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Lean practices can avert a warehouse capacity crunch

A warehouse worker using an augmented reality wearable device.

By now, it’s well known and widely accepted that the explosive growth of e-commerce over the last five years has seriously disrupted the logistics and supply chain industries. Consumers expect fast, cheap (or even free) shipping, a wide range of choices, specific delivery windows, and painless returns. These new expectations—nicknamed ‘the Amazon effect’—have strained supply chain nodes from last-mile parcel carriers to regional distribution centers all the way back to port terminals. Apart from the stress put on logistics providers by e-commerce merchants successfully competing in the space, digital sales growth has also led to a so-called ‘retail apocalypse’, sucking customers out of brick-and-mortar stores and driving retailer after retailer into bankruptcy.

FreightWaves reported in January on the effects these new shipping dynamics have had on warehouse prices. In short, prices for larger ‘first-mile’ sites have more than doubled in the past year; prices for urban ‘last-mile’ sites are up 25% over last year. The warehouse vacancy rate is at an historic low, hovering around 4.5%. 

“In short, we see continued challenges for logistics real estate customers. Planning ahead for growth requirements has never been more crucial,” wrote Prologis in its January 2018 Industrial Business Indicator Report. 

“Capacity constraints are driving very high utilization of leased space. There is effectively no shadow space in the market,” said Melinda McLaughlin, head of U.S. Research for Prologis. “Customers are expansion-minded, but are operating in a difficult market. Space is hard to find, and as a result, rents are growing quickly. Looking ahead, Prologis Research expects supply and demand to move in tandem, as customers absorb the space that becomes available. We forecast 220M sq ft of new supply and net absorption in 2018. It won’t be enough to alleviate the challenges users face, making advanced planning for requirements a necessity for future growth.”

There are several options for companies throughout the supply chain to expand, even in a difficult, expensive warehousing market. For instance, in Atlanta real estate developers are turning old malls into 1M sq ft distribution centers. But today, we’re going to concentrate on strategies for maximizing productivity in existing warehouse space, especially practices that derive from lean manufacturing. We believe that most warehouses are run fairly inefficiently and can make double-digit productivity gains and reduce cost at the same time by discovering and implementing best practices.

In 2014 McKinsey established a Model Warehouse in Karlsruhe, Germany, to apply successful approaches used in lean manufacturing to lean and digital warehousing. The Model Warehouse is an ‘experiential learning environment’ that uses a fictitious corporate identity as a automotive spare parts company, with background information, simulated data, real warehouse equipment that participants used to pick and pack real parts, detailing training materials, and customized performance tracking processes using root-cause analysis.

McKinsey bases their concept of ‘lean warehousing’ on lean manufacturing, which ultimately stems from the Toyota Production System. “Lean warehousing enables simultaneous cost reduction as well as service and quality improvements. For example, in order to increase productivity and ultimately lower costs, sources of waste, variability, and inflexibility are systematically identified in warehouse operations,” McKinsey wrote. They found that warehouse cost savings of 20% were easily attainable in every industry vertical while simultaneously improving service and quality, and even 50% savings were possible. McKinsey also found that experiential training—‘learning by doing’—was by far the most effective way of training warehouse workers, with 85% of knowledge retained after three months.

Knut Alicke and Martin Lösch studied warehouse efficiency and discovered that the gap between actual and clean sheet picks per hour performance was 33%. Labor efficiency may be a more difficult nut to crack: Alicke and Lösch recommended both hyper-flexible workforces that could respond with days or hours notice and investing in more serious training programs. 

LeanCor came up with a list of 26 best practices in lean warehousing, covering everything from prioritizing safety, to pacing operations to customer demand, regular gemba walks for continuous improvement, and maximizing standardization. Kenco, a leading 3PL, published a free e-book called Embracing Lean Warehousing. There are a couple of approaches to lean warehousing, including value stream mapping (VSM) and the 5S system borrowing from lean manufacturing. 

VSM entails visually mapping workflows so that managers can understand how various processes interact and how scheduling and departmental workflows impact operations in order to let managers identify gaps and bottlenecks in their processes. The 5 S’s of the 5S system are: Sort (removing unneeded items from the workspace); Set in order (arrange each workspace for convenience and efficiency); Shine (clean after every shift); Standardize (document successful improvements so they can be applied in other work areas); and Sustain (repeat each step in 5S on a daily basis). 

In sum, we see a ferocious competition among shippers and 3PLs to meet consumer expectations as e-commerce continues to grow. This competition is already driving warehouse prices through the roof–last week Prologis bought a warehouse in Queens for $757 a square foot–putting downward pressure on the margins of anyone who wants to offer cheap deliveries and returns. Companies unwilling or unable to pay a premium for more space in a sky-high market will have to look inward, improve their operations, and squeeze efficiencies out of the facilities they already have. There may not be any slack in the industrial real estate market, but there is almost certainly slack in your current warehouses’ operations.

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John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.