The goalposts in e-commerce fulfillment continue to move. Where once five-day delivery times were considered standard, now consumers routinely expect two-day or even next-day delivery. Same-day delivery is on the horizon.
These shifting expectations have forced e-commerce and omni-channel retailers to expand their distribution networks. It can be difficult—and expensive—to meet even the two-day requirement from a centralized distribution center. Meeting same-day requirements will require material changes to existing supply chains and both order management and inventory management processes.
The solution is to move distribution closer to customers. This philosophy, of course, is not unique to e-commerce. It has been employed across a host of industries. Where e-commerce is different from other industries is in the extent to which fulfillment operations are being localized.
To support next-day or same day delivery fulfillment, “warehouses” are increasingly being located within densely populated areas, such as large cities, and orders are being fulfilled from retail stores.
The impact of this trend is already being felt in industrial real estate markets. According to Spencer Levy, Americas Head of Research and Senior Economic Advisor for CBRE, “In New Jersey, during the last five years the average lease went from about five years to around eight years. The relevance of that is profound. Not only are you seeing increases in rent, and not only are you seeing increases in demand, you’re actually seeing an increase in the value of the asset itself, because the stability of its income base has improved.”
With land relatively scarce and prices on the rise, warehouse operators are having to become innovative in how they use that space. Here are three ways that could play out in the near future.
Fewer Shelves, More Doors
Because of the space constraints imposed by the environment, urban fulfillment centers must minimize product storage. In fact, they may look more like parcel delivery hubs than a traditional warehouse. These specialized cross dock facilities, which are already sprouting up in London, Hong Kong and other densely populated areas, occupy relatively small buildings, but pack as many doors and as much parking into the space as possible. They also need to be designed with the flexibility to support a variety of current and future last-mile delivery methods, as well as to serve as pickup and return centers for customers.
Another trend that is emerging internationally is the development of the multi-story warehouse. Just as has happened with office space when land prices reached a certain point, it becomes more economical to expand vertically than horizontally.
Of course, this can complicate both development and operation and, in many cases, there is the opportunity to expand vertically with higher racks and increased mechanization, rather than adding multiple stories. This may delay the need for multi-story development in the United States, but, if current trends continue, it seems likely this option will eventually prove attractive in some areas.
Managing inbound product flow will prove to be a challenge for many urban distribution centers due to extreme traffic congestion in the areas where they are located. Because these facilities will hold limited inventory in-stock, shipment delays from regional distribution centers could significantly impact operations and make it more difficult for these hubs to fulfill their purpose of compressing delivery times. Some have suggested large drones may ultimately provide the answer. This issue may also be mitigated through increased use of predictive analytics to allow retailers to better manage inventory—and shipments—based on expected demand.
We are still in the early stages of this trend but the scarce supply of land and increasing pressure to provide faster fulfillment is forcing e-commerce and omni-channel companies to move quickly to stake their claim on this frontier. The facilities that emerge in the next several years must not only be innovative in their use of space, they must be flexible enough to adapt to market changes and emerging approaches to last-mile delivery.