Volatility in Supply Chain Variables and Real Estate Create Challenges - and Opportunities

Cushman & Wakefield Transportation Experts Explore State of the Market. End Quote

Newark, NJ (1888PressRelease) March 26, 2011 - Unprecedented volatility in logistics variables, and in the commercial real estate market, is creating challenges and opportunities for U.S. companies. While many decision-makers, understandably, adopted a "wait and see" position late in 2008, now may be the best time to make supply chain strategy shifts that capture the upside of this unique climate, in both the logistics and the real estate markets.

During 2010, commercial real estate services firm Cushman & Wakefield, Inc., hosted a series of free webinars on issues and trends impacting the United States industrial markets. Most recently, John Morris, a partner in the firm's Global Consulting practice, who also sits on the Oversight Committee for the U.S. Transportation Research Board, led a supply chain-focused program entitled "Transportation Forecast: Projections for the Rebound in the Freight Market and the Implications for Shippers."

He was joined by David Bovet, a partner with Norbridge, Inc., a leading management consultancy for the transportation and logistics industries; and Paul Anderson, vice president of BNSF Railway Company. In the following Q&A interview, Morris and Bovet provide a brief look at current trends in industrial real estate and transportation and, more importantly, how these trends could impact business.

What factors are most challenging for supply chain strategists today?

John Morris: Never in my career have I seen so many companies concerned over so many critical supply chain variables, and never have I seen so many of those variables themselves be, well, so variable.

• Fuel pricing is volatile and impossible to forecast
• Freight rates are unstable and expected to rise significantly
• There are ever increasing concerns over the availability and quality of industrial labor and, therefore, the level of DC automation required to address these concerns
• The logistics infrastructure in this country is simultaneously overburdened and changing, signaling paradigm shifts in mode selection, including more reliance on intermodal and an increasing penetration for East Coast ports

The net of it all, therefore, is that increasing fuel prices, transportation costs and opportunities to shift modes; the challenges of finding qualified industrial labor; and the increasing emphasis on "green" supply chain practices will drive industrial network strategies in the near term. We expect to see more facilities, closer to population centers, and an increasing level of materials-handling automation.

The commercial real estate market has been turned upside down. What opportunities and trends has this created among industrial space users?

John Morris: The bottom line is that companies can significantly upgrade facility infrastructure at lower-than-expected costs. We are seeing stepped-up advocacy for bulk warehousing. Generally speaking, a trend toward warehouse square footage being more closely aligned with population is beginning to emerge. Markets where the percent of U.S. consumer population is much greater than the percent of U.S. bulk warehousing space, like some markets in Florida, for example, should see growth in warehousing demand.

Additionally, the e-commerce sector is generating some interesting supply chain trends. Companies like Amazon and Target that require massive distribution centers with huge staffing levels for e-fulfillment are deciding to develop these facilities outside of "traditional" distribution corridors. Why compete for labor, space and equipment with the rest of the market? In fact, the addition of these types of facilities is right now more common than the development of new space for distribution to the brick-and-mortar channel.

Container volumes are rising as world trade recovers. How will this impact real estate-related supply chain decisions?

David Bovet: Global ocean container trade expanded sharply and surprisingly during 2010, after an ugly meltdown in 2009. Despite what has seemed like a modest recovery in the US economy, import container volumes have been up by 10 to 20% at U.S. ports, on a year-over-year basis. West Coast ports, such as Los Angeles, Long Beach, Seattle and Vancouver, have turned in strong performances. And on the East Coast, Savannah has done particularly well.

In addition, US exports are strong. This translates into increases in outbound containers loaded with machinery and semi-finished goods. Agricultural products, in containers or dry bulk form, have been flowing from the U.S. to the four corners of the globe, helped by the weak dollar and strong demand.

Coupled with the high fuel prices that John mentioned, and strong regulatory and driver constraints on trucking, we foresee greatly recovered demand for port-proximate space. This will increasingly need to be intermodally served. Traditional port cities such as Norfolk, Charleston and Los Angeles will see growth, as well as emerging gateways like Jacksonville and Prince Rupert. Emphasis will be on a network of flow-through cross-dock and transloading facilities more than on massive distribution centers. New East Coast to Midwest rail corridors and Panama Canal expansion in 2014 will drive special advantage to the Atlantic Coast ports.

Within this context, how can companies construct an approach that balances practical steps taken today with a long-term strategic vision?

John Morris: It's not an easy time to be a supply chain executive. Finding solutions to reduce costs and raise service levels is concerning company board rooms today more than at any time in recent history. The question is what do you do, when do you execute, and what's it worth? What is the cost of delay? Many companies we speak with are not sure if the savings available, in occupancy, labor and freight, from a realignment of their distribution network is worth more than the costs of change to capture that savings.

Post recession, many companies, especially those taken over by investment capital during the recession, have elevated expectations for return on capital. For some, a cash-on-cash positive return within two years of a significant network redesign is not fast enough. For every company, though, it is critical to quantify and understand the cost of change and the value of change.

A sophisticated network study can answer these questions. It does not take long or cost much to understand the value of various options. If a company decides to stay on the sidelines during this market opportunity, when so many variables are in transition and making changes is easier than in the recent past, they should at least know the present value of the decision not to act.

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