The Retailer Struggle With Inventory Management And Rationing Warehousing Space In Times Of Supply Chain Volatility
Retail operations are sandwiched between overstocked inventories, plateauing demand, and critically low warehousing space, pushing the need for optimization to higher relevance
A hearty welcome to the 53rd edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
Truckload freight rates have been steadily falling over the last couple of months, with shippers sighing in relief after witnessing two years of meteoric rise in freight prices. For retail businesses, COVID-19 led to a spike in logistics costs that have since eaten into their already-thin margins, as companies paid multifold more for logistics services that have only worsened in quality post-pandemic.
With retail being a high-volume business, optimizing inventory storage costs is critical to staying afloat. This would mean two things: ensuring retailers stock exactly what they can eventually sell and stock them as close as they can to the target customer base. The latter is of critical advantage in this age of e-commerce, where people have learned to expect quick deliveries.
Retailers find this a challenge, considering there's no 'right' answer, and optimization is a never-ending exercise. Finding warehousing space is not easy as the country stares at less than 5% vacancy rates in most of the sought-after commercial real estate markets like Southern California, Dallas, and Atlanta. Freight delays are still commonplace thanks to the various supply chain bottlenecks. While significantly down from their historical highs earlier this year, transport costs are still relatively high compared to their pre-pandemic figures.
Finding warehousing space is not easy as the country stares at less than 5% vacancy rates in most of the sought-after commercial real estate markets like Southern California, Dallas, and Atlanta.
All these headwinds make it harder for shippers to optimize logistics costs. In the end, a retailer's best-case scenario is finding space for inventories close to consumption hotspots. For inventories that can't be accommodated in the geography of choice, they would have to be held in regions with fairly developed freight markets to ensure swift hoisting onto a truck when it's delivery time.
The holding and hauling costs aside, the biggest risk to a retail business is excess inventories. Aside from taking up space, overstocking ties up capital that could have been spent elsewhere.
The mode of transport, too, varies based on the urgency to haul freight across the country as collective decisions of retailers determine the fortunes of railroad and truckload markets. Low season and plateauing consumer demand led retailers to move their incoming inventory imports via railroads from the ports rather than the back of trucks. Trucks are quicker and more expensive, while railroads are slower and more cost-effective, with retailers using the latter in low seasons to whittle down transport costs.
However, all is not well on the railroad side, courtesy of pandemic-induced bottlenecks that reduced the total intermodal volumes moved across North America in the first half of 2022 to a five-year low. This development, coming in the wake of historically high imports, is a definite cause for concern.
The upstream and downstream impact of clogged railroad networks is tremendous. Slow intermodal movement has meant thousands of containers are stuck at port and railroad terminals, as containers get stacked faster than being hauled out. Shippers are also blamed for the congestion, letting containers sit at docks and terminals as they are hard pressed to find warehousing space for the fresh inventories. What happened to their existing leased space, you ask? They are occupied with excess inventories that no retailer wants as their sales have slowed.
Slow intermodal movement has meant thousands of containers are stuck at port and railroad terminals, as containers get stacked faster than being hauled out.
Ultimately, the current environment poses great risks to retail operations. Lack of warehousing space has made it harder for businesses to position their inventories at the right time and place, even as they struggle to manage incoming inventories.
Inventory management is critical, pointed out Sunil Kardam, head of supply chain at Gramener. "Smart warehousing technologies can help improve operations through data analytics. Analyzing master, transaction, and business data help businesses compute warehousing costs," said Kardam. Overstocking is often the result of poor visibility into inventories, which inevitably creates issues with leasing warehousing space.
"Billing data including transactions like receiving and put away, picking and packing, shipping, adjustments, cycle counts, value-added services, and variable and fixed charges can provide insights. It identifies issues in achieving metrics, honoring service level agreements, and provides recommendations on continuous process improvements."
Optimizing inventories aside, businesses must look to gain the most out of the warehousing space they've managed to secure. Kardam contended that the entire design and physical setup of traditional warehouses need revamping.
"Tweaking warehouses with alternate racking systems such as double-depth racks and adjusting aisle space can provide more room without compromising warehouse safety and operational efficiency. Working out of warehouses with combined shipping and receiving docks can create more storage space too," he said.
Being mindful of available space constraints, inventory turnover times, and consumer demand can help retailers stay afloat on rainy days. Kardam explained that retailers must employ aggressive data analytics to keep tabs on suppliers, with visibility into performance, disaster recovery processes, operational capacity, and technical prowess. "Inventory management should shift focus from lean and just-in-time to maintaining adequate inventory to ensure continuous supply, which translates to continuous sales."
Being mindful of available space constraints, inventory turnover times, and consumer demand can help retailers stay afloat on rainy days.
That said, there's no 'one-size-fits-all' approach to inventory management. Some businesses might chase a larger percentage of safety stocks, some require nano warehouses closer to their customer base, while others might be comfortable bearing higher transportation costs as long as their warehousing costs are low.
"Post-pandemic retail might see companies finding value in 'continuous supply-continuous sales' approach, which enables them to offer sticky products or introduce marketing strategies that induce stickiness," said Kardam. "Offering freebies to customers is one way to do it, as it ensures orders fill trucks and keeps sales volumes high, securing margins. Eliminating middlemen and investing directly in logistics assets is another way to keep costs low. Ultimately, it's about ensuring you stay mindful of market developments and adapt operations to stay nimble no matter what."
The Weekly Roundup
This past June has seen the highest ever volume of imports from Asia to the US, rising 12.7% year-over-year. Retailers, attempting to stay ahead of supply chain bottlenecks have been front-loading fall orders. The import volume also indicates US consumer spending remains strong, despite inflation concerns.
The US supply chain could be in for another shock as the threat of a strike from 115,000 railroad workers looms. It is expected that a board of arbitrators will be appointed by the Biden administration to mediate negotiations to keep freight moving via railways. However, this might only serve as a stop-gap measure.
Truckers are protesting California state law AB5, outside the US West Coast ports of Los Angeles and Long Beach. The law would reclassify independent owner/operators as employee drivers rather than independent contractors. The U.S. Supreme Court returned the case to the 9th U.S. Circuit Court of Appeals after refusing to hear the California Trucking Association’s challenge to AB5.
Shippers are scrambling to renegotiate high contract rates in the face of dropping freight costs. Many shippers had little to no choice as panic-driven demand surged prices and severely capped capacity. As the US economy begins to dip, freight prices are leveling out and dropping, leaving some shippers locked into rates several times higher than pre-pandemic levels.
…said who?
“There’s so much demand, and this is something that’s critical,” he said. “It’s vital for our economy.…Everyone has to eat. We have not experienced any slowdown at all. If anything, it’s picked up.”
- Thomas Eldridge, principal at cold storage company RL Cold, commenting on the tight demand for refrigerated warehousing gripping the market
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