17 minute read
The Warehouse Space Race
With warehouse capacity at a premium, businesses try to get goods and move them out as global economic chaos disrupts long-held ideas about stocking stuff just in time.
BY GABRIELLE GURLEY
The pandemic shattered the fine art of moving stuff from your fingertips to the front door. Purchases of food, household supplies, and over-the-counter medicines exploded when COVID-19 lockdowns spread across the globe. American businesses fought to keep up as the world’s most voracious consumers, propped up in part by stimulus payments and boosted unemployment insurance, traded in-person movies, sports events, and concerts for new clothes, armchairs, books, TVs, and other creature comforts that could be packed up and shipped to their homes.
This triggered severe strains at every level of the nation’s transportation and logistics system, with cargo buried on offshore ships, in stacked containers, at overflowing ports, and in creaking truck beds and railcars. Many companies compensated for this by ordering “safety stocks”—additional inventory to guard against supply chain slowdowns, ensuring they’d have at least something to sell.
But this led to a new problem: finding a place for the goods once they finally trickled out of ports. The pandemic and the logistics mess exposed a long-standing issue: The United States doesn’t have enough warehouses, or workers to run them, to satiate Americans’ insatiable desires for new stuff.
This has led to a mad scramble for storage, a warehouse space race. Rents for renewing existing leases are at “nosebleed” levels, according to commercial real estate firm CBRE. Almost 96 percent of existing space in the U.S. is in use. Of the 190 million square feet of warehouse space under construction in 2020 across North America, almost half of it was pre-leased. Private equity firm Blackstone, which normally seeks riches in more high-flying deals, recently paid $2.8 billion for warehouse space to lease out.
The race for space heralds a massive transformation for the communities where new facilities land. Amazon has led a warehouse construction surge in rural towns and urban neighborhoods. There are boarded-up shopping malls to be converted, too. Large warehouse-seeking companies promise jobs, pocket tax breaks, and deliver noise, traffic, and air pollution while oblivious consumers sit somewhere else waiting for their cardboard boxes.
In addition, with death and the threat of it closing in every workday, warehouse workers have reassessed what it means to do physically and mentally debilitating manual labor, unappreciated by firms bent on paying them as little as possible now and aiming to replace them with robots later.
But one nagging question is, how did the country get caught so short? How were retailers so ill-prepared for the need for more warehouse capacity, when we’ve known about the e-commerce surge for years? The answer lies with our corporate titans of conspicuous consumption, who are always thinking about how to refine the lean inventory management philosophies that have steered commerce for several decades.
In the 1980s, big-box retailers like Walmart
embraced an inventory management philosophy that had already catapulted Japanese companies like Toyota into the first rungs of global manufacturers. In a sense, American retailers did an about-face, embracing concepts that auto companies rejected when W. Edwards Deming, an American engineer and New York University statistics professor, first proposed them before World War II.
Deming went to Japan to assist with the postwar reconstruction effort, and continued touting his ideas. His “total quality management” philosophy rested on imbuing a company’s leadership goals with team-oriented approaches. Success meant that everyone, from assembly line workers to executives, worked on problemsolving strategies that could occur at any point in the production cycle. Workers observed problems in producing or moving goods as they developed and assisted managers in resolving them.
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Amazon opened 300 warehouses in 2020 alone, up from an average of 75 openings a year.
Impressed, Toyota executives sought out Deming to refine the company’s inventory precepts into what became known as the “just-in-time” logistics system (later the Toyota Production System). Just-in-time prescribed that component parts should be acquired for manufacturing only when required to complete that unique part of the process. This allowed a company like Toyota to save on warehouse space, for starters.
Just-in-time “is not black-and-white, it’s a continuum in the sense that just-in-time doesn’t mean zero inventory,” says Ravi Anupindi, a professor of operations, research, and management at the University of Michigan’s Ross School of Business. “It means sufficient inventories such that you have smooth sailing; the flip side is you can have too much inventory to hide the problem, so [the question is] how do you gradually show a cycle of improvement to keep reducing inventory and keep removing the problems.”
Toyota’s interest in staying lean in its manufacturing process migrated to Walmart as a desire to stay lean in its distribution of finished goods. Innovations like the barcode gave retailers a better understanding not only of the number of computers or coats sold but also when and where demand was the highest. This served as a transfer of economic power from manufacturers to large retailers like Walmart. Keep-
ing a warehouse well stocked with products “just in case” of a bump in demand lost out to the notion of keeping inventories low and dispatching goods as orders for replenishment came in, that is, just in time.
One primary impact of this philosophy is that it requires fewer warehouses. Inventory sitting around gathering dust is seen as a cost to a retailer; they have to pay rent for the warehouse space. It shows up as a liability on the balance sheet. Inventory moved just in time to store shelves can be sold quickly. Maximizing profit meant predicting precisely how much inventory would be needed at a given time, and only ordering that much.
This is an incredibly lucrative strategy for the handful of sophisticated companies that can manage it. But just-in-time requires consistent, predictable supplies. And the only thing the pandemic has supplied consistently is a cascade of global shortages.
A perfect example of the shortsightedness of just-in-time logistics can be seen in Abbott Laboratories’ decision last summer to destroy millions of BinaxNOW rapid COVID tests, which are in such short supply now. The reason? Demand for testing at that time was going down, and waiting around until it ticked up again would mean storing the tests, and paying for that storage, in a warehouse.
Where Deming advised, “It would be better if everyone worked together as a system, with the aim for everybody to win,” Walmart and other big-box stores opted for a cafeteria approach to just-in-time, picking out the cost-cutting features to boost profits and grossly devaluing the people toiling in warehouses for low pay and poor benefits.
“Just-in-time is hard to implement in practice because a lot of companies are going for efficiency and they mistakenly think of the line workers as a cost rather than a source of problem-solving,” says Senthil Veeraraghavan, a professor of operations, information, and decisions at the Wharton School of the University of Pennsylvania. “They get into this situation of cutting costs, cutting staff, cutting inventory, bringing it down as close as possible to zero,” he says. “Firms then suffer problems because they have lost experienced workers who could solve those problems.”
E-commerce, with its direct shipments to
consumers, represents “a fundamental shift” in warehouse logistics, according to Anupindi. A warehouse that supplies retail stores has different expectations for workers, technology, and equipment than an e-commerce fulfillment center that ships packages to homes. Walmart has distribution centers that supply to stores and different distribution centers that ship to individual walmart.com consumers.
Unlike retail stores, where customers interact with employees, most people opening their cardboard boxes have little idea about the harms other people suffered to get their orders into those packages. COVID-19 in particular has pushed warehouse workers over the edge and into the Great Resignation. Warehouse work is a backbreaking way to earn a living. Walmart normalized punishing daily regimes and low wages, purposely siting warehouses in rural areas far from highways to keep pay at rock bottom, and frustrating union organizers. But if Walmart stepped up maltreatment of warehouse workers, Amazon has perfected what Courtenay Brown, an Amazon fulfillment center worker, called the “high-tech sweatshop” in testimony before a Senate Finance subcommittee this past December.
“Amazon is the innovator in not just warehousing but a lot of sectors,” says Sheheryar Kaoosji, executive director of the
Not Even a Superhero Could Fix Global Supply Chains
The comic book industry halted production in 2020 and a supply chain crisis bubbled in 2021, hitting retailers and fans alike.
By Jarod Facundo
World War II and 9/11 couldn’t halt comic
book production; COVID did. In 2020, as the world flipped on its head, even comics couldn’t evade a concentrated economy’s bursting fault lines. Diamond Comic Distributors—the industry titan that distributed Marvel and DC Comics for a quarter-century—shut down operations in April 2020 for nearly two months.
While distribution eventually restarted, the industry has continued to suffer lags. Entering the third year of the pandemic, frustrations run deep among comic book enthusiasts. Paloma Deerfield has worked for more than five years at Vault of Midnight, a comic book shop in Grand Rapids, Michigan. Her favorites include X-Men, Saga, Demon Slayer, Jujutsu Kaisen, and the indie comic publisher Boom! Studios. It’s disappointing, says Deerfield, “not being able to stock the shelves the way we want to.”
Buyers and sellers alike are feeling the impact not only from comic book distribution delays, but also from a shortage of bags and boards—the materials used to preserve collections in mint condition.
At BCW Supplies, an Indiana-based company that provides over 900 hobby accessories for collectors and retailers, backing boards are processed in their Indiana facility, while plastic bags are produced in their China factories, according to marketing manager Ted Litvan.
The paper industry’s significant price increases, explained Litvan, are due to higher demand outside of the collectibles industry. In early 2021, Amazon and other e-commerce giants snatched up the majority of the world’s cardboard supply. The cost of producing corrugated cardboard tripled last year too. For imported goods, meanwhile, “the ports are a mess,” and BCW can no longer predict when a shipment will be available for final delivery.
The supply chain is worsened by every aspect of shipping being more expensive. When cargo arrives at ports, BCW must transload their goods from cargo containers to separate intermediary locations, and then long-haul-truck the products to their Indiana facility. The transloading model is more expensive and differs from the intermodal model, which keeps products in the same container from start to finish. As the proliferation of e-commerce stripped sentimentality out of virtually every shopping experience, comic book stores managed to remain exemplars of nostalgia and wonder. But for retailers, the inability to keep comic books and hobby accessories in stock makes it hard to keep the momentum going. “You wanna get [comics] in people’s hands, but you can’t,” said Deerfield. “People have holes in their collections. It’s a bummer.” n
Warehouse Worker Resource Center, which organizes non-union workers. “Keep up with a certain rate or else you don’t get called back tomorrow. This is starting to bleed over into drivers, how many packages they can deliver in a day or an hour. It’s really starting to become something that’s going to be endemic.”
Amazon designs its warehouses to keep people moving, limiting connections that could serve as a spark to coordinate grievances or foster unionization, according to Kaoosji. To optimize how its “industrial athletes” navigate the warehouse floor and complete tasks, Amazon warehouses are multiple football fields long. Cameras monitor workers scanning items. Roving managers prod people who fall behind and fire people who can’t keep up. Rotating shifts minimize interactions between individuals.
Many of Amazon’s non-union warehouse workers are temporary employees hired by subcontractors, putting distance, if not responsibility, between Amazon and its warehouses. Amazon doesn’t want these jobs to be permanent landings; the company sees them as a pathway to a better, non-Amazon job. A case in point: A recent National Labor Relations Board order directed Amazon to hold a new election on unionization at its Bessemer, Alabama, delivery center. But most of the workers who voted the first time around, a Wall Street Journal investigation found, have already quit.
The pandemic has forced a new reckoning on Amazon’s warehouse practices. A wage hike to $18 an hour has failed to slow down the mass exodus from these festering places. COVID outbreaks are rampant in facilities, yet Amazon, now the world’s largest retailer, has been penalized a paltry $500,000 for hiding outbreaks from California warehouse employees. OSHA has Amazon in its sights after an earlyDecember tornado touched down on an Edwardsville, Illinois, Amazon delivery station, killing six workers. Questions have been raised about why workers were kept on-site despite the tornado warnings, not allowed to have cellphones on them, or did not have emergency shelter appropriate for storm conditions.
Bad press has not persuaded the com-
Amazon warehouses are increasingly dominated by “mobile drive unit robots” that lift boxes and bins. pany to change its ways, though ultimately it’s aiming for warehouses with the lowest number of humans possible. Amazon dove into automation a decade ago, acquiring Kiva Systems, a robotics company. Its warehouses are increasingly dominated by robots that lift boxes and bins. GeekWire reported that the company has 350,000
“mobile drive unit robots,” a 75 percent increase over two years ago. The pandemic has only accelerated automation across the warehouse sector, and the C-suite is highly motivated to phase out people. After all, they get sick; they can’t work 24/7; they complain or foment rebellion by agitating for unions. Yet robotics engineers have not yet come up with robots with fine motor skills, to pick out large numbers of items that robots can’t discern, as well as scan and pack them.
And a recent report from software maker
Lucas Systems found that 99 percent of warehouse operators expressed difficulty using artificial intelligence effectively. For the time being, retailers like Amazon are stuck with people. Some state governments want Amazon to stop treating people like robots. California is the first and, so far, the only state to tackle the tyranny of warehouse algorithms that set the pace for human work. As of January 1, large warehouse employers must provide workers with production quota metrics, and rules prohibit terminations based on quotas that interfere with a worker’s meal or rest breaks. The legislation also empowers state agencies to investigate “algorithm-enforced quota systems.” New York and Minnesota are also looking into similar measures.
“Amazon workers in the warehouses will be able to find out what their production standards are, and what algorithm is governing them, and if I think it’s unreasonable, well, guess what, I can join together with my co-workers and do something about it,” says Doug Bloch, political director for Teamsters Joint Council 7, which represents Northern California and Nevada workers in transportation and logistics and other sectors.
Flying from the Northeast to Los Angeles, about 30 minutes before landing at Los Angeles International Airport, planes glide
over the Inland Empire and its acres of nondescript buildings. “It’s warehouse city,” says Yossi Sheffi, director of MIT’s Center for Transportation and Logistics. “Warehouse after warehouse, flat roof after flat roof.”
From that vantage point, it would seem like there are enough warehouses to move all the consumer goods that Americans want on the same day or, better yet, in a couple of hours. But there really aren’t. CBRE estimates that the U.S. alone needs 330 million more square feet of warehouse space to meet e-commerce demand into 2025; to meet total demand, another firm, JLL, put that number at one billion. (According to CBRE, every $1 billion in new e-commerce sales requires one million square feet of new warehouse space.)
Amazon has pursued a blistering pace of warehouse expansion for years. According to a Consumer Reports investigation, Amazon opened 300 warehouses in 2020 alone, surpassing its previous average of 75 per year in each of the four previous years. Moving inventory means bigger warehouses approaching one million square feet or more, as well as smaller facilities to speed up “last mile” package transport in metro areas, so that Amazon can live up to its promises of rapid delivery.
Amazon’s land rush has pushed its bigbox competitors off the sidelines. Companies like Walmart, Target, and Costco are all jockeying for warehouse space, in a reversal of the just-in-time mindset. Base rents rose nearly 10 percent in the first half of 2021, according to CBRE. Walmart announced the construction of two million square feet of space in Tennessee and Utah in December.
Accelerated warehouse construction predates the pandemic, but the current demand has sent the industrial real estate market, which has long been the “bad stepchild” of the real estate sector, into the stratosphere for at least five years, says Mark Dlott, a senior vice president the Apex Commercial Group, a Dayton, Ohio, commercial real estate firm.
In October, Amazon announced a one-million-square-foot fulfillment center built on a former golf course in Canton, Ohio. While Ohio Gov. Mike DeWine and local officials hailed the project, neighbors didn’t know much about the plans. (Amazon appears to court secrecy about new warehouse projects with innocuous names like “Project Tarpon” and “Project Cyprus,” both in Florida.) One Canton resident who lives across the street from the site told CBS19 News in Cleveland, “It’s going to be a hassle; I would’ve preferred the golf course stayed there.”
Golf courses seem to be sought-after locales. Opponents of a 2.6 million-squarefoot Amazon fulfillment center proposed for a Hudson, New Hampshire, golf course have filed a lawsuit against the town. So far, jobs have greater appeal than open space in the Rust Belt, says Dlott, the Ohio real estate executive. “Manufacturing centers are trying to claw their way back to being relevant, that’s what are you seeing, with communities being receptive to these huge facilities.”
Elsewhere, Consumer Reports found that Amazon sites its urban warehouses in low-income African American and Latino neighborhoods that contain large swaths of industrial-zoned land and are less likely to have the resources to fight a company bringing air and noise pollution and truck traffic and “crappy jobs,” as Bloch, of the Teamsters, calls them.
These are the drawbacks that have soured Northern California communities on megawarehouses. San Jose rejected a proposed six-football-fields-sized Amazon distribution center. Contra Costa County introduced a temporary moratorium on new “Amazon style” development or expansions in North Richmond. The politics have shifted. It’s not just some progressive elected officials, the Sierra Club, and the Teamsters warning about the downsides, but the residents themselves. “Part of the reason why people are saying no,” says Bloch, “is that we’ve seen what happened when we said yes.”
One of the reasons these tensions between
communities and warehouse interests are spilling over is that our cities weren’t built for the e-commerce revolution, either. The just-in-time philosophy helped to dictate fewer warehouses, and fewer of the attendant harms to workers and the environment from them. Now that companies are scrambling to build more, there are few places for them that make sense. Yet insufficient warehouse capacity risks more supply shortages and higher consumer costs—persistent supply chain disruptions already cloud year three of the pandemic. The lack of reserve inventory means that almost no goods are really safe from being out of stock.
These uncertainties may have effectively suspended just-in-time, at least in the short term. Many companies, especially smaller ones, have staked their businesses on stockpiles, that is, “just-in-case” inventories. But inventories are only part of the story. The pandemic is prodding businesses to revisit the connections between manufacturers and suppliers and between affected customers, according to Sheffi of MIT, who explores some early lessons learned in his book The New (Ab)Normal: Reshaping Business and Supply Chain Strategy Beyond Covid-19.
“Just-in-time is not going to go away anytime soon, or maybe ever, because it’s just too good,” Sheffi told the Prospect. One of the keys to post-pandemic resilience is what he calls “smart globalization.” “I’m not saying get out of China or Southeast Asia. But think about distributing your purchasing power.”
Such a shift could mean that some manufacturing returns to the U.S. and that nearshoring to Mexico increases. But how the warehousing sector evolves depends on how the pandemic peters out, and where demand ends up. Large retailers have the resources to build redundancy into their warehouse networks to mitigate against both local and global supply shocks; however, new pandemics and extreme weather events pose threats to many smaller businesses that cannot make comparable investments.
Amazon’s expansion plans are already galvanizing cities and towns to push back against more community-destroying, carbon-spewing mega-warehouses, a disturbing trend that recalls Walmart’s destruction of local business districts with superstores in the 1990s. The pandemic has enabled Amazon to stoke even higher levels of consumer mania. The blatant disregard for worker health and safety, the dizzying rate of warehouse construction, and the willingness of many public officials to bow down to it all are symptoms of a deeper societal malaise. None of that matters, though, as long as the titans of conspicuous consumption find places to pack and ship your stuff. n
