Where are we headed? Because we’re getting there fast

The past few months have had an impact on everyone in some way and, while each of us has dealt differently with the challenges the COVID-19 pandemic has brought, there are some shared outcomes that have emerged.

Among the biggest changes and drivers of new activity in the property sector include:

• Fuelled by increased online shopping, eCommerce volume has grown in just a few weeks to levels predicted to be reached only in five years

• The roles of Industrial & Logistics and Retail sectors of the property market have had to align to respond to the rapidly changing market demands

• Delivery, and especially Last Mile landscapes, have shifted to new delivery patterns and changed centres of gravity.

These dynamics have highlighted the importance and key role supply chain plays in every organisation, regardless of industry. Now, more than ever, we are aware of the importance of property in enabling the supply chain to perform at the levels required to respond to sudden and unexpected market changes – as well as flex and adapt to rapid changes in supply and demand profiles.

The US has recorded the equivalent of a decades’ growth in online sales in just eight weeks. Australia and New Zealand are coming from slightly lower penetration rates, so our levels are equivalent to around five years’ online sales growth. This transformation is extraordinary, especially considering how supply chains have needed to respond in a very complex environment.

Business performance – jumping five years ahead in just weeks

Transportation and distribution typically make up 50% of total supply chain costs. Traditionally this has led businesses who understand their cost profile to design their distribution network around key locations that optimise their product transport costs within required service delivery standards.

The next largest cost segment is inventory, which is unique to each industry and each business’ inventory practices – however, as an average it would be 20% of total supply chain costs. Up until the end of 2019 those operating a “just in time” inventory would have been applauded for having low safety stock levels and running a tight supply chain.

The disruption to product sourcing and transport, together with rapidly changing demand profiles, have been unlike anything seen before.

Large scale cancellations to air travel has dramatically reduced air freight capacity which has been mirrored in the ocean transport industry with reduced sailings. The ability to rely on traditional transport and sourcing routes was removed at the same time dramatic changes in demand patterns were occurring.

Looking ahead, businesses are expected to change sourcing and inventory policies to better weather any future disruptions. Those companies that are reviewing their inventory policies are typically considering a 10% increase in safety stock, which will have an impact on the storage space required as they move to a “just in case” inventory model.

This path to increased resilience will bring increased costs which will need to be balanced with savings from an optimised network. Location, which has always been important, will become even more important to ensure product is available when and where required at an optimal cost.

A quick look at Amazon’s strategy in the US demonstrates that by increasing their operational footprint by 15% year on year for the past two years, they’ve been able to position products close to the point of consumption in order to offer delivery times that draw consumers in.

While not every business aspires to the Amazon model – there are two key learnings that apply to any business who needs to service their customers with a fast and cost-efficient network.

• Order to Ship Cycle – this is the time from when an order is received to when it’s dispatched for delivery. This is referred to as “click to ship” by eCommerce players. High levels of performance are driven by a focus on warehouse process optimisation, enabled by strong IT solutions for order processing and supported by property infrastructure that can support the integration of systems with the required process.

On the high end of sophistication - it means supporting an automated solution, which requires a property solution that can deliver on the power, systems, weight and height requirements.

• Ship to Door Cycle – this is the time from the order leaving the warehouse to receipt by the customer. This is where network location and inventory positioning become critical.

Having the right products in the right location where delivery can occur quickly at manageable costs means the difference between a viable customer delivery solution or one that creates unsustainable costs in the business.

Flexibility – Industrial & Logistics integrating with retail property in real time

Prior to the pandemic – Retailers were already designing operational processes that provided multi-channel shopping options. With the onset of the pandemic – having a retail store network that compliments distribution centres in customer order fulfilment, became survival 101. The line between these two asset types is blurring and the role in fulfilling customer demand becomes far less distinct. For example - as soon as a retailer fulfils an online order from stock at a retail store – that store transforms into a key part of the online fulfilment logistics network.

In recent times, the required coordination between distribution centres and retail sites became very clear to consumers. Just think back to the lack of toilet paper and other basic essentials experienced in the early days of the pandemic. These stock outages weren’t brought about by supply issues but instead by unexpected and sudden increase in demand. Dramatically increased demand at the retail sites required fast ramping up of logistics network throughput.

Online retail fast delivery and click and collect offerings are examples of how these sites need to function seamlessly in the logistics network by positioning products close to the point of demand to meet customer requirements and respond rapidly to changes in demand.

At the onset of the COVID-19 pandemic, we saw retailers accessing stock in closed retail sites to fulfil online orders. This is smart inventory management, however, sadly not all had the ability to tap into their store locations and lost sales.

Moving forward, having the flexibility to access inventory across the entire network will be critical to ensure products can be distributed timely to the points of demand whether they be online or in store.

The disruption to product sourcing and transport, together with rapidly changing demand profiles, have been unlike anything seen before.

The trend to bring retail sites further into the online order cycle does come at a cost – 30% more costs. Handling online orders at the retail store level is moving the order fulfillment process from a typical industrial site and cost base to a retail cost base with typically higher rent and labour costs. Not to mention most retail centres do not have the outbound order parcel shipping infrastructure at the scale of a distribution centre operation.

This doesn’t mean it’s not a successful strategy. Target in the US has moved to fulfilling more than 80% of their online orders via store and have captured additional market share as a result. They acknowledge that the increased cost is worth the increased sales experienced. Using their vast store network is a smart move that enables them to compete against Amazon and their fast delivery network.

JB Hi-Fi is a local stand out in terms of their omni-channel shopping solutions. Web shoppers can easily see if their selected product is available for in-store for purchase, or decide to click-n-collect or have their order delivered. The success of its strategy has come from close integration of store and distribution centre stock management, as well as a robust order management system.

Chemist Warehouse has just announced the addition of same-day home delivery to its eCommerce solutions, which previously were limited to online purchases with standard delivery and click-n-collect. To power these solutions, product management efforts need the support of technology as well as property that can enable the technology.

eCommerce fulfilment solutions are the way of the future; however their operational execution requires three times the space of a traditional retail store sale and will drive strong demand for Industrial & Logistics property solutions.

At the same time, there are changes occurring in the role shopping centres play. Efforts are clearly underway to define services that will continue to draw traffic into the shopping centres.

Shopping centres are typically located closer to residential populations which could open the opportunity for them to play a role in the fulfillment cycle by holding inventory close to the point of consumption – even if not purchased direct through a retail store located in the shopping centre.

Adapting – Last mile landscape changing

The increase in online shopping has occurred in sync with home restrictions. This has brought about a fast and, in some cities, dramatic change in the delivery patterns and volumes for parcel delivery providers.

Prior to the COVID-19 pandemic, there were high concentrations of parcels going into the CBDs, where fully loaded vans could deliver large volumes in a relatively high-density location. With the stay at home orders, delivery volumes shifted to the lower density delivery landscape of the residential areas. While delivering into these areas was not new - the combined effect of increased volumes delivered to a wider area brought about a need for additional delivery vehicles requiring additional staff.

In Australia, as many as 2,000 additional vans have been secured to cover the changing delivery patterns. These additional vans require not only trained staff to drive them but space at secure depots to use as an operational base.

What does the future alignment of property and supply chain look like?

We’ve been on a fast-paced learning curve the past few months and despite the challenges some key learnings are emerging:

• Freight and logistics are essential services and in future crisis management situations careful consideration needs to be given to ensuring operational sites, including distribution centres, remain operational

• Increased online shopping is here to stay and based on the forecasted penetration rates, solutions integrating property and products will be essential

• The distinction between retail and logistics property will diminish as integrated solutions grow to meet market demands from consumers.

Christine Miller Head of Supply Chain Advisory, CBRE