The Future Supply Chain

I was invited to attend a meeting this week in Washington, D.C. to help develop the U.S. Roadmap for Material Handling & Logistics and the future supply chain. The group consisted of about 30 leaders from industry, academia, and government that were tasked with identifying areas where these groups can collaborate to support long term supply chain improvement in the U.S. There was much spirited discussion on topics such as the Panama Canal expansion, e-commerce, re-shoring, and robotics, with no shortage of opinions on what the future supply chain might hold. I won’t steal the thunder of the meeting, as a larger roll-out of the roadmap is planned in the near future. But, here are a few of my personal theories on how the next 12 years will unfold:

 

• Ecommerce: Competing with Amazon becomes the name of the game.
  • Most companies will find it difficult, if not impossible to replicate Amazon’s strategy of saturating the country with distribution centers to place inventory as close as possible to the point of consumer demand. The inventory costs alone of this decentralized model will be prohibitive to all but the largest companies.
  • While I do not believe that “same day shipping” will ever become mainstream, it seems very likely that by 2025 e-commerce distributors will have to be able to offer next-day or two-day ground service to most of the country to be competitive.
  • Operating three to five distribution centers will be cost prohibitive to many companies who do not have the sheer outbound volume to justify so much brick-and-mortar at the DC level.
  • Enter the new, re-imagined e-commerce 3PL. The shared facility and labor costs of a 3PL network will be the only way for mid-sized distributors to gain the economies of scale to replicate Amazon-like service. But the nature of the 3PL relationship must change. The short term, competitive contracts which are so common today discourage investment in automation. Longer contracts and more true partnering between 3PLs and clients must occur to make these relationships viable. Additionally, the distributors (the clients of the 3PL) must be willing to do more standardization in order management protocols, labeling, and other areas which will allow 3PLs to handle multiple small companies under the same roof efficiently. Pulling costs out of the operation in these areas will help to offset the costs of more decentralized inventory.

• General shift away from California: This is a trend that will be driven by a number of factors, including:
  • High cost of doing business: This one is nothing new. California is one of the most heavily regulated states in the country, with high labor and real-estate costs. These factors are already leading companies to build distribution centers in neighboring metropolitan areas like Las Vegas, Reno, and Salt Lake City which are friendlier to businesses.
  • Parcel logistics: For companies with two-DC parcel networks, California is too far west to effectively service the middle section of the country. These companies are building distribution centers in Nevada, Utah, and Idaho with corresponding east-coast DCs to cover the country.
  • Panama canal expansion: While I don’t expect this to have the immediate, major impact that some have predicted, it will make it easier for companies to land ocean shipments in southeast, gulf, or northeast ports inexpensively. Once the infrastructure upgrades are completed in many of these ports, volume will be gradually siphoned away from mega-ports like Long Beach and Oakland.
  • Retail-driven network design: Commonwealth first wrote about this trend in our blog a few months ago. Many of the tenants of the industrial parks in the vicinity of Long Beach share a common business model: they land goods from Asia and dry them to the closest, cheapest distribution center they can find, since their retail customers pay the outbound freight. Retailers like Wal-Mart and Home Depot are already wising up to this trend and are pressuring these companies to locate their distribution centers in more central parts of the country like the middle south.
  • All of these trends combine to paint a less-than-flattering picture of the industrial real-estate market in California by the year 2025.

These seem like two of the “safer” predictions for the future supply chain in the U.S. and what the next 12 years will bring. I welcome comments from our readers
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