Cutting costs has for years been one of the main pressures on the industrial property market. Getting goods made and to market as cheaply as possible is vital. It is the reason why many manufacturers moved their operations overseas and it is the reason why warehouses have become bigger and bigger, to gain economies of scale. Consolidation makes for more competitive pricing, so consolidation has become king.
But is this an unequivocally good thing? Some are beginning to question this, or at least to factor in an additional element to their thinking when acquiring a new warehouse: supply chain risk.
Unexpected events can wreak havoc with delivery schedules. One of the most obvious examples of this was the Japanese tsunami, which highlighted the pressure that could be put on car production in the UK if suppliers in Asia suddenly stopped supplying.
A tsunami might be unlikely in the UK, but floods and snow are not. Nor are strikes or power cuts.
Jon Sleeman, director of research at Jones Lang LaSalle, says: “There is a growing interest in supply chain risk management precisely because of events such as this. A few trends in logistics, including consolidation of suppliers and consolidation of inventory, have made more people aware of the potential risks to supply.”
For retailers this might mean that bigger warehouses and single sources of supply result in empty shelves if there is a single large event, such as a flood, war, strikes or political embargo. And what if the main warehouse supplying a retailer simply burns down?
Sleeman says: “It is estimated that three-quarters of retail groceries go through just 65 distribution centres – a very small number – so it’s clear that one disaster can have a very big effect.”
Among the warehouses to have recently suffered unexpectedly was Sony’s in Enfield, which was destroyed by fire during last year’s riots. The company announced in March that it was to build a 258,316 sq ft replacement distribution centre on the same site, but with better security. A lesson learned perhaps, but it will not be the last time that an unexpected event disrupts supplies.
Fires, of course, are nothing new. Primark lost a warehouse to fire at Magna Park in Lutterworth in 2005, a building which TNT rebuilt the following year.
And Sleeman believes that in future anybody building or leasing a warehouse will need to be aware of whether the area is liable to flooding or any other problems that might affect supplies.
There is evidence that some retailers are already considering the unexpected when buying or leasing warehouses. Graham Brown, head of industrial at Savills, cites River Island, the clothing retailer, which suffered a fire at one of its buildings in the US some years ago. Ever since, River Island has preferred to have two smaller warehouses, side by side, with sufficient space between them to mean that if one burns down, the other will be safe.
This why when River Island wanted 500,000 sq ft at Gazeley’s Magna Park site it went for two 250,000 sq ft buildings rather than one bigger one, says Brown.
He adds: “Put generally, most of those putting up warehouses nowadays are doing their best not to design in disaster.”
Other industrial agents agree that price is not the only factor that tenants now consider when choosing warehouses. Simon Lloyd, DTZ’s head of industrial and logistics, says: “It’s no longer just cost, but security.”
It would be overstating things to say that the trend towards larger warehouses has now reversed, but there is definitely an awareness that having all your goods in one site might not be the smartest thing to do.
And while cost might not be the only factor, it still matters. Lloyd points out that rising container prices mean that getting goods to the UK from Asia is becoming pricier all the time, which might lead to some suppliers returning to the UK, or at least Europe, in order to cut down on transport costs as well as increase security of supply.
The container cost element is more critical with low-value goods because they usually take up more container space relative to their value than high cost goods. If container costs continue to rise, the basis for manufacturing things far away could begin to erode.
So far, however, the most notable case of manufacturing returning to UK shores has been in the motor industry and this did get a significant boost because of the consequences of the Japanese tsunami.
Steve Williams, head of industrial at Lambert Smith Hampton, says that “more stock and more sources” are what the vehicle makers are looking for with suppliers that have a “sufficient network to fulfil their promises”. Similarly, retailers want to know that “they are going to have stuff on their shelves” even if they are holding huge amounts of stock in China.
“It’s got to be a balance,” adds Williams.
Sometimes the buildings taken by suppliers are exactly tailored to their needs, both in square footage and length of lease.
One example, says Emma Hargreaves, associate at Knight Frank’s Birmingham office, was a 12-month lease taken by SAS Automotive for 28,000 sq ft at Kingsbury Business Park. This was done to service a Jaguar Land Rover contract for navigation systems that SAS won.
Such steps may be relatively small, but they indicate a trend that simultaneously addresses both the return of some manufacturing and greater security of the industrial supply chain.
Assessing supply chain risk
Assessing risk is the first step to minimising it and there is advice available for firms that want to do so.
Help is offered by consultants such as David Symons, director at global environmental specialist WSP Environment & Energy. Symons says that in terms of coping with threats to the supply chain, firms tend to “over-estimate their ability to deal with it and underestimate what can go wrong”.
Part of the difficulty, he adds, is that “high-impact, low-likelihood events” do happen and, when they do, can cause enormous damage very quickly.
Symons points to events such as the snow in December 2010, which shut Heathrow for five days, and the floods in June 2007, which closed six motorways. Estimates of the total financial damage done by the floods went to more than £3bn.
For Symons, however, the point about flooding is that it is not entirely unpredictable. Some areas are more prone than others. To minimise your risk, basically put your warehouse well away from a flood-prone area.
Similarly, if power cuts would be very damaging, then having a back-up generator permanently available makes sense. You can’t control power cuts but you can make sure you have an answer when they happen.
“Not everything is uncertain and immeasurable,” says Symons. He adds that when disasters occur, as they will, companies should be ready to deal with them imaginatively.
A good recent example was the collapse of the Glenfiddich distillery roof in 2010. The distiller responded by blending and marketing a one-off whisky – the Glenfiddich Snow Phoenix – using the whiskies in the warehouse when the collapse occurred. Symons adds: “There aren’t many better examples of creating profit out of adversity than that.”
