The Warehousing Segment Is Being Squeezed On All Sides. Automated Orchestration Can Help.

Demand for warehousing space is expected to outpace supply, especially in hot markets. This, coupled with labor challenges, make it crucial to improve operational efficiency in existing warehouses.

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Uncertainty hangs over freight markets like stubborn mist as industry stakeholders witness considerable erosion of fortunes from the pandemic years. Both capacity demand and freight rates have stayed low for the better part of ‘23. Regardless, not all parts of the logistics ecosystem feel this freight downturn equally, as it may be the case with the warehousing segment.

While vacancy rates for US industrial real estate have inched up to 4.1% in Q2 ‘23, it is still well below the pre-pandemic rate of 5%. Even with rising vacancy rates and the emergence of new warehousing capacity, lease prices are notably higher than in the spring of ‘20. Contrary to the freight market, where there's abundant capacity, companies often compete for warehousing space today, despite reduced consumer demand at the backdrop.

Several factors contribute to this situation. To start with, adding warehousing capacity takes a lot of work. Constructing new warehouses demands time and capital, aside from the necessity to meet renters' specific expectations regarding design and location.

The steady growth of e-commerce is another factor driving the urgent need for warehouses, especially for commercial space closer to dense consumer markets. E-commerce has become an experience centered around consumers, inevitably spiking expectations from when consumers place their orders to product handoff. A primary measure of consumer expectations is the delivery speed, which has crept up from around a week in the early 2000s to same- or next-day delivery today. 

To keep pace with accelerated delivery expectations, shippers and retailers are compelled to maintain more extensive inventories, considering their supply lead times have not fallen as quickly as last-mile delivery times. This trend significantly benefits the warehousing sector, which foresees a steady rise in capacity demand, especially as e-commerce commands a larger slice of the overall retail pie.

Then, there’s the difference in distribution nuances between traditional storefront retail and e-commerce that further strains warehouse capacities. While the former primarily used pallet-based operations, e-commerce shifts focus to piece-picking and individualized packaging. Aside from heightening warehouse labor needs, this shift also increases the demand for space due to the expanded volume of individually packaged items, even for equivalent inventory levels. This disparity will become even more pronounced as our reliance on e-commerce intensifies in the future.

“Increasing product variety as a result of advanced manufacturing processes has pushed retailers to stock more SKUs,” said Akash Gupta, the co-founder and CEO of warehousing automation company GreyOrange. “For instance, Apple, which once had only six to eight product variants, offers around 600 now.”

The SKU numbers have ballooned in sectors where mass manufacturing is cheap and efficient — like apparel and general merchandise. “For any given product, you might find 20 different variants in this sector. Companies like Amazon have elevated the customer experience, impacting warehousing operations that have had to rapidly adapt to serve evolving needs.”

All these factors put together, it is increasingly clear to retailers that the need of the hour is optimizing available space — to run tight warehousing operations that maximize efficiency, streamline inventory management, and ensure rapid order fulfillment. 

This is where warehousing automation comes into prominence. “Automation can be categorized into two main types,” pointed out Gupta. “The first is mechanical automation, which involves the use of machinery to streamline processes. The second is decision-making automation.” 

Automating decisions is an essential part of running warehousing at a time when inventories are expected to move off the shelves quicker, and demand comes across a variety of mediums. “Current operations are mostly omnichannel to prevent duplicating inventories. This leads to noticeable peaks and troughs not just annually, but monthly and even weekly,” contended Gupta. “Given such complexity, there’s a need for real-time adjustments in today’s environment that require automation.”

Merging the two types of automation gets us AI-powered automation orchestration, which GreyOrange specializes in. “AI-powered orchestration is about evaluating the total work required and organizing it across various processes. This is about allocating tasks to different agents — be they robotic or human — in real-time. By employing predictive models and neural networks, it anticipates the workload across the day and reacts in real-time to meet these demands,” said Gupta. 

While considering orchestration, there are two metrics to look at — streamlining workflows between different processes and the distribution of agents across these processes. “For example, if you utilize logistics bots for pallet movements or roll case movements, it's essential to strike a balance in their deployment between inbound and outbound tasks. Ensure an appropriate number of agents are dedicated to deep storage for replenishment, while others focus on inbound and outbound operations.”

Striking a balance is crucial as it is about allocating resources efficiently across different processes given the year-around fluctuating demand. Automating such decisions rather than relying on manual decision-making helps companies reduce overhead costs and remain agile to market dynamics. 

"In an omni-channel warehouse, when there's a surge in retail orders over e-commerce, you'll need fewer packers since retail orders generally have more items. This reduces the bots needed for transport between picking and packing. These bots can then shift to tasks like value-added services,” said Gupta. “Efficient adaptation to such changes requires a centralized system to orchestrate all bot types. Siloed operations and bots that aren’t interconnected cannot adapt to changing demands.”

To that effect, the role of human labor in warehousing will continue to evolve into more specialized roles. Gupta contended that warehouses face headwinds with recruiting labor, as the younger demographic is not too keen on working punishing schedules. As more warehousing facilities get built, labor demand will continue to climb amidst constrained labor availability, leading companies to look at automation and robotics to bridge the gap.

“Change management will be crucial as warehouses undergo transformation. Introducing a new way of thinking and operating requires a strategic approach. It's vital to ensure a good user experience with the systems being adopted,” said Gupta. He explained that there is a distinction between robotic outcomes and fulfillment outcomes. The former centers on robot efficiency, while the latter expands the scope, leveraging robotic capabilities and integrating human expertise to achieve optimal order fulfillment. With the right training and an intuitive interface, the transition becomes seamless, preparing workers for this evolved operational paradigm.

That said, automation in the industry still has a long way to go. “While there’s vast range in automation, perhaps 30-40% of warehouses have delved into it. The shift we’re seeing is from isolated automation of specific tasks to conceptualizing an ‘automation-friendly’ or ‘automation-enabled’ warehouse,” said Gupta. 

“Focusing solely on automating individual processes might improve a specific area, but broader fulfillment challenges will persist as it’s akin to simply shifting a bottleneck from one point to another. When considering automation, the goal should be more holistic. It's about leveraging the right software and robotic technology to ensure the entire process is optimized for ROI, rather than just relocating inefficiencies.”

The Week in Snippets

Despite the US economy expanding faster than anticipated amidst declining inflation, US freight demand remains subdued and is expected to continue its downturn through late 2023, possibly extending into Q2 2024 for the trucking sector. Lower manufacturing output, overstocked inventories, and excess capacity in trucking are contributing factors, with nationwide truck shipment levels decreasing for five consecutive quarters, marking a 9% YoY drop in Q2.

Shipping costs from Asia to the US have surged recently, with the average spot rate for a 40-foot container from China to the U.S. West Coast jumping 61% in just six weeks. Industry experts anticipate the rate uptick to be temporary, expecting an influx of new containerships to increase capacity and potentially drive down rates again by the fall.

Following Yellow's exit, LTL providers like ABF Freight and TForce Freight are experiencing increased volume, potentially due to their unionized status. Old Dominion Freight Line, however, is focusing on service quality over volume. Regardless, Yellow's departure has disrupted the capacity for freight consolidations, posing challenges for shippers.

Blanked sailings on key east-west container routes have become the new norm, with Alphaliner data revealing that 10.8% of Central China-Europe loops were voided in June and July. While analysts highlight these aggressive capacity withdrawals, understanding the underlying numbers will show only a 2.4% drop in effective deployed capacity compared to last year.

Quotable 

“The exchange should guide businesses to use futures to manage risks. We hope liner operators, freight forwarders and cargo owners will make use of futures as a hedging tool.”

- Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, commenting on the new container shipping futures established by the Chinese government to hedge risks in container shipping

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