Overcoming rising cost supply chain roadblocks
To survive the long, bumpy ride through the recent recession, many retail logistics executives focused on cost reduction. This necessary objective drove important changes in supply chain strategy, from network right-sizing to innovative warehouse automation and energy-efficiency tactics. A “lean and mean” supply chain model arose, and quickly became vital to survival.
Now that the economy is rebounding, and costs are rising, every supply chain strategy must address this new reality.
JLL's analysis of current supply chain trends, found that several consecutive years of stable freight rates coupled with low rents and zero interest rates may have some decision-makers enjoying a false sense of security. A word to the wise: Rising costs are on the horizon. And an increased focus on omni-channel strategies and the need for faster delivery of more goods to more places could cause some pain.
Today's improving economy could actually create bigger problems for supply chains in the not-so-distant future, unless key operational strategies are reviewed now. In other words, it is time for retailers to reassess their supply chain. Here’s how:
Roadblock 1: Nailing faster delivery—without charging customers for it.
Next- and same-day delivery is on the fast track to becoming table stakes for retailers. To achieve these tight delivery times without asking customers to foot the bill, distribution real estate strategy must move away from today's centrally-located distribution plan. The average distribution center (DC) is located roughly 823 miles away from its customers, a crippling distance in the race for faster delivery.
• Solution: Expand your distribution network to incorporate regional DCs in strategic markets. Operating 10 regional DCs for example cuts the average distance to 183 miles, while opting for 35 DCs pares it down to just 83 miles—a meaningful difference that enables retailers to reach 91 percent their customer base by ground, within a single day.
Roadblock 2: The only way is up for interest rates. Supply chain systems have traditionally been one of the larger cost buckets for the retail industry, but the recession-led reprieve in interest rates of recent years may have left decision-makers with their budgetary guards down. With economic recovery marching forward interest rates are certain to rise.
• Solution: Focus on lean inventories in an effort to reduce carrying costs and obsolescence.
Roadblock 3: Without trucks, America stops (for now, anyway).
One concern keeping supply chain professionals “up at night” is transportation costs. Trucks are responsible for transporting more than 80 percent of consumer goods in most communities. But with economic recovery creating more freight transport, a looming driver shortage and new federal regulations expected to limit capacity, trucking costs are on the rise. Moreover, analysts say that truck utilization is at an all-time high of 95-97 percent. This declining supply could leave supply chains in the lurch when they need capacity the most.
• Solution: Diversify your distribution methods to include more rail and intermodal options.
Roadblock 4: Growing demand for distribution space means higher real estate costs.
JLL has billed 2014 as “Year of the Distribution Center” for a reason. Company supply chains will likely face increased costs and decreased flexibility, as more companies scramble to expand their DC networks close to population centers to minimize transport costs and meet service delivery goals. This is true not just in primary markets, but in secondary and tertiary locations as well.
• Solution: Critically evaluate your long-term distribution footprint, so that you can negotiate better lease terms now—before your competitors beat you to it.
Roadblock 5: Chasing low-cost manufacturing options overseas can cost more.
As international economies ebb and flow, making location decisions based on manufacturing costs alone could ultimately cost more. As markets change and customer bases shift, the cost of transporting products to consumers could outweigh the value of lower manufacturing costs.
• Solution: Adopt regionalized manufacturing strategies that focus on near shoring. Making or sourcing products in the same region where they are consumed can reduce transport times, complexity and risk, and ultimately increase efficiency.
Taking steps now to manage supply chain costs will help retailers avoid the edges of the improving economy’s double-edged sword. By advance-managing the downside of an economy in growth-mode, retailers can maintain delivery commitments to consumers, secure prime locations near population centers and stay a step ahead of the competition.
Rich Thompson leads the global supply chain and logistics solutions team for Jones Lang LaSalle, a professional services and investment management firm that specializes in real estate. With annual revenues of $3.9 billion and operations in 70 countries, Jones Lang LaSalle provides services to a property portfolio encompassing 2.6 billion square feet and manages $46.7 billion of real estate assets. Visit www.jll.com.