Warehousing À La Carte
The Fourth Industrial Revolution has brought about a broad range of technologies that are emerging – bundled in solutions – in all parts of the economy. Also, the logistics industry is changing and faces first signs of disruption. One area which has resisted digitization for some time is warehousing. This, despite the increasing pressures exerted by the e-commerce revolution, which requires flexibility, scalability, responsiveness and proximity to the markets.
Traditional warehousing is largely static through long-term leases and substantial fixed operating costs. Warehouses are often too far from the consumer and don’t support agile supply chains with short lead times. The long-term contracts with minimum volume commitments and rigid pricing models conflict with the needs of today’s dynamic business environment.
The alternative model which offers the flexibility the market needs is on-demand warehousing. This offer serves e-commerce companies and retailers that need flexibility for peaks and promotions or manufacturers that need overflow solutions. Regardless whether large corporations or small and midsized enterprises (SME), they often struggle to find quality locations in far-away cities, particularly when it comes to specialty spaces like cold storage.
The flexible model allows that customers add additional space or warehouses whenever and wherever required and pay only for what they need. This new pay-as-you-use offer became possible through digital platforms and the culture of the sharing economy, with its most prominent representative Uber and Airbnb.
Platforms are the future
In 2018, seven of the world’s top 10 largest companies by market capitalization are based on a platform business model. Platforms are marketplaces where demand and supply meet and that modularize and integrate. While in the traditional economy companies aimed at controlling supply of taxis and hotels, trucks and warehouses, platforms focus on customers and consumers.
In fact, platforms modularize the supply markets, such as warehousing space, and integrate customer relationship and inventory and order management, including order placement, contracting and payments.
This is exactly what an on-demand warehousing platform is offering. Through one single platform, product owners can manage growth, inventory peaks, returns and new-market entry by creating warehouse networks that scale up and down as necessary.
The idea of an Airbnb or WeWork for warehousing is not new. Already 2017, Sabine Mueller, CEO of DHL Consulting has stated in the article Warehousing Revisited: The Smart Warehousing Cloud “The answer is the Smart Warehousing Cloud (SWC) which combines a cloud solution with predictive analytics. The SWC is a real-time online platform that intelligently allocates warehouse space by matching customer needs for storage with available capacity in a warehouse network”.
The SWC is a different way to describe what is also known as the on-demand warehousing model. The formula of the Uberization of warehousing is simple: Warehousing space sized to a company’s immediate needs and located close to the final customer or consumer.
Solving a big problem
The customer pain level is high. According to the Flexe report The State of On-Demand Warehousing “74% of survey respondents report that fluctuating inventory levels result in excess capacity, or excess inventory without a place to store it.” The same report states that “90% of businesses who deal with inventory fluctuation need more capacity throughout the year.”
In Europe and in the United States (US) the industrial real estate market is in boom mode. Customers experience under-supply and over-demand across the board, which is reflected in rising rents. The decline in demand for high street retail space does apparently not help. This, at times when e-commerce increases the demand and costs for distribution and warehousing.
“Relative to brick-and-mortar, e-fulfilment requires the re-allocation of 75 percent of supply chain costs and prompts an approximate 400 percent increase in spending on distribution centers and transportation to consumers”, we can read in the Prologis research paper Unlocking Supply Chain Value.
Today, inventory fluctuation resulting from seasonality followed by forecasting issues and a shift in the warehousing model from bulk storage to piece picking and single-line orders to accommodate direct to consumer (D2C) deliveries is one of the key challenges in managing warehousing space in the era of e-commerce.
A more flexible model
Customers recognize the challenges and respond increasingly positively to the offers of the on-demand warehousing platforms. On-demand warehousing, however, does not only address above challenges but also opens totally new opportunities to reduce lead times, costs and emissions. Thanks to on-demand warehousing, companies can place and distribute the warehouses where it makes most sense, and not in the current more limited fashion, so that the patchwork of largely unconnected warehouses remains manageable.
In the new world of on-demand warehousing, a network of warehousing and fulfillment providers allows retailers and brands to add capacity and services where and when needed. On the supply side of the spectrum, warehouse operators and fulfillment providers can optimize their capacity throughout the year. On-demand warehousing customers can access and manage the space they need through one platform instead of dealing with disconnected warehouse providers.
They only pay for what they need instead of entering long-term lease agreements. Customers get the type of warehouse and service they require, only at the scale they need it in a flexible way. While the initial idea was to provide warehousing space for companies with some inventory overflow the concept and business has been evolving into a full-fledged fulfillment service.
The use cases
The most pertinent use cases are derived from the challenges and opportunities in today’s traditional warehousing model: lack of affordable proximity of storage and handling space, seasonal peaks and excess inventory, and flexibility of space and handling services to scale for e-commerce, promotions and market tests.
- Retail distribution
Brands who distribute their products to retails wish to shorten last-mile transportation to reduce lead times and cost. On-demand warehousing assists sellers offset inventory storage fees by positioning merchandise close to the intake centers of their customers.
- Inventory overflow
Companies face planned seasonal peaks and unexpected excess inventory. On-demand warehousing allows retailers and brands to quickly add additional capacity as it’s needed. It’s a turnkey solution for recurring warehousing shortages – for example to fill an overwhelming surge of orders when a new product was launched.
- E-commerce fulfillment
Retailers and brands need flexibility to scale their fulfillment networks to perform their D2C deliveries. On-demand warehousing for e-commerce fulfillment gives retailers and brands the possibility to pop up fulfillment centers to improve their delivery performance, test markets, and handle short-term product promotions.
On-demand will only become more important. Consumers wish to receive their orders instantly. Mass customization ensures that products are tailored to their needs – in terms of design, size and even price. Delivered through their channel of choice. “Decentralized e-fulfilment distribution is the most cost-effective model.
Total cost of supply is about 15-20% less than self fulfilment in a traditional retail environment”, finds Prologis. Soon, fulfillment centers close to the customers will be the norm ensuring that orders reach consumers directly at lowest cost and within the shortest delivery times – for instance within 15 to 30 minutes of order placement.
This is performance is enabled through automation. Warehouse automation is common today. Amazon has deployed 100,000 robots around the world working along-side the 125,000 warehouse workers. In – still rare – “lights-out” or “mostly lights-out” warehouses, autonomous mobile robots guided by ultrasonic and visual sensors, and automated storage and retrieval systems (AS/RS) fill orders with the help of asset tracking technologies and without or with limited human intervention.
Robots are increasingly equipped with cognitive abilities to be able to operate in highly complex warehousing environments. Internet of things (IoT) devices can report the conditions within the warehouses and the goods stored inside, like temperature and a potential fire that is about to break out. And, also the level of humidity the merchandise is exposed to, while shock sensors provide information about the quality of the handling of the cargo in the warehouses.
Automation makes it only easier for on-demand warehousing platforms to drive their growth. Just to be added is distributed ledger technology (DLT) – if not already installed – which comes with its smart contracts. Smart contracts can facilitate the matchmaking on the platform but also empower the autonomous warehouses to directly contract with customers. The platform can take also care of the related payments.
Pioneers in on-demand warehousing
The market observed an increase in on-demand warehousing companies and startups over recent years. The probably best-known representative of the new model is Flexe, created in 2013, which caters to larger corporations and e-commerce startups. Stord (created 2015), Warehouse Exchange (2016), and Flowspace (2017) are other examples. Deliverr (2017) partners with under-utilized warehouses across the United States to do fulfillment services for e-commerce customers who wish to enjoy 2-day delivery without using Amazon Fulfillment Services.
Flexe has more than 1,000 warehouse locations in its network and Warehouse Exchange has 200. With 500 locations in 17 countries, Stockspots (2017) has been taking the lead in the on-demand warehousing space in Europe. In 2019, Singapore Post and e-commerce solutions provider Synagie Corporation Ltd announced that they will partner to provide on-demand warehousing and fulfillment solutions in Singapore and Southeast Asia to small and medium-sized enterprises (SME).
The space is hot and large corporations don’t sit on their hands. UPS announced its market entry with Ware2Go in summer 2018. With Ware2Go’s, shipping software has expanded into physical deliveries of orders with the UPS trucks. While there is no shortage of demand, there’s plenty of excess warehouse space out there.
Estimates are in the range of 20-30 percent. Simply, because it’s hard to size a logistics warehouse in a dynamic market, companies usually decide to build warehouses that are just too large. On-demand warehousing can offer exactly the flexibility in scaling space that companies are looking for.
Today, the businesses that enjoy the benefits of on-demand warehousing as an alternative to long-term warehousing arrangements range from Fortune 100 companies to startups, from e-commerce players to traditional businesses to business enterprises. The direct response to Amazon’s network of distribution centers allows to position warehousing space ever closer to customers for order delivery in two days or less.
The pioneers of the new warehousing model have not gone unnoticed. In 2018, the co-founders of Stord, Sean Henry, 21, and Jacob Boudreau, 20, made it on the Forbes 30 Under 30 list in manufacturing and industry.