them to work longer hours. The push for more warehousing also requires more hands or faster adoption of automation features. The article wrote, “ Until then, some of the warehouse staff will buckle under the pressure and move on to less stressful jobs. This will have a negative impact on warehouses and further increase the pressure on existing employees. Management needs to understand these dynamics and proactively work to avoid their damaging effects.” Even if companies are building better and bigger warehousing they still need people to manage them, and the hiring freeze can further hurt business.

    http://www.supplychainquarterly.com/topics/Warehousing/scq201005warehousing/

  • April 18, 2018 at 11:58 pm
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    As almost everyone has mentioned, e-commerce has put a dent in traditional retailer’s pockets. The service and experience of buying inside a brick-and-mortar store is losing its appeal and companies need to adapt to changing consumer preferences. I find it interesting that Target basically use their stores as distribution centers now with large warehouse additions that serve to hold inventory. The winners and loser in the consumer product distribution industry will be made based on logistical efficiency and optimizing inventory strategies in warehouses.

  • April 19, 2018 at 1:13 am
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    In the past, we have seen this growing trend of major malls shutting down as e-commerce takes over. Most people these days prefer online shopping which saves a considerable amount of time and travelling costs as compared to going to malls for shopping. As e-commerce increases, companies such as Amazon are using technology to reduce delivery times for customers. Drones, as mentioned in the article, are one of the newest trends in the delivery business. However, the drone technology is currently in its nascent stage and has not fully expanded. Therefore, most businesses are looking at vacant malls and property as possible warehouse locations. The main reason behind this strategy is that these vacant malls are closer to residential locations and provide the opportunity for companies to provide shorter deliveries to customers. Additionally, these warehouses provide great job prospects in logistics for residents of the community. Another main reason why these dead malls are gaining popularity as warehouse locations is because most malls are connected to the highway or have some sort of established road network. This already established infrastructure helps these warehousing companies save a lot of costs as they do not have to spend additional money to build infrastructure in the region. According to recent statistics, 400 or so of the roughly 1,100 malls in the U.S. will close in the coming years due to the rise in e-commerce. Recently, Amazon has turned one of these “dead malls” in Cleveland, Ohio to one of its service centers (https://www.wsj.com/articles/the-best-place-for-a-new-warehouse-an-old-mall-1502190001). By refurbishing the mall, Amazon has achieved considerable cost savings while ensuring that it is close to its customers. Although some people might argue that finding warehouse locations close to residential areas might be difficult, I believe that as the retail industry declines, the opportunity to build warehouses on these vacant locations close to customers will automatically present itself.

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