Professionals offer a look at how firms can adapt to the supply chain disruption caused by COVID-19 and Brexit.
The global COVID-19 crisis is accelerating the transformation of the warehousing sector. A surge in online retailing and global supply chain uncertainties, combined with the departure of the UK from the European customs union, present new challenges for CFOs and other financial professionals.
“In recent times the stockpiling of goods during Brexit negotiations and the pandemic has led to businesses in certain sectors requiring space to hold more products and often for longer,” said Sian Huish, director of corporate services at Jersey-based consultancy Hawksford. “Demand has been high. Meanwhile, supply of these spaces has become more challenging of late due to COVID, with construction sites closed and new developments paused or delayed.”
The pressure on companies to increase inventory to handle short- and medium-term disruptions caused by COVID-19 and Brexit are leading many to reconsider their warehousing strategies. Moving forward, finance professionals will face increasing pressure to balance consumers’ expectation of delivery-on-demand with the costs of providing it.
FM magazine spoke to a range of industry professionals about how financial management professionals can best approach warehousing in this environment.
Plan based on long-term expectations
One reason that warehousing has bucked the economic trend is the meteoric growth of online shopping due to the COVID-19 crisis and related lockdowns.
It seems likely that this demand will be “sticky” now that more people have become acquainted with online shopping. Even if GDP were to flatline for the coming decade—an unlikely scenario—more warehouse space will be needed to cater for growing online demand, said Jonathan Compton, London-based head of logistics strategy at CBRE.
“If I were a CFO, I’d certainly think longer term than I may have done in the past,” Compton said. “Where does your company want to be in five years? Who is the customer base? Where do they live? You need to make sure that your network is fit for purpose because, if all of a sudden you have to realign who you’re selling to, it’s hard to quickly build up a quality warehouse network.”
Adapt to changing customer expectations
The rise in online shopping does not mean that retailers can continue to use their existing warehouses and logistics processes but simply deliver to end customers, bypassing shops. Customers’ growing expectation of next-day or same-day delivery means that companies must focus more on last-mile and urban logistics. Warehouses are increasingly opening away from transport corridors and closer to urban areas to meet demand.
“Amazon is ripping up the model of centralized distribution to replenish retail stores,” said Peter Ward, chief executive of the UK Warehousing Association. “The old model of large logistics centers in the heart of the country is being shredded. You need to get to customers in 24 hours now. Post-COVID, that genie is out of the bottle.”
Companies operating hybrid physical shop and internet models will increasingly have to take into account the impact on their bottom line of a growing proportion of their sales being online. The requirement for multiple storage locations for online sales, and the cost of selecting, packaging, and delivering goods ordered online are squeezing margins.
“Online retailers are doing 90% of the work for the consumer. That works when 10% of your sales are online, but beyond that I think is when finance directors have to step in and say, ‘What’s the cost of this?’ They need to challenge the retail model,” Ward said. “The expansion of online retail has to be paid for by the consumer—the margins aren’t sustainable otherwise.”
Factor in returns
The model of free returns—where customers can order ten T-shirts, choose one, and return nine—is another cost centre. Retailers often underestimate the cost of returns, and the process of reverse logistics as a whole. Research carried out by Sheffield University, Cranfield School of Management, and Sheffield Business School in the UK—and funded by CIMA’s academic research program and the UK government—found that return rates vary between 5% and 50%, adding substantial costs.
The resultant Reverse Logistics Toolkit 2.0
published by CGMA.org argues that management accountants should monitor costs inside and across supply chains more closely and work with supply chain partners to strengthen cost management holistically, rather than focusing only on their own organization.
“The customer returns process is important in terms of a consumer’s buying decision in the first place, and therefore warehousing infrastructure (in-house or outsourced) for a retailer needs to ensure that customers’ needs are fully met, given their requirements for a simple, speedy returns process for purchases that they want to return,” said John Cullen, FCMA, CGMA, emeritus professor of management accounting at the Sheffield University Management School and a co-author of the Reverse Logistics Toolkit.
Uncertainty around the UK’s exit from the EU single market and customs union has added another layer of pressure to the warehousing market. Brexit-related delays will lead companies to build up inventory to maintain their lead times.
Financial professionals must be prepared and balance the costs of storing more inventory with those of managing disruption caused by the new regime.
“Were I a financial manager, I’d ask if we had enough inventory of crucial items pre-Brexit. What is the proportional cost of holding more inventory as buffer stock? You can then run down the stock if there are no problems,” said Jon Sleeman, London-based director of research at commercial real estate company JLL.
Looking at the longer term, however, parts of the UK economy, including warehousing, could receive a boost from Brexit if it leads to a lower-tax, lighter-regulation business environment.
“I’m not sure Brexit is going to have a massive impact on warehousing—people are still going to buy things,” Compton said. “There may be tax benefits that help the industry.”
Consider new models of warehousing
Vaggelis Giannikas, associate professor at the University of Bath School of Management, highlighted four ways in which CFOs can rethink how they approach warehousing. First, the growth of e-commerce and home delivery means that there is a need for warehouses to operate as fulfillment centers, rather than merely as storage spaces.
"As a result, costs are fundamentally different as the people, technology, equipment, and staff required in each type of warehouse are very different to each other,” Giannikas said.
Second, companies can consider using existing space occupied by retail stores that are doing less business as temporary storage facilities either to cover short-term needs or to strengthen home delivery within cities.
Third, consider using “warehousing as a service”—outsourcing warehousing to third-party logistics companies that have expertise and may be able to offer lower costs and greater flexibility.
And fourth, consider shared inventory and warehousing space, particularly for manufacturers that may be storing goods for their clients.
"We are seeing investors manage their warehouse space in new and interesting ways,” Huish said. “For example, ‘on-demand warehousing’, which involves shared and flexible warehousing space to meet the peaks and troughs of consumer demand and inventory fluctuations, as well as multipurpose use, which is about accommodating more than one tenant to reduce the financial risk and outlay for businesses.”
Take labour into account
When looking into renting warehousing, the first concern of many CFOs might be the cost of the rent itself. Yet rent typically only accounts for around 5% of the running cost of warehousing, Compton said, while labour accounts for around 40%, and workers are not always easy to find.
“The availability of labour looks to be potentially a very serious issue in the context of both Brexit and the COVID crisis,” said Gavin Withers, ACMA, CGMA, director of the UK’s Keswick Enterprises, a private-equity company focusing on supply chain and fulfillment businesses.
“There is a danger that both factors give rise to a shortage of people available predominantly for lower-skilled jobs. CFOs should probably be looking at this issue both within their businesses but also potentially with key suppliers that might be affected,” he said.
Compton said that he knows of companies that have been forced to locate new warehouses up to 200 miles from their original planned site to ensure that they were close to an appropriate labour pool—the sort of cost/benefit analysis that CFOs will need to take into consideration.
This article originally appeared in FM Magazine, which is published by the AICPA.