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The Future of the Supply Chain is More Warehouses, Everywhere

Michael Wilson | Jul 26, 2018

Over the last decade, there has been a flowering of e-commerce. Everyone is ordering everything online, and if you don’t have some form of online shop, you’re barely a business. ...

Over the last decade, there has been a flowering of e-commerce. Everyone is ordering everything online, and if you don’t have some form of online shop, you’re barely a business. Digital sales grew 16% in 2017, representing 49% of the total growth in the retail industry. By 2021, $4.5 trillion worth of goods will be sold online every year.

One side effect of an explosion in e-commerce is increased competition. Amazon, of course, has a massive market share, commanding 49% of the entire US ecommerce market. Not only are  the remaining e-commerce companies forced to compete against each other, the must also complete against the e-commerce giant to offer amenities such as low prices, one-click ordering, and one- or two-day shipping.

This last offering has proven to be the bane of e-commerce providers across the entire industry. Short of using tireless automated cars and trucks, the only way for companies to get their products to consumers faster is to keep them physically closer. As a consequence, one unintended result of the e-commerce boom has been a literal gold rush for warehouse space.

Unintended Consequences of the E-commerce Boom

Briefly, the effort to bring more goods to more consumers faster has resulted in a sea change in the global urban and industrial landscape – warehouses. The last few years have seen more new warehouse construction, the refurbishment of previously derelict warehouses, an increase in total warehouse space, and more. Here are just a few of the changes:

  • More warehouses overall
    For every $1 billion of goods sold online, 2 million square feet of warehouse space is required to store those goods during transit. In other words, by 2021, when the e-commerce industry sells $4.5 trillion worth of goods per year, we’ll need approximately 5.4 billion square feet of warehouses. For comparison, that’s an area just of almost 200 square miles, or about nine times the size of Manhattan.
  • Larger warehouses
    Not only will there be more warehouses, but each individual warehouse is larger. Since 2007, the average new US warehouse has grown 143% -- with a corresponding height rise of 3.7 feet. On the plus side, larger warehouses can employ more workers – even in places where shipping and manufacturing industries were once thought moribund. On the minus side…
  • Higher warehouse costs
    These days, more people live in cities. To deliver to people in cities quickly, you need to have warehouses near cities, and prime urban real estate is not cheap to build or maintain. Therefore, warehouse owners have passed their costs along to ecommerce companies. In 2017, rates for warehouse space increased an average of 5.4%.

Warehouse space is much more expensive now, and it’s also harder to find. This problem is also not expected to get better in the near future. How are e-commerce companies going to cope with the rising cost of warehouse space – without passing the costs along to their customers?

If You're Not Amazon, You May Have a Problem

One potential solution to the cost of warehouse prices is automation. Amazon, most notably, has led the pack in devising automated warehousing solutions with its purchase of Kiva Systems back in 2012. By using automated lifting systems to rearrange warehouse space on the fly, Amazon has managed to save 20% on operating costs – and pack in 50% more goods per building.

If you’re not Amazon – or don’t have an Amazon-sized budget – the automation outlook is less rosy. Kiva Systems appears to have been far ahead of its time in terms of warehouse automation technology, and all of that technology is firmly under Amazon’s thumb. Equivalent replacements have been slow to emerge. Therefore, other e-commerce companies must continue to search for a way to lower their costs, without the comfort of a technological solution to their problem.

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