Inventory management is often a significant line item. Companies looking to maintain or expand omnichannel sales must find cost-saving labor, inventory management, and shipping efficiencies while simultaneously meeting customers’ rising expectations. In 2023, 3PLs and merchants facing these challenges also deal with the continued scarcity of warehousing space.
Warehouse Capacity
Historically, supply chain research experts estimate that warehouses operating at 80-85% capacity are the most efficient. This capacity allows seasonal fluctuations and allows for new product introductions. For 3PLs, flexibility in available space is critical to add clients. Many warehouses are packed well beyond that 80–85% target.
Beginning in 2020 with the advent of COVID, warehouse capacity began a historical trend in space constraints, a trend exacerbated by the supply chain disruptions wrought by the pandemic.
The trend of constrained warehousing persists. Approximately 20% of organizations report over 100% capacity in their warehouse, relying on unorthodox solutions like renting shipping containers to keep in a parking lot or overflow storage options. Another 40% report between 90% and 99% capacity, and 28% operate between 80 and 89%.
CBRE, in its U.S. Real Estate Market Outlook 2023, offers key insights into what’s driving this warehousing trend. First, despite supply headwinds, warehouse demand is still strong; 2023 is experiencing an extremely tight vacancy rate, expected to continue for the next two years. CBRE’s North American Industrial Big Box Review and Outlook report finds that twenty-one markets —most along the coasts and near transportation hubs—have sub-3% vacancy rates.
There are four factors that are converging to squeeze the supply chain:
- The Amazon Effect: the fundamental change in consumers' expectations that they should get goods in two or fewer days and at no cost.
- COVID: the pandemic accelerated the need for companies to expand across the country to meet delivery expectations amid massive geographic expansion.
- Higher construction costs: planning new warehouses has become complicated due to skyrocketing construction costs.
- Rent increases and other inflationary pressures: Companies need more budget to navigate exorbitantly high rent increases and record-low warehouse vacancy rates when paired with additional costs resulting from supply chain disruptions, labor shortages and extended project timelines.
The New Reality Requires Different Solutions to Deliver Lower Costs
Merchants and warehouses must find ways to reduce warehousing costs and optimize capacity without impacting operations or negatively affecting customer satisfaction.
In this economic climate, expanding and moving into new geographic geographies is challenging, especially with the cost of borrowing capital, making it prohibitive for organizations to make significant big cost-out cash outlays. If rising shipping costs impact you, the first step is to optimize current facilities.
For merchants experiencing overflow or at-capacity situations, expanding doesn’t necessitate building a new warehouse. Here are four lower-cost options to consider:
- Connecting with a 3PL to support new geographies that would be optimal for consumers. A 3PL enables merchants to scale and expand reach without heavy capital investment and offer flexibility that empowers businesses to better accommodate seasonal fluctuations and industry shifts. Evaluate potential fulfillment partners based on your needs, based on factors such as:
- Location, which determines the cost and speed of fulfilling orders. Depending on your customers’ location, look for a fulfillment center that can efficiently ship orders.
- The types of services the offer, as fulfillment centers can offer a range from order processing to shipping
- What fees or costs are associated with the fulfillment center, as custom price quotes may vary widely
- The industry reputation and track record as determined by their experience, customer reviews and industry awards or whether they’re part of a pre-vetted marketplace.
- Using non-functional external storage acquired at a lower rate. Purchasing and storing product in trailers provides a temporary storage solution at a significantly cheaper cost than building expansion. Evaluate the cost for temporary solutions, factoring in any charges and a generous estimate for how long you’ll need to utilize the external storage to determine what’s better for the long-term bottom-line.
- Leveraging dead retail space as a micro-fulfillment option. Underperforming retail space is increasingly being tapped for last-mile fulfillment. Often centrally located, connected to utilities, and with idea maneuverability, these spots offer a turn-key option for warehouses and brands, especially when you have a small number of SKUs in a relatively small concentration in a concentrated area.
- Knowing the most cost-efficient locations for the best next-day or two-day shipping. Get insight into your shipping areas so you can optimize your coverage for next day or two-day shipping with crossing fewer zones. For example, if you operate out of just one coast, expanding to the other coast may deliver significantly higher coverage of two-day delivery without introducing expedited or expanded costs.
Finally, if you’re a 3PL, consider partnering to build a network and grow geographic reach. 3PL network partners enable a lower-risk approach to expansion while delivering a 25–50% reduction in shipping costs and time. To maximize a network approach, many businesses are also adopting a fourth-party logistics provider (4PL) business model. Unlike 3PLs, 4PLs don’t just provide inventory management and order fulfillment, but often manage multiple independently owned 3PLs and can offer a diverse and broad warehouse network that handles the full scope of customer supply chain lifecycles.
The new reality for businesses and warehouses means accepting the drastic reduction in warehouse availability and implementing logistics strategies to meet—even delight—customers. Successfully optimizing operations doesn’t have to mean high costs and inconvenience. Instead, turn to the shared benefits of networking and innovative approaches.
