In the past few years, warehousing and distribution has undergone a major identity shift. Gone are the days when a distribution center (DC) was regarded as simply a place to stash goods before shipping them off to a retail store or end-customer. Now, warehouses hum with cutting-edge technology, and the C-suite is beginning to recognize the essential role distribution plays in driving repeat sales and profitability.
The latest installment of the multiyear “Logistics 2030: Navigating a Disruptive Decade” study makes that clear, showing that the function is attracting both management attention and investment dollars like never before. (For more on the “Logistics 2030” study, see sidebar below.)
“The real tell-tale sign that the perception has changed is that companies that traditionally would have invested in stores, in factories, and in marketing are spending some pretty big dollars on expanding their fulfillment network,” says Brian Gibson, a professor at Alabama’s Auburn University and co-author of the report.
According to the study, this evolution has been driven largely by e-commerce—or more precisely, e-commerce’s disruptive effect on the retail supply chain (often called the “Amazon effect”), which has spilled over into other industry sectors. This wide-reaching shift in how people buy goods and services has pushed more DCs into the direct-to-consumer fulfillment game and intensified the pressure to provide speedy service. As one executive quoted in the report noted, “Amidst a cultural change from the way things have been done for a long time, we’re now using DCs to directly serve end-customers.”
Gibson and his co-author, Auburn professor Rafay Ishfaq, predict that over the next decade, customer expectations will continue to grow and that to respond to them, DCs will need to enact transformational change in three areas: tactics, talent, and technology. (For more on the study’s findings, see the infographic in this issue.)
A change in tactics
To meet those rising expectations, many companies plan to expand their distribution networks so as to be closer to (and thus, provide faster service to) their customers. As Gibson points out, “proximity is key for speed.”
“For too long, many organizations had focused on consolidation and minimization of the number of [warehousing] facilities and streamlining inventory,” Gibson says. “As a result, there wasn’t much inventory for them to fall back on when the challenges [of 2020] began.”
It’s not just the location, but also the size and scope of these DCs that is slated to change. “Instead of giant centralized warehouses, we will see more small facilities or depots being serviced by centralized facilities,” Gibson says. “We will see more inventory pushed out into marketplace in order to have it in closer proximity to customers.”
Those DC network expansions are expected to coincide with increasing customer demands for customization and a wider variety of goods. According to the study, 96% of respondents said they believe warehousing and distribution will become more complex over the coming decade.
In light of these trends, it’s not surprising that more companies are turning to third-party logistics service providers (3PLs), Gibson says. Currently, 60% of the study’s respondents are using a 3PL; that number is projected to jump to 70% by 2030. Given the major changes occurring in warehousing and distribution, respondents expect that the capabilities they’ll want in their 3PL providers in 2030 will be different from what they want today. The study indicated it will become increasingly important for a 3PL to have an extensive national network that provides an array of services, to offer flexible capacity, and to have the latest technology and automated systems in place.
The talent show (or no show)
If redesigning their distribution networks weren’t challenge enough, DC leaders will likely face continuing staffing difficulties in the decade to come.
Labor shortages are nothing new for the industry. When Gibson and his team began work on the study last year, more than 80% of respondents reported having difficulty finding hourly workers.
The reasons for that are well known. “It’s not fun work,” Gibson admits. “It’s repetitive at times, it involves heavy lifting, and it’s not always in the most pleasant working conditions. It’s very different from working in an office environment.”
The hiring challenges remained even when the pandemic hit and unemployment skyrocketed. “The labor market stayed pretty resilient in warehousing and distribution because it became a truly essential type of role for companies to maintain flows to their customer,” Gibson explains. “In a lot of cases, companies—especially retailers and manufacturers—were not laying off warehousing employees; they were hiring throughout the pandemic.”
Companies are deploying a range of tactics to make these jobs more attractive, such as raising wages and extending benefits to more of their employees (such as those who work 30 hours a week instead of the traditional 40). They’re also trying to change the work culture and environment to make it more appealing. More than 70% of respondents said they’ve taken steps to improve facility conditions in a bid to retain employees, and about half are offering more flexible schedules.
Getting a technology assist
As distribution operations become increasingly complex and labor costs continue to climb, more supply chain executives will be looking to technology for help managing fulfillment operations.
According to the study, over the next 10 years, companies will increasingly implement robust software that can orchestrate their inventory, people, and automation requirements. Specifically, respondents say they plan to invest in order management systems, warehouse management systems, warehouse execution systems, and warehouse control systems, the survey showed.
Given all the hype surrounding today’s emerging technologies, you might have expected to find robots and autonomous vehicles at the top of respondents’ shopping lists, not software that’s been around for well over a decade. But Gibson doesn’t find it surprising. It’s crucial to have these systems in place first, he explains. “You can buy the big shiny automated equipment, but if you don’t have the systems to coordinate it with your orders and your people, it all will be very disjointed,” he says. “You’ve got to have that backbone that keeps things in synch and well-orchestrated.”
That’s not to say that emerging technology doesn’t have its place. According to Gibson, companies are showing particular interest in automated systems that are flexible and scalable. Some 80% of the survey respondents say they are interested in technology that will allow them to scale their operations up or down in response to market conditions. “We’re going to see a desire for material handling technologies that are really flexible, are quick to implement, and don’t carry the huge capital investment of a big automated storage and retrieval system,” Gibson says. Examples include robots that can provide a “labor assist” to their human colleagues by lifting heavy loads or reducing travel time.
As for funding, a full 45% of study participants say they currently lack adequate funds to support warehousing and distribution technology initiatives. But that may change in the near future. Many respondents report that their employers are adjusting their ROI (return on investment) criteria for automation projects, particularly as labor and cost challenges grow.
Not a blip on the screen
Warehousing and distribution has definitely emerged from the shadows and into the limelight. And it appears that its stature will continue to grow: A full 88% of respondents say they expect warehousing and distribution to be a company priority by 2030.
Gibson, in fact, believes it will be a priority for many years to come.
“It will be quite a while before [warehousing and distribution] capabilities fully catch up with demand,” he says. “The pressure is going to continue to be on warehousing and distribution folks. They will continue to have that seat at the table. Even once we’ve accomplished what needs to be done in terms of network service level, I don’t think warehousing and distribution will get pushed to the back burner. I think it will continue to be a focal point and a key part of strategic discussion and planning.”
ABOUT THE STUDY
Launched in 2018, “Logistics 2030: Navigating a Disruptive Decade” is a multiyear study designed to assess the strategies, requirements, and tools that will shape supply chains and drive success over the next 10 years. The research is being conducted by Brian Gibson and Rafay Ishfaq of Auburn University’s Center for Supply Chain Innovation, and is supported by the Council of Supply Chain Management Professionals, the National Shippers Strategic Transportation Council, and AGiLE Business Media (publisher of DC Velocity and CSCMP’s Supply Chain Quarterly).
The first installment of the study, released last year, looked at transportation. This year’s study examined warehousing and distribution. The warehousing report is based on 11 in-depth focus group discussions and survey responses from 206 supply chain executives. Some 40% of the study participants work for companies with revenues of over $1 billion.
Work on the study began last year and continued into 2020. While most of the research was conducted before the pandemic hit in March, the study does incorporate survey responses submitted during the pandemic, as well as input from interviews that took place in May.
The third installment of the study, which will focus on procurement, will be published in mid-2021.
Editor's Note: This story first appeared in the November 2020 issue of DC Velocity, a sister publication of CSCMP's Supply Chain Quarterly.