Time was that most manufacturing businesses owned their own distribution facility, whether it was a small warehouse adjoining the production unit of a SME, or a number of huge depots located strategically around the country for larger companies. At a time of relative stability such ownership offered a prized management asset, namely control.
Yet over time, a range of pressures have combined to make these businesses reappraise the way in which they manage the distribution of their products. Over the past 30 years, most sectors have witnessed a sea change in their external environment. Competition and globalisation have increased – ever more driven by commercial use of the Internet; supply chains have become extended, but are more closely integrated; and there is economic volatility worldwide.
The result has been a reluctance to commit to any major capital expenditure without a guaranteed and quick return and a reassessment of what non-core parts of the existing business can be managed better internally, or indeed outsourced.
For all businesses, control has now been replaced by a new watchword: flexibility. At Amethyst, as a provider of outsourced distribution and logistics solutions, we must by definition acquire premises in order to offer such services. So what kinds of considerations come into play when the decision has to be made whether to buy or rent a new distribution facility and where should it be sited?
Like any business, there are always competing pressures on capital and especially so in challenging times. There must be a strong degree of confidence in the future growth of the business if the decision is made to acquire new premises. For Amethyst, consistent and steady growth has enabled us to recently add a sixth distribution facility, and a further two are planned in the near future.
But even with such a positive view of market potential and our ability to take advantage of the opportunities it offers, the decision whether to rent or buy remains. In the case of Fradley Park, our new 10,140sq m distribution hub near Litchfield, Staffordshire, we have taken a long-term lease. Balancing financing the development cost-efficiently – in terms of investment, both upfront and over the term of the lease – and the certainty required to plan and manage growth over an extended period.
A key element in any such decision is siting. The residential estate agents’ mantra of ‘location, location, location’ has an especial resonance in determining how to make the most of a commercial warehouse investment. At Amethyst, considerations will of course include good transport links, but also proximity to existing and prospective customer sites, good value and the right deal. Of significant importance too is the location of management expertise, something I believe is not always given enough consideration in such deliberations.
Yet even decisions regarding location are no longer as clear-cut as they once were. With the emergence and rapid growth in e-commerce, the siting of an e-fulfilment warehouse, though equally critical, is now demanding a different approach.
As Neil Barnwell, of Kurt Salmon Associates, observes because e-fulfilment warehouses are often more labour-intensive than other types of distribution centres, they often have to be in places with plenty of people – namely a big town or city. “So, turning on its head what has become received wisdom in the logistics world, forget about greenfield sites just off the motorway,” he says.
For most businesses however, there is no inherent need to acquire distribution premises and so options other than the straightforward buy or lease alternative may be considered.
Short-term warehousing based on simple licensing agreements for example has been introduced in response to growing demand for a less rigid distribution option, particularly from food and high street retailers looking to meet seasonal pressures such as the build-up to Christmas trading.
Such arrangements, however, will not be preferable to traditional leases in every case and a question mark remains over the availability of sufficient capacity offering such arrangements in prime locations across the country. For example, this capacity must include available labour, and the organisation must have the management capacity to oversee a new site.
Of much broader significance, however, has been the outsourcing of peripheral or support activities, as companies have looked to concentrate in-house resources on what they considered to be their core areas of competence in an increasingly complex and integrated supply chain environment.
In response, third-party logistics suppliers (3PLs) grew in importance during the 1990s, adding expertise and value to the provision of basic transport and warehousing services. And in 1999, as companies extended further the concept of outsourcing into increasingly core activities, a new breed of service provider emerged, characterised by Andersen Consulting as fourth-party logistics providers (4PL). These it defined as, “providers of global reach and supply chain expertise, with the ability to manage a host of service providers” – in other words, incorporating in addition a proactive co-ordination and integration capability.
And such developments are global. In a wry look at this trend in the US (reported in Manufacturing.net earlier this summer), Arnold Maltz, professor of logistics at Arizona State University, imagined a commercial advertisement which ran: “Warehouse for lease: Offers cooking, laundry and babysitting services”. He quickly went on to point out that this ad had not yet run, but that “the day when it might may not be too far off”. In a study of how warehousing has evolved in recent years, he found: “The most striking change is that as the supply chain becomes more complex and customers more demanding, warehouses are being asked to do everything from quality checks to shelf-ready item production to light manufacturing.”
Why is this? Maltz found one of the main reasons to be warehousing’s continuing cost-effectiveness: “In most cases, warehousing is still the cheapest place to do some things in the supply chain.”
In the UK too, this has underpinned the concept of multi-user warehousing, offered by a range of contract distribution companies, including Amethyst. Operating at different levels, the principle is to provide the individualised service of a traditional warehousing solution but in an environment that allows companies to share the costs of running their supply chains with other users.
The goal here is to turn what would otherwise be a fixed cost into a flexible resource. Multi-user distribution centres are now well established across the UK – many on a 24-hour basis and ISO 9001 accredited – and individual warehouses have strategic skill sets that accommodate inbound and outbound logistics specialisations. This may include both primary product distribution as well as secondary support solutions to static or field-based locations and can support both B2B and B2C distribution requirements.
In an ever more sophisticated IT environment, systems support is critical. The multi-user option will typically offer a systems infrastructure which can be configured and integrated to individual client requirements – an essential element in providing the scalability required to meet current and future needs.
Today, this can range from simple warehouse management tools to fully integrated e-commerce and enable end-customers to view stock levels in real-time and order goods direct from the warehouse. Further, multi-user warehousing can offer a broad range of supporting services, including inventory management to marketing logistics to distribution and transport management.
And what of “laundry, cooking and babysitting”? Well, these are not here yet either, but companies today can access a wide range of added value services, from kitting, final assembly, sub-assembly and Kanban sequencing to cross-docking, bonded storage, warranty repairs and reverse logistics.
Amethyst however takes the client’s need to respond fast to changing market conditions one crucial stage further. Rather than offering fixed-term or volume contracts common to the warehousing and logistics sector, Amethyst operates on a flexible ‘pay as you go’ basis. Here, clients pay for what they use, including facilities, systems or people. Such an approach is especially attractive to fast- growing businesses in which volume fluctuations are commonplace as costs rise and fall directly in line with business generated. It enables such companies to take full advantage of new markets, customers or channels without the need for significant investment in fixed assets and specialist skills and infrastructure.
In short, what this multi-user option enables companies to do is to outsource risk. Globalisation and rationalisation, shortened product life-cycles, the need for greater speed, and increased customer expectations have combined to make the issue of supply chain management ever more complex and expensive. Within this, the old physical warehousing and logistics approach – that of getting the right product in the right quantities to the right place at the right time – still holds good in many ways, but now encompasses a number of broader strategic and operational issues.
In response, the straightforward ‘buy or rent’ choice in developing an in-house distribution capability, or all-embracing offerings of traditional logistics suppliers, have given way to an almost infinitely flexible approach, understanding that bespoke solutions are necessary for clients in unpredictable markets and at differing stages of development.
In this way, warehousing as an integral part of a modern, cost-effective supply chain management structure must make full use of the latest developments in information and communications technologies and market expertise in order to combine cost reduction with improved customer service. Boston Consulting has said that: “Generally, if a company can establish a response rate three or four times faster than its competitors, it will grow at least three times faster than the market and be twice as profitable as the typical industry contender.”
And that is the key: in selecting from an ever-widening spectrum of warehousing options control may have given way to flexibility, but only as the means to an end – that of achieving the twin and enduring goals of customer responsiveness and company profitability.
Martin Palmer is business development director at Amethyst Group Logistics Division. Tel: 01580 895665.