Chain of Thought

Look Who’s Directing Traffic in Same-Day Supply Chains

Same-Day delivery is a popular subject in logistics circles. In fact it came up several times during last week’s WERC Conference held in Chicago. Many of the discussions focused on the value and cost of this service to supply chains, but John Morris, senior managing director at commercial real estate service firm Cushman & Wakefield, added a new angle: the value and cost of industrial real estate.

The only way to make same-day work is to get close to your markets. As the value of this service goes up, so will the value of property in close proximity to those markets—even ugly properties only a mother could love.

“Getting local is the most important driver of asset value today,” Morris said. “The sites that were previously not developable because of work involved—like brownfields—the rents were too high for a long time. Now with needs to get closer, the rent isn’t the compelling issue, so large users can afford to pay those rents. Buildings close in to New York City are being leased before they come out of the ground at record rents.”

The way this works is there will be big DCs 60 miles out and smaller facilities closer to market. Morris says these trends will increase the metric that has become a logistics cost benchmark: logistics as a share of GDP. In the U.S. inventory carrying costs plus freight and distribution costs dropped to 7% of GDP during the recession but is now back to eight. The highest it’s been is between nine and 10. Morris predicts it will hit 12 within ten years.  That will force logistics professionals to find new supply chain economies—like making best use of outbound and inbound transportation. This is good news for 3PLs.

Also at WERC, Mari Bishop, logistics services manager for Colgate-Palmolive Co., talked about the new relationships that would result—calling them examples of horizontal collaboration. In these relationships, companies like Colgate will work with competitors to maximize their transportation efficiencies. This will raise the demand for a new type of logistics professional—a trustee or an orchestrator who will manage this collaboration and keep it out of legal (anti-trust) trouble.

“This saves companies money and reduces carbon footrprint, which is especially important in the U.S. as we deal with capacity issues,” Bishop said. “But a neutral trustee needs to put the rules together, finding accounts and making the networks fit together. There has to be conflict resolution so all parties involved know what needs to happen and how to adjust.”

As online shoppers raise the demand for eaches, shippers will have to find ways to recover scale and the best way may be letting their eaches ride along with their competitors’ eaches. That could explain why 3PL business was up 14% last year, as they increasingly offer aggregation opportunities shippers can’t get from mid-size regionals.

In a new article by Tompkins International ("From Malls to Click-and-Collect: How Today's Pace of Change Is Impacting Real Estate"), CEO Jim Tompkins says the get-local trend will cause traditional mall and store real estate values to pale next to distribution and fulfillment real estate.  He echoes Morris’ prediction that companies will purchase more real estate in major cities where they can fulfill orders faster and have products available for pick-up at a nearby store.

“The utilization of nontraditional warehouse space for distribution and fulfillment will also grow,” he writes. “Demand for available real estate for distribution/fulfillment will continue to be presented with less lead time; this will create significant opportunities for real estate owners and investors.”

This trend is certainly e-commerce driven, but not just on the consumer side. UPS just released the results of a survey it conducted with TNS, a market research firm. They assessed the buying habits of 1,500 industrial supplies purchasers in the U.S. Thirty-four percent of survey respondents claimed they made online purchases outside of their existing supplier base in the last year. Why? Sixty-four percent cited knowing shipping costs prior to making an order and 63 percent cited the ability to see real-time product availability as well as the estimated delivery date when ordering.

So you can bet carriers like UPS and DHL are just as happy as 3PLs about the new opportunities e-commerce and same-day shipping are opening up for them. Their challenge will be drilling through the thickening congestion filling the major arteries serving those growing real estate markets. In fact DHL just announced it’s trying a new way to get around such traffic: by flying over it.

This carrier is testing a helicopter service for the downtown Los Angeles area, providing early morning delivery for several major banking customers. They’re promising 9:00 a.m. delivery service, regardless of traffic bottlenecks. International shipments arrive at the DHL LAX Gateway, with specific packages transported by helicopter to a dedicated heliport in downtown Los Angeles. A DHL courier meets the helicopter and provides the final mile deliveries.

In the New York City area a DHL helicopter service speeds deliveries of financial and legal documents from the carrier’s JFK gateway to prime U.S. bank headquarters and Federal bank locations.

As same-day demand grows, many of those legal documents could be the very contracts making these new supply chain relationships possible.

 

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