Current Events in Supply Chain + Real Estate

This week I thought I would follow up on some of the topics discuss here recently and also provide some links to events having a substantial impact in the supply chain world.

Last week I focused an entire post on SOLAS.  As a follow up, the rule and whether or not the shipping industry will/can comply with its mandate heated up this week.  One article in the Journal of Commerce cited a CargoSmart survey of shippers where the majority of shippers were not prepared to comply with the weight verification regulation.

While SOLAS has been the focus of the shipping industry, the trucking industry is dealing with its own set of regulations.  Even though it won’t be in effect until December 2017, the Electronic Logging Device requirement (ELD) is already causing changes in the industry. There is an expectation from some that this regulation will impact small and medium trucking companies the most, leading to reduced capacity in the industry as these small and medium companies go out of business. Some trucking firms, such as Swift, are stating that shippers are not inviting firms to bid on projects unless they have a plan in place to comply with ELD.

Supply chain real estate was in the news this month as major industrial real estate brokerages released their 1Q 2016 numbers.  Across most markets in the US, they supply of industrial real estate, especially distribution centers, is increasingly limited.  According to my firm, Cushman & Wakefield, the national industrial vacancy is at its lowest level in the past 30 years and is 240 basis points lower than its 10-year historical average.

Lastly, the interaction of technology and real estate is of increasing importance to logistics firms.  Just today the Wall Street Journal published an article citing the increasing technological changes in warehouses.  As supply chain real estate advisors, we are working with companies and vendors to determine how we can provide a real estate solution which will meet the technology requirements throughout the expected occupancy term.  Due to the infrastructure inconsistencies, such as internet bandwidth, antiquated and obsolete internal wiring, and insufficient power supplies, it is important for companies to understand what limitations they may have to support these new technologies in certain locations.

SOLAS

Over the past week I couldn’t help but notice the amount of articles dedicated to SOLAS verified weight requirements, which go into effect July 1, 2016.  Since the requirements have been public for a few years, the sheer volume of articles is a good indicator that actors within the supply chain are concerned about the new regulation going into effect, assuming the publishers are accurately gauging their audience.

SOLAS’ verified weight requirements and its potential impact on the supply chain speaks to the challenges continually presented to the supply chain industry.  The reasons for SOLAS verified weight requirements are certainly justified.  However, the implementation of the new requirement is resulting in challenging questions about how to comply and who will pay for such compliance.

Created in 1914 following the Titanic disaster, SOLAS stands for Safety of Life at Sea, is an international treaty created and administered by the International Maritime Organization, or IMO for short [1].  The IMOis a United Nations Specialized Agency responsible for the safety and security of shipping and prevention of marine pollution by shipping.  SOLAS has been revised over time by what are called Conventions, or conferences in which the terms of SOLAS are discussed and reaffirmed by the member nations.  From time to time, SOLAS is amended to strengthen provisions based upon current realities.

In response to several shipping disasters relating to unsafe shipping tonnage, SOLAS was amended in 2014 to require that all containers have a verified weight before being loaded onto a ship [2].  Currently, shippers can declare the weight of their packages using the estimated weight of the container contents plus the tare weight of the container.  Under the 2014 amendment, the weight of the packed container will need to be accurately verified.  The responsible party for verifying the weight of the container and contents is the shipper on the bill of lading (hereafter referred to as the “Shipper”)  [3].

The Shipper must choose one of two methods to comply with the SOLAS container weight mandate.  Method 1 is taking a loaded container over a nationally certified and calibrated weighbridge or similarly accurate device to get the total weight of the truck, fuel, chassis and filled container and subtract weight of the truck, fuel, and chassis to get the net loaded weight of the packed container.  Method 2 is weighing all goods and materials to be packed into the container and add them to the weight of the container to obtain the weight of the packed container.  A great infographic on this is found on the Journal of Commerce website here.

The penalty for not complying with the SOLAS mandate is significant.  If the Shipper does not comply with the mandate, the ocean carrier may not allow the container to be loaded onto the vessel until a verified weight is produced.   Therefore, the Shipper must have the ability to verify the container weight prior to loading the container onto a ship for export.  Realistically, they would need to provide the verified container weight to the ocean carriers and terminals in advance of arriving at the dock, since the ship’s stowage plan needs to be completed prior to loading any containers.

This requirement means that the Shipper would need to have the supply chain infrastructure to meet the requirements of Method 1 or Method 2.  If they do not possess the infrastructure, total landed costs are sure to increase. Furthermore, it means that there is an additional step in the supply chain which can cause delays and disruptions.  Both Methods can be time consuming, even if the required equipment is available.

Lastly, the SOLAS weight verification mandate could have an impact on supply chain real estate, mostly in and around the ports of export.  There could be increased demand from Shippers for locations suitable to install weighbridges and yard space to efficiently operate Method 1.  One could also imagine an increase in 3rd parties who would lease facilities dedicated to offering either Method.  Additionally, there may be an increased demand from Shippers to control the “last mile” delivery of the container to the port (as opposed to using a 3rd party).

Whatever its impact on real estate, it will be very interesting to see how the supply chain industry handles these new SOLAS requirements starting on July 1st.

 

 

 

 

 


1 “International-Convention-for-the-Safety-of-Life-at-Sea-(SOLAS),-1974 International Convention for the Safety of Life at Sea (SOLAS), 1974 //.” International Convention for the Safety of Life at Sea (SOLAS), 1974. International Maritime Organization, n.d. Web. 19 Apr. 2016. <http://www.imo.org/en/About/Conventions/ListOfConventions/Pages/International-Convention-for-the-Safety-of-Life-at-Sea-(SOLAS),-1974.aspx>.

2 Leach, Peter T. “Container Weight Compliance to Boost Costs for Shippers.” Trade and Container Shipping News. Journal of Commerce, 11 Apr. 2016. Web. 19 Apr. 2016. <http://www.joc.com/maritime-news/international-freight-shipping/container-weight-compliance-boost-costs-shippers_20160411.html&gt;.

3 2015, February. “The SOLAS Container Weight Verification Requirement.” The SOLAS Container Weight Verification Requirement (2016): n. pag. Feb. 2015. Web. 19 Apr. 2016. <http://www.worldshipping.org/industry-issues/safety/WSC_Summarizes_the_Basic_Elements_of_the_SOLAS_Container_Weight_Verification_Requirement___February_2015.pdf&gt;.

SC Tech and its Impact on CRE

I recently read an interesting article in the 1Q 2016 CSCMP’s Supply Chain Quarterly titled “Ten tech trends that will transform your supply chain”.  The article reviews ten technology trends cited by International Data Corporation (www.idc.com) as trans-formative to the manufacturing supply chain.

As I am a supply chain real estate adviser, when I read this article my thoughts immediately focus on, assuming this list is prophetic, what are the potential impacts on the real estate within the manufacturing supply chain.  Starting with the IDC list, I have written a few of my opinions below on how each trend might correspond to supply chain real estate.  As always I welcome your feedback!

  1. Cloud-based commerce networks
    • Increased cloud usage may correspond to larger bandwidth requirements.  Properties with ISP’s providing larger bandwidth at lower costs may be much more attractive to end users.  Properties without bandwidth may require tech work-arounds, which may or may not be possible.
  2. Micrologistics
    • A great trend for industrial real estate and 3PLs in infill markets.  For those companies who desire dedicated facilities, considerations may include lack of trailer storage on-site, sub 30′ clearance heights, truck ingress and egress issues, and sharing common areas.
  3. Integrated business planning
  4. Modern postponement
    • Modern postponement ties in with the cloud and micrologistics concepts and many of the same real estate considerations apply.  Requirements for 3D printing and other flexible manufacturing processes may increase the need for additional power sources.
  5. Resiliency and visibility
  6. “Broadening” of the supply chain
    • Adding product design, manufacturing, and service to a supply chain will most likely drive demand for more employee intensive properties.  Amenities such as increased employee parking areas, increased power, and proximity to retail amenities would likely be of greater importance.  Companies could separate the product design and service functions to office space.  However, if there is a need to have all three functions in a certain location, this separation would typically be more expensive than if all three were in one industrial space.
  7. Cloud-based WMS and TMS
    • With greater cloud-based data there may be additional demand for internet bandwidth.
  8. Robotics
    • Increased power requirements, access to alternative sources of energy, locating in lower cost energy areas may be drivers for companies employing robotics in the supply chain.
  9. Internet of things
  10. Talent
    • Location, location, location.  It probably goes without saying that anyone with marketable talent will want to work in a desirable environment, unless the corresponding compensation in one shape or form is adequate to offset their preference.

Incentives

I wanted to share a great resource for anyone interested in learning about incentives in the U.S.  C&W has the best incentives group around and this website is just one of many tools they give our clients.  Check out their website and the page at the following link: cushwakeincentives.com.  You can click on any State in the Union and learn about their current incentive program.

LA Basin Rental Appreciation

Along the lines of my “3% Annual Bump” post, using C&W’s market information I ran a quick calculation on rental appreciation on average over the past five years in the LA Basin industrial markets, the biggest and hottest industrial market in the US.  Here are the results:

Central LA: 9%

Inland Empire: 7%

San Gabriel Valley: 7%

Mid-Counties: 6%

South Bay: 6%

Orange County: 5%

Westside: 5%

LA North: -1%

The largest percentage increase for most markets happened this past year.  The Central Los Angeles market jumped 23%!

Wisdom of Munger

This weekend I came across another nugget of wisdom from Tim Ferriss’s 5 Bullet Friday email.  The nugget was a transcript of a speech given by Charlie Munger (if you don’t know who he is, google him) to the USC Business School titled “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”.

Aside from the investment advice, which I know nearly nothing about, I appreciate Mr. Munger’s insights and interests-mostly likely because at a much less developed level the same topics interest me.  Especially psychology.  I am working on relating his ideas to the supply chain real estate world.  I must tell you that I don’t need to think very long to find examples of his concepts.

I would encourage you to read the transcript above, which is in way too small of a font, and check out this and this.

 

Ocean

From my GLS class this past Tuesday taught by Brandon LeCou of Hamburg Sud NA, some information I thought was interesting about ocean transportation:

  • Beneficial Cargo Owners (BCO’s) with high cargo volume have tremendous leverage in negotiating rates directly with carriers, however, they may not have the expertise nor the risk protection offered by working with a freight forwarder
  • A “tramp service” is an ocean carrier which goes where it wants to go, i.e. it is not part of an established ports of call.  An example would be chartering a shipment to Guam for a bulk shipment of power plant parts.  As you might expect, the term “tramp” is derived from the English word meaning a beggar or vagrant.
  • There are a significant amount of carriers and they are constantly consolidating and forming alliances with other carriers.
  • Containerships are still called steamships, even though most of them run on diesel.
  • Most of us heard about the CMA CGM 18,000 TEU Benjamin Franklin’s recent call to the POLA.  It is the largest steamship to service the POLA.  Interestingly another the previous record for ship size was set two days earlier when the 15,000 TEU Maersk Edmonton called on the POLA.
  • CMA CGM is planning on calling on the POLA with all six of its 18,000 TEU ships over the next year.
  • Big ships can cause big problems for infrastructure and other supply chain requirements.  It remains to be seen whether US ports are prepared for the larger ships.
  • More ocean carriers are offering freight consolidation, warehousing, trucking, and rail services to deliver packages to their final destination.

The 3% Annual Bump

In the primary industrial real estate markets in the United States, a strange phenomenon has taken shape through the past few market cycles.  Market rental rate increases have found an almost uncanny stability across markets and property types.  The 3% annual rental increase, while not an absolute, is so common in most top tier markets that one almost does not need to inquire about it-it is just assumed to be the case.

My question is not why this trend has happened.  I am more interested in understanding why it has stayed consistently at 3% despite all the other lease elements adjusting with the market conditions.  Low interest rates no doubt play a part.  Obviously landlords are much more accepting of lower rental increases when there are few inflationary pressures, as their value of money would theoretically stay somewhat consistent.

However, I think the trend is tied more to custom rather than rationale.  It’s easy to play along with the market and, if no one is objecting, toeing the status quo.  I am not insinuating that landlord’s should ask for more than 3%.  Obviously tenants are accustom to this structure in primary markets and would probably greatly resist a substantial deviation (or get it from the landlord “down the street”).  But with such a tight market across the country for good quality distribution space, it is interesting we don’t see more landlords at least asking for more.

Remote

I am currently in the town of Landers, California, in a house off a dirt road which you need the latitude and longitude coordinates to find.  Basically I am in the middle of the Mojave Desert and it is beautiful.

I have noticed that the nearest place to buy really anything is 5 miles away, a liquor store which doubles as a market.  The selection is obviously limited.  There is a Von’s about 10 miles away, but I am not so sure about its existence given its location on the map looks even more remote than my current location.  I get the impression that the population in this area need to drive a decent distance in order to buy really anything from a storefront.

It makes me wonder what kind of market exists for ecommerce in remote areas.  Although the population density is not substantial, you would think the participation percentage would be significant.  If I owned a store that served such a population, I certainly would look into ways to partner with ecommerce companies or even start my own website storefront to deliver goods or have them ready for pickup at the brick and mortar storefront.  When ecommerce offers convenience to a city dweller how much more so to those outside of populated areas.  

The Next New

Today I am wondering what is the next new innovation in logistics that will be a game changer for the industry.  Is it widespread implementation of RFID (5c magic price), automation, new ways to transport?  On one hand technology continues to improve rapidly for ERP and software, on the other tools like RFID have been around for a long time.  Warehouse clearance heights go up but how many companies really take advantage of the extra cubes?  I am interested in hearing from supply chain experts on their thoughts.