David L. Welch is CEO and President of Robinson Weeks Partners.
One boat, one canal and one fragile global supply chain commanded the news cycle in late March as the Suez Canal blockage by the container ship the Ever Given laid bare an inefficient international logistics network that relied too heavily on optimal conditions. Due to the 220,000-ton stuck ship, vessels carrying thousands of shipping containers filled with important goods faced substantial delays in reaching their destinations in Europe, Africa and elsewhere. Although the Ever Given was finally dislodged after a six-day ordeal, questions remain about the long-term impact the blockage may inflict on the supply chain at large.
Already, labor shortages throughout supply chain networks made it difficult for logistics providers to keep up with the rise in demand of e-commerce orders, leaving millions of dollars worth of goods stranded on the high seas in shipping containers with nowhere to go, whether in floating traffic jams outside ports, or left unpacked on land for weeks or even longer. According to data from Lloyd’s List, the Suez Canal blockage alone held up approximately $9.7 billion of products each day, further delaying already strained retailer inventory restocks. Increasing shipping container costs are another bottleneck in the process, with Freightos Baltic reporting that the cost of shipping a container has tripled since last year.
The issue calls into question the general laissez-faire approach many logistics providers and manufacturers tend to hold towards redundancy, or the layering in of preventative measures such as back stocking inventory, diversifying markets and increasing labor supply in the event of an unexpected supply chain slowdown. Despite optimistic long-term forecasts for industrial real estate, the chance of a supply chain snag is always looming, and the pandemic has further highlighted the associated risks.
While most disasters will not be on as large a scale as the Suez Canal crisis, the ensuing mess exposed the overwhelming fragility of our global supply chain and magnified the importance of taking action through redundancy before the unpredictable strikes. Here are three strategies to build redundancies in industrial real estate development that will serve to lighten the load on our worldwide supply chain.
1. Increase supply of warehouse space to enhance back stocking capabilities.
A key tenet of effective redundancy strategies is to improve resiliency across the supply chain. One way to achieve this is to make sure there is an adequate number of facilities and amount of warehouse space within logistics systems that are able to store an elevated reserve of backstock. Over the last year, the industrial sector has seen an uptick in consumer demand, but the current supply of warehouses has not been sufficient to facilitate this rise.
Put simply, the sector needs more space, particularly as growth estimates for e-commerce activity outpace production efforts. Prologis forecasts that through 2025 the national industrial market needs to add 125 million square feet of warehousing space each year to meet demand. By expanding warehouse development in critical markets, companies can build a well-connected and efficient network of properties that work together to fulfill inventory and production needs. More supply also necessitates a larger skilled workforce, which comes in handy when demand spikes during peak seasons.
With redundancies like higher inventory levels and a larger workforce, occupiers and users that invest in a network of facilities across established and emerging industrial hubs stand a better chance at remaining resilient in a fast-moving and unpredictable logistics cycle.
2. Focus on land and development opportunities with multiple power sources.
Industrial facilities require a reliable power source to keep warehouses running smoothly and at efficient rates of speed. According to the U.S. Department of Energy, power outages cost American businesses around $150 billion annually. Industrial operators bear much of that burden, with more than 26% of manufacturers losing power at least once a month, according to one report, and one hour of power loss can cost major manufacturers more than $5 million. A downed power line caused by a storm or construction mishap can shut down the entire operation for days at a time, posing risks to production line outputs and revenue streams while also triggering a domino effect that can shut down supply chains altogether.
To get ahead of cases of extreme weather or other unforeseen circumstances, manufacturers and occupiers should locate in development sites that offer easy access to a variety of power options. The land slated for warehouse facilities should be amenable to alternative power supplies in the case of the stoppage of one or more power sources. In doing so, industrial users will be better prepared to manage a shutdown and will be able to quickly bounce back to pre-outage production levels once power returns in full.
3. Develop logistics hubs that provide transport diversity.
What’s better than a well-located logistics hub near easily navigable interstates with access to key trucking routes? A logistics hub that also offers access to rail and international maritime shipping options, such as those found in burgeoning markets like Charleston, Savannah and Houston.
To capitalize on an expected surge in investment in these markets, the Georgia Ports Authority recently approved a $205 million infrastructure improvement plan in the Port of Savannah that will enhance container capacity by 20%. South Carolina Ports has committed to a $3 billion investment strategy for the Port of Charleston, focused on improving cargo movement, port-to-rail connectivity and other infrastructure advancements.
As online orders take over the global retail industry, companies are finding value in regions where goods can come and go by truck, train or boat, enhancing the flow of the supply chain and ensuring quick delivery speeds. Building industrial developments in these well-connected logistics hotspots will prove to yield operational efficiencies that positively impact profit margins.
With the industrial market continuing to benefit from e-commerce tailwinds, investing in redundancies is a key strategy to avoid supply chain jams and keep business on track. Users of industrial space and industrial developers must work hand-in-hand to keep our fragile global supply chain network well-oiled and ready to tackle all the inevitable logistics conundrums to come.
Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?