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Reinventing inventory strategies could lead to spike in warehousing demand

Received wisdom suggests that one impact of the Covid-19 pandemic is that companies are giving series consideration to their inventory strategies going forwards.

A new report recently released by Los Angeles-based industrial real estate company CBRE said that the need for supply chain restructuring, due to a what it called a response to the COVID-19 pandemic, could lead to new practices which could drive further demand for industrial distribution space.

The CBRE report said that the downward trend in inventory-to-sales ratios since the early 1990s could reverse as manufacturers, wholesalers and retailers store materials and products closer to manufacturing centres and end consumers.

The Covid-19 crisis has underscored the fragility of just-in-time (JIT) production networks and shown their susceptibility to manufacturing facilities, ports and borders that have been closed due to the epidemic.

CBRE suggests that there are indications that businesses may well be considering a reversal of thinking on running lean supply chains with low inventory cover, which would most likely lead to increased levels of inventory being held close to hand over the long term, with a subsequent upsurge in demand for warehouse space.

In a post-Covid-19 world, businesses will need greater flexibility and agility in their inventory strategy to become more resilient to massive disruption to supply chains that we have seen resulting from the pandemic.

This has led to radical changes in warehousing requirements from retailers, manufacturers and shippers against a backdrop of slowing sales and the need to store goods coming in from suppliers, in some sectors, and soaring demand in others, such as health and groceries.

The report adds that it is time for business to switch from the traditional strategy of maintaining a core capacity of warehousing while paying for expensive emergency space during peaks, and accepting there will be periods of under-utilisation, by lowering the level of core capacity and accepting peaks as a normal way of doing business.

This would necessitate the use of a range of resources so business can be switched in and out of the additional facilities seamlessly, with minimal impact on the costs and efficiencies of the supply chain.

Additionally, the CBRE report said as economies restart, business supply chains will develop to reflect new realities, predicting that domestic supply chains may receive a boost as companies re-shore or near-shore production and up inventory levels to be closer to consumers and manufacturing locations, although it acknowledges that is by no means an easy or fleeting decision.

Clearly that is not something that would show up in the data yet, but companies will be making decisions regarding their inventory levels which will impact the demand for industrial space over the medium-to-long term.

Many global manufacturers have already responded to rising labour costs in China and ongoing trade conflicts by diversifying supply chains throughout Asia in a multi-country strategy.

Supply chain analysts have suggested that the COVID-19 pandemic is likely to see businesses with an over-dependence in one country or region reassessing their sourcing and manufacturing strategies.

However, the CBRE report concludes that a widespread exodus of manufacturing capacity from China is unlikely given the sophistication of the industry, the maturity of the supply chain and China’s massive domestic consumption market, with volumes produced from China and the broader Asian region likely to remain dominant.

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