E-commerce DC of the future to be hybrid of automation, labor, expert says

E-commerce distribution centers will never be fully automated, but instead be composed of a 50-50 split of automation and labor, a top supply chain consultant said Wednesday.

Joe Dunlap, managing director, supply chain services, for Los Angeles-based real estate and logistics services giant CBRE Inc., said e-commerce distribution centers (DCs) of the future will increasingly be stocked with products of all shapes and sizes, with varied storage, picking, and packing requirements. It will be virtually impossible for a completely automated e-commerce facility to cost-effectively manage such an operation, Dunlap told the JOC Inland Distribution Conference in Atlanta.

Only companies with a narrow band of SKUs, such as a manufacturer or retailer of one type of item, could even think of fulfilling without labor, Dunlap said.

Another stumbling block is the surge in fulfillment activity at the typical e-commerce DC, Dunlap said. Orders come in waves each day, and the volatility increases exponentially during the pre-holiday peak shipping season that officially begins the day after Thanksgiving, otherwise known as "Black Friday." A mix of automation and labor is the only way for DCs to efficiently manage the inevitable jolts to the network, Dunlap said.

"Flexible labor will always be needed," Dunlap said.

The good news for DC operators is that a well-managed system of automation and labor can yield productivity improvements of 25 to 35 percent, according to Dunlap's estimates.

The rule of thumb is that every $1 billion of e-commerce revenue requires about 1.25 million square feet of DC space to effectively manage it. However, as more DCs are erected in urban centers to be near clusters of end customers, facility footprints will need to shrink due to the relative dearth of available land, Dunlap said. At some point, there could be a one-to-one ratio of e-commerce revenue to the required capacity, meaning that each $1 billion of e-commerce revenue will require 1 million square feet of DC space.

E-commerce's explosive growth, and the surge in DC demand to support it, drove nationwide average industrial vacancy rates to 4.6 percent in the third quarter, the lowest in CBRE's multi-decade history of tracking such data. Net rental rates of $6.88 per square foot last quarter hit a multi-decade high, according to CBRE data.

In a reflection of e-commerce's role in changing the broad economic calculus, industrial property users have absorbed 50 million square feet more than what would be normal given the current state of the U.S. economy, CBRE estimates. A cyclical business that historically tracks the ebb and flow of U.S. GDP, industrial real estate has, to some degree, become unmoored from its typical patterns due to the e-commerce phenomenon, CBRE said.

For that reason, the sector should remain strong through 2018, even though it has been in a prolonged bull market, at least for landlords and lessors, the firm said.