John H. Boyd is Founder and Principal of The Boyd Co., Inc. Founded in 1975 in Princeton, NJ, the firm provides independent site selection counsel to leading U.S. and overseas corporations. Organizations served by John over the years are many and varied and include The World Bank, The Council of Supply Chain Management Professionals (CSCMP), The Aerospace Industries Association (AIA), MIT’s groundbreaking Work of the Future Project, UPS, Canada's Privy Council and most recently, the President’s National Economic Council providing insights on policies to reduce supply chain bottlenecks.
COVID-19 has hit supply chains with a “double whammy.” It’s not just that supply of vital medical equipment, pharmaceuticals, and essential consumer staples has crashed. Companies have also seen a plunge in demand as more than 30 million workers lost their jobs and shelter-in-place rules halted normal commerce. Meanwhile the already booming e-commerce sector has kicked into overdrive.
How will these large and rapid changes impact the distribution warehousing sector here in the United States? From my vantage point as a corporate site selection consultant, I have identified some of the key trends that I see having an impact on site locations and design decisions.
Move toward reshoring
Reshoring of manufacturing and supply chain operations from China back to the U.S. has been a trend since the Trump tax cuts, but we expect the pace of this supply chain realignment to pick up even more now. The pandemic has brought into the spotlight the fact that our nation’s supply chains have been stretched to the limit at our great peril. COVID-19 has been a painful wakeup call that our supply chains—normally hidden from public view—are far too reliant on distant nations like China. The message of supply chain risk has even reached the halls of the U.S. Congress where lawmakers—on both sides of the aisle—are crafting legislation to encourage American companies to shift supply chain operations from China back to the U.S. through the use of tax breaks, generous subsidies, and new rules of the road.
As a result, we expect that warehouse site selection within the U.S. will become less “port centric” and more oriented to the dynamics of domestic production and consumption. In recent years, some of the most popular and expensive supply chain real estate has been close to deep-water container ports like Miami, Florida; New York/New Jersey; Southern California; and Houston, Texas. We see that interest moderating and predict a heightened interest in warehouse sites near centers of U.S. manufacturing and agricultural production, especially in our nation’s central region.
Weakened economy
Interest in keeping a close eye on cost efficiencies and operating costs will intensify in the weakened COVID-19 economy. As a result, companies may favor lower-cost cities and states with more favorable tax regimes for their supply chain facilities. Figure 1 lists ten top locations on the U.S. East Coast for a cold chain distribution center serving the pharmaceutical industry and shows the comparative operating costs (labor, real estate, construction, power, taxes, and shipping) for a 175,000-square-foot facility. Annual costs range from a high of $27.5 million in Staten Island, New York, to a low of $18.1 million in Rocky Mount, North Carolina. The cost differential between the New York location (a state with a corporate income tax rate of 6.5%) and North Carolina (a state with the nation’s lowest corporate income tax rate at 2.5%) is $9.4 million, a significant differential of 34.2%.
[Figure1] Distribution center operating cost comparisons Enlarge this image
Also shown in Figure 1 are ten top Central U.S. DC sites along with annual operating costs for a 750,000-square-foot national warehouse. Annual costs range from a high of $20.1 million in Humble, Texas, to a low of $18.1 million in Liberty, Missouri. Three of the ten top national DC sites are in Missouri which records the lowest corporate income tax rate in the Central U.S. and the second lowest in the nation at 4.0%.
Site-seeking companies need to be on guard for major tax hikes and toll increases in the months ahead. Those states hardest hit by COVID-19 will face unprecedented budget challenges and will be searching for new revenue sources. California, for example, is gearing up for a large property-tax hike. The state’s November ballot initiative would effectively exclude commercial and industrial properties from the landmark Proposition 13 passed in 1978 that limited property taxes for homes, businesses, and all other land to 1% of the property's value at the time it was last sold. If passed, this game-changing initiative is expected to hike property taxes for California businesses by as much as $12 billion.
At the same time, the weakened economy may also open up new sources for distribution sites. Some of the nation’s most attractive commercial real estate will be the many millions of square feet of retail space that will not be coming back after COVID-19. Developers will be especially quick to repurpose former malls and “big box” stores. These sites may prove attractive to developers due to their low cost, highway access, and truck and employee parking accommodations.
The role of risk management
Conventional risk management has always been part of the warehousing location decision. Companies have long taken into account such considerations as the integrity of the physical site, insulation from natural disasters, and political stability when choosing where to locate a warehouse or distribution center. The pandemic, however, will greatly expand the boundaries of risk management and its role in site selection. It will now need to include a range of COVID-related considerations like transitioning to new suppliers and/or customers as well as transitioning away from some that may go out of business due to COVID. Similarly, DC design and management will need to consider a myriad of human resourcefactors related to the impact of the virus on the DC’s workforce and local labor market as a whole.
Rising importance of the cold chain
COVID-19 will change not only where warehouses and DCs are located but also how they are designed. Cold storage was already on track to become a much larger player in the supply chain before COVID-19. Now, we are seeing unprecedented interest in the cold chain from investors and site-seeking industries like pharmaceutical and food. Our firm’s BizCosts unit forecasts that between 100 million and 125 million square feet of freezer/cooler space will be required to meet new demands, much of it coming from pharmaceutical, biotech, and food processing companies.
This trend is expected to continue beyond COVD-19. We expect to see many consumers continue to order perishables, including frozen food, online. Additionally, pharmaceutical and biotechnology firms are developing a wide range of new products that rely on cold storage throughout the entire supply chain. Biologics—drugs and medicines developed from living organisms—are also driving new cold storage demands. The cold chain will become even more critical when the much anticipated COVID-19 vaccine is developed, and the pharmaceutical supply chain has to handle distribution of an unprecedented number of dosages.
Technology and connectivity
COVID-19 is also causing a spike in warehouse automation. Some companies are turning to robots to help maintain social distancing and keep workers safe within the warehouse setting. Fetch Robotics, a provider of warehouse robotics, reported that inquiries are up by two-thirds since the emergence of COVID-19. Walmart says that concerns about worker safety are driving its dealings with Bossa Nova Robotics, which is designing a new shelf-scanning robot for the mega-retailer’s warehouses and stores.
Greater use of robotics will also be encouraged by the COVID-19-driven reshoring of manufacturing and supply chain facilities back to the U.S. This type of automation will help companies offset higher U.S. operating costs, principally in the area of labor.
COVID-19 has also accelerated the trend toward remote working, which will have a significant impact on the U.S. commercial real estate industry. As more employees work from home, the demand for office space decreases. When we started our firm in the 1970s, many U.S. offices averaged 500 square feet per worker. That number dropped down to 200 square feet per worker a decade ago and is now less than 150 square feet per worker. For warehousing projects, we expect to see less space allocated to other back office functions (such as accounting, sales, and customers service) that may be co-located at the site.
Rewriting the script
It’s important to remember that no one saw this coming. There’s been no script for supply chain players to follow when it comes to reacting to and dealing with the COVID-19 pandemic. Instead supply chain companies and their consultants have been writing a new script each and every day.
Given the industry’s ability to adapt quickly to changes, I have no doubt we will recover from this horrible event with a more secure and resilient supply chain in tune with the “new normal.” … What that “new normal” is, however, still remains to be determined.
Chief supply chain officers (CSCOs) must proactively embrace a geopolitically elastic supply chain strategy to support their organizations’ growth objectives, according to a report from analyst group Gartner Inc.
An elastic supply chain capability, which can expand or contract supply in response to geopolitical risks, provides supply chain organizations with greater flexibility and efficacy than operating from a single geopolitical bloc, the report said.
"The natural response to recent geopolitical tensions has been to operate within ‘trust boundaries,’ which are geographical areas deemed comfortable for business operations,” Pierfrancesco Manenti, VP analyst in Gartner’s Supply Chain practice, said in a release.
“However, there is a risk that these strategies are taken too far, as maintaining access to global markets and their growth opportunities cannot be fulfilled by operating within just one geopolitical bloc. Instead, CSCOs should embrace a more flexible approach that reflects the fluid nature of geopolitical risks and positions the supply chain for new opportunities to support growth,” Manenti said.
Accordingly, Gartner recommends that CSCOs consider a strategy that is flexible enough to pursue growth amid current and future geopolitical challenges, rather than attempting to permanently shield their supply chains from these risks.
To reach that goal, Gartner outlined three key categories of action that define an elastic supply chain capability: understand trust boundaries and define operational limits; assess the elastic supply chain opportunity; and use targeted, market-specific scenario planning.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
“Unrelenting labor shortages and wage inflation, accompanied by increasing consumer demand, are driving rapid market adoption of autonomous technologies in manufacturing, warehousing, and logistics,” Seegrid CEO and President Joe Pajer said in a release. “This is particularly true in the area of palletized material flows; areas that are addressed by Seegrid’s autonomous tow tractors and lift trucks. This segment of the market is just now ‘coming into its own,’ and Seegrid is a clear leader.”
According to Pajer, Seegrid’s strength in the sector is due to several new technologies it has released in the past six months. They include: Sliding Scale Autonomy, which provides both flexibility and predictability in autonomous navigation and manipulation; Enhanced Pallet and Payload Detection, which enables reliable recognition and manipulation of a broad range of payloads; and the planned launch of its CR1 autonomous lift truck model later this year.
Seegrid’s CR1 unit offers a 15-foot lift height, 4,000-pound load capacity, and a top speed of 5 mph. In comparison, its existing autonomous lift truck model, the RS1, supports six-foot lift height, 3,500 pound capacity, and the same top speed.
The “series D” investment round was funded by existing lead investors Giant Eagle Incorporated and G2 Venture Partners, as well as smaller investments from other existing shareholders.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”