What is On-Demand Warehousing and Why is it Useful?

Unlike traditional warehousing with lengthy annual contracts, warehouse on-demand enables shippers to turn warehousing services on and off when desired.  Although the primary product is the storage space, all the services related to the movement of inventory to and from the warehouse itself must be incorporated into the product model.  Warehousing services must be able to scale up to meet demand and scaled back down when demand recedes.

Making the warehouse on-demand model work can be tricky.  To be successful, on-demand warehouses need to be able to maximize the numbers of buyers and sellers.

Here is How the Traditional Warehouse Model Operates:

The length of the typical lease is 5 or more years.  The amount of space that companies require for warehouse space is calculated based upon sales forecasts, which tend to be increasingly less accurate the further out in time that the projection is made.  Because of this, as the lease terms get closer to the date of expiry, the less likely it is that the amount of contracted space will be suitable for that business.  Typically, this means that space is either unused or more is needed.  Because of transaction costs, warehouse owners do not favor short term leases.

Current Warehouse Space Market Conditions:

On a national average, the vacancy rate for industrial properties was 4.6%.  The vacancy rate was even lower in seaport-dependent areas.  Low vacancy rates are expected to be the norm throughout 2018.  Demand and net absorption outpaced new construction:  completions totaled 51 million square feet and net absorption was revealed to be 61 million square feet.  According to industry expert CBRE, Q3 2017 saw 33 U.S. markets record a deadline in availability.

Transacting for Warehouse Space

Finding and securing warehouse space can be a time-consuming, lengthy, and often frustrating process.  It is known that many businesses with warehouse space face challenges with underutilized space because of strong seasonal demand (and lack of demand in off-peak seasons).

Warehousing logistics processes have remained largely unchanged for years but with recent changes in the supply chain logistics industry, that is on a fast track to change.  E-commerce and omnichannel retailers know the importance of supply chain, distribution, customer service and delivery, but often cannot initially make substantial investments.  Some e-tailers do use 3PLs and warehouse operators but need overflow space as they continue to grow their businesses or deal with seasonal demand.

Omnichannel fulfillment operations tend to need to be near population centers to facilitate fast last mile delivery and this is typically where the warehouse space is most problematic and costly to secure.

Why is On-Demand Warehousing Becoming Increasingly Popular?

In a word, e-commerce.  We live in an interconnected, fast-paced world in which consumers have become accustomed to on-demand services.  From on-demand food and grocery home delivery, transportation and logistics to delivery of online orders, it is a “Now”-oriented world.

The concept of scalable on-demand has already helped to transform numerous other industries and business models.  Having the ability to scale up warehousing services to meet demand and then to scale back down when not needed is appealing to many businesses, especially those in seasonal markets, industries or which deal with seasonal products.

With the e-commerce boom, retailers are continually expanding their product ranges as consumers want more choice and options.  Because of this, retailers are often looking for more warehouse space but need it to be an adaptable arrangement.  Conversely, many warehouses have warehouse space adequate to handle the influx of seasonal demand but unused at off-peak times.  For example, home improvement stores and beverage companies have peak demand in the summer and have underutilized warehouse space at other times during the year.  Warehouse space available in off-peak season can be leased on a short-term, on-demand basis, benefitting the shipper needing the space and the company that contracted for it.

The on-demand warehouse model helps to transform a traditionally fixed cost into a variable cost that enables greater flexibility in areas of the supply chain.  According to industry experts, for every $1 billion spent online, 750,000 square feet of warehouse space is needed for execution.

On-demand warehouse marketplaces have cropped up.  These marketplace organizations emphasize adaptability, enabling the e-commerce industry to expand and online retailers to grow the variety of products that they sell.

On-demand warehousing is sometimes referred to as “pop-up” warehousing.  With origins in the gig economy movement, the pop-up warehouse likewise matches demand to excess capacity.  Why is on-demand warehousing seeing a surge in popularity across supply chain networks?  It fulfills short term needs and is flexible.  Unlike subleasing warehouse space which typically requires longer lease terms, pop-up warehouses can be used to fill short term or seasonal needs, allowing the original company to have the warehouse space back for use when needed for their peak season.

According to a Flexe 2017 report on Warehouse Capacity and Trends, companies that use on-demand space to meet a single peak seasonal increase in inventory were found to have improved the utilization of the warehouse by approximately 100%.  In addition, these companies reported that they were successful in reducing seasonal inventory and warehouse costs by 50%.

Conclusion

The gig economy has caught up with the supply chain.  Today, e-commerce omnichannel retailers and other supply chain operations are looking for short term, adaptable warehouse services and space to accommodate their growing, SKU-sprawling operations.

The on-demand or pop-up warehouse model is useful for both sides of the equation:  it helps supply chain companies reduce waste and cost on unused warehouse space and provides flexible warehouse DC operations space to meet flexible needs of online retailers and other supply chain companies that need short term space.