Recently, I was talking to a friend who had interned with a company who are leaders in the shipping industry. His project was to create the roadmap for their ‘on-demand warehousing’ business, a new domain the company is looking to enter. This was a new term and when I looked into it, what I got to know was something I feel is going to be the next game-changer in the supply chain.
Uber and Airbnb started the online matchmaking of demand with supply in the space of underutilized transportation and lodgings, on-demand warehousing has extended it to the storing of inventories. Dynamic on-demand warehousing is emerging as a viable way of purchasing warehousing services on demand – paying only for what is used.
From Melbourne to Mumbai to Manhattan, it seems the entire supply chain is taking a crack at on-demand warehousing. Actually, the concept is not as new as the name. After all, who doesn’t know that fairly successful e-commerce company that has been practicing on-demand warehousing for some time. You know it as Fulfillment by Amazon (FBA). Companies that sell products on Amazon can use FBA to fulfill those orders. Or as FBA says – “You send your products to Amazon fulfillment centers, and we pick, pack, and ship them and provide customer service.”
Just as interesting, companies as diverse as KFC and Exploding Kittens have used on-demand warehousing. In the case of Exploding Kittens, it is the only way it was ever going to be distributed initially. The company thought it could assemble, pack and ship its first orders at a launch party. Except a million orders flooded in almost all at once. Forget the launch party, enter on-demand warehousing.
So, how does on-demand warehousing work?
There are three different models already. In one, the company providing the warehouse space also fulfills orders just like FBA. Or, the owner of the inventory might prefer to have its own people on-site filling orders. A third variation is a consortium of companies that efficiently stage inventory and fulfill orders across their private network.
On the operations side, on-demand warehousing is not so tough. Slotting inventory into empty space in a warehouse is manageable. And it’s not impossible to work out the details of who and how that inventory will be managed. The tough part is matching up warehouses with space and companies with the inventory.
Warehousing Tries to Keep Up with e-Commerce
Before the advent of e-commerce, many retailers used warehouses as intermediate storage points (distribution centers or DCs) to supply their stores; it is still a common way to manage distribution.
A retailer could use a network consisting of a few Distribution Centers (DCs), each serving a “region” comprising many states, with replenishment lead times of a few days.
With the development of e-commerce, however, the traditional warehousing model began to fall short.
E-commerce creates significant challenges in terms of customer expectations, compared to traditional retail. In general, outbound shipping with e-commerce features very small quantities sent directly to individual customers.
Shipping time is absolutely critical: Many customers now expect their items to arrive inside two days, and more and more retailers are offering same-day delivery. Furthermore, e-commerce demand can be highly variable, influenced by social media and faster news cycles in the Internet media.
Such factors are forcing significant changes on the warehousing industry. The changes are not simply because e-retailers keep more inventory in warehouses because, by definition, they have no brick-and-mortar stores.
Overall, demand for warehousing space is growing, as is the need for an efficient warehousing and distribution strategy.
For e-retailers, shipment options have been challenging indeed. Traditionally, their options have been these:
- Startup–drop ship. If the retailer owns its own manufacturing/assembly facility, initially it may ship directly from that facility. Many small e-commerce retailers start this way.
- Self-owned network. If the retailer operates its own warehouses, it is unlikely to have the scale and financial resources to build an extensive network. As a result, the average distance to the customer is high, resulting in high shipping costs and longer delivery times.
- Network outsourced to 3PL. Although this offers a little more flexibility compared to a self-owned network, many 3PLs demand commitments of one year to three years. This effectively locks the retailer into a fixed structure for several years.
- Distribution outsourced completely. Again, “Fulfillment by Amazon” (FBA) wherein it distributes other retailers’ products through its network is an example of this. Although this can provide speedy service to customers, the costs can be high and many retailers are wary of handing over a core part of the business to a top competitor.
A Role for On-Demand Warehousing
On-demand warehousing, quickly matching those needing space with facilities that have space available, is emerging to help facilitate the pace and scope of e-commerce’s logistics needs. Several new companies have launched recently to provide the on-demand service.
It is “dynamic” in the sense that the retailer can change the configuration frequently: based on demand conditions, warehouse space could be deployed at different locations, for different volumes, in a dynamic fashion. Its order management system and warehouse management system can link the retailer’s systems with those of the warehouse provider.
The idea is that the shipper has access to a large network of warehouses, and can activate services “on the fly,” ranging from bulk pallet handling to fulfillment, in small to large volumes and for relatively short times.
For example, a small e-commerce retailer may decide to create half a dozen different distribution points, with as few as 50 pallets at each warehouse and little to no fixed time commitment. A tried and true approach here is third-party logistics. It’s a big business. But 3PLs usually want multi-year deals and big space requirements. They typically have no intentions of letting anyone but their own people manage the inventory.
On-demand warehousing is not a new twist on 3PLs. Flexibility and short-term storage are the hallmarks of on-demand warehousing.
At the same time, 3PLs have quite a different business model. As an expert in warehousing has to say, “[T]here is a great void between the requirements of 3PLs and companies that might only need 300 pallet positions for three months. This notion of flexible space just doesn’t exist.”
In on-demand warehousing, the warehouse provider would use its own labor and equipment to perform standard and optional services such as receiving, shipping, case pick, item pick and packing, and would charge the retailer on a per-unit basis.
In such a system, the retailer incurs no upfront fixed costs, and gains significant flexibility. Of course, the unit cost charged by the warehouse provider may be higher or lower than what would be incurred by the retailer if it operated its own high-volume, high-utilization warehouse. But this is the benefit of dynamic on-demand warehousing: The retailer gains flexibility and avoids capital expense, even if sometimes the per-unit cost is higher.
Many companies are now getting into this field now. The new flexible warehousing concept is a good example of what has been called “platform capitalism” – one of the fastest growing and most significant trends in the business-to-business (B2B) world, based on reports in publications such as The Guardian.
Over the last decade, electronic marketplaces have proliferated, providing an ever-wider range of services and business activities.
For example Warehouse Exchange, which is in beta, is what WeWork is for office space. Both offer space and some supplemental services including security. All of the matchmaking is done electronically. But the challenge these companies are facing is the limited supply, while the demand is off the charts. The claim that demand is strong seems to be confirmed by UPS’ jump into the fray last month. UPS’ Ware2Go platform is targeted at small- and medium-size companies. UPS says its service can handle the entire transaction starting with finding space and ending with fulfilling orders with guaranteed two-day order-to-delivery.
Value for Warehouse Operators
On-demand warehousing is of real value for warehouse owners as well. Building a warehouse can be expensive; any unused space has an opportunity cost.
Even if a warehouse owner/operator has long-term contracts with retailers or 3PLs for much of its space, any remaining space can be turned into a revenue-generating asset by “registering” it on a dynamic on-demand warehousing marketplace.
Depending on its operating costs, opportunity costs and market dynamics, a warehouse owner can choose a price that may be more, or less, than the rates it charges its existing clients.
Clearly, there are several options already in on-demand warehousing. The challenge is to find the one best suited to your business. In any case, rest assured that the next time someone asks you what KFC and Exploding Kittens have in common, you know the answer—on-demand warehousing.