Once again, how goods flow from manufacturers to consumers is about to change. Over the next decade, prompted by new technologies and business processes, this transformation will reduce supply chain costs and reorder its components.
Logistics real estate is at the center of this shift. The traditional warehouse was once an afterthought— an out-of-the-way box to store things. As e-commerce grows, however, modern distribution centers that can quickly move goods to consumers are rising to prominence. For companies looking to outpace the competition, logistics real estate is a business-critical decision that favors high-quality space in the best locations near urban centers.
On the production end of the supply chain, the upstream part that feeds factories, not much changes unless businesses move manufacturing to capture lower labor costs. Companies must still deliver supplies and materials to plants for manufacturing and assembly. Yet once goods leave the factory doors and begin the downstream journey to the end consumer, everything is changing. This is where we see the most dramatic transformation in the future flow of goods. While supply chains must continue to serve brick-and-mortar stores, e-commerce is disrupting retail markets and urbanization is concentrating growth in major population centers. That’s why demand is set to soar for distribution centers that are the last touch on goods before they reach the consumer.
The supply chain of the future, while more complex, will be less expensive and more efficient. How money is spent across the four key variables of the supply chain—energy for transportation, labor, inventory carry, and rent—will undergo notable change. Energy/transportation is poised for the biggest savings. At more than half of total supply chain costs, this is the largest expense. Advances in autonomous driving, electrification, solar power, and energy storage will literally drive costs out of the system. More intelligent use of infrastructure, such as autonomous electric vehicles that run silently through the night and algorithms that dictate efficient routes, will also increase the capacity of roads. What now comprises over half of supply chain outlays will someday cost virtually nothing.
Next is labor: the cost to employ people in trucking and moving goods in and out of warehouses. Today, labor accounts for just under a third of supply chain costs. As warehousing jobs and wages grow, autonomous vehicles will address looming shortages of truck drivers, causing overall labor costs to fall as a portion of total supply chain costs.
Third, inventory carry costs, currently about a quarter of the total, should rise with consumption growth as companies store more volume and a broader selection of goods to meet consumer expectations for availability, variety, and speed of delivery.
The fourth variable, rent, which today is less than 5% of the total, will increase faster than many people might expect. Here’s why: While location has always mattered, companies used to optimize solely for costs. They did this by building warehouses in remote locations, a strategy that worked as long as they had easy access to highways and other major transport hubs. Now, time and distance to concentrated populations of consumers is the imperative. Next-day delivery is evolving into same-day and one-hour delivery. In this environment, consumers have put manufacturers and retailers on notice. They will no longer settle for the basics. Instead, they want product offerings in multiple sizes, colors, and configurations and at the best price. Sellers of goods will have no choice but to compete with service and selection. Proximity to large, dense population centers and broad product offerings will be the name of the game.
As a result, companies will have to operate from high-quality buildings in prime locations that enable efficiency and rapid delivery. To fit in these landscapes, logistics facilities must become more sophisticated—even converting to multistory structures. The Internet may be the virtual platform for e-commerce, but logistics is the physical platform. Just as e-commerce infrastructure must boost productivity and provide an always-on, highly functional user experience to ensure the future flow of goods, so must logistics real estate.
Hamid Moghadam is chairman and CEO of Prologis, Inc. Roughly $1.3 trillion in goods pass through Prologis’ buildings each year.