This summer’s bullwhip effect has warehouse capacity at an all-time high and firms scrambling to store a growing stockpile of unsold goods. Bottlenecks have moved inland, from seaports to warehouses and distribution centers. Beyond reduced warehouse capacity, shippers will have to contend with increased storage costs and ground transport delays.
Inflation and the threat of a recession slow consumer spending
When the pandemic hit, retailers braced themselves for disaster. Amid concerns regarding unemployment, consumer confidence, and long-term economic impact, firms faced the most uncertainty they’d seen since the 2008 recession. But those clouds soon dissipated, with consumer spending patterns shifting from services to goods almost overnight.
A global race against jammed supply chains and congested seaports ensued. Consumers rushed to purchase anything that would make life in lockdown a little more bearable; businesses scrambled to keep up. To avoid empty shelves, lengthy delays, and rising shipping costs, many firms resorted to ordering excess inventory and warehousing at home in hopes of quickly replacing sold items.
Lockdowns, mask mandates, and the threat of infection are gradually dissipating. Those kitchen appliances, stationary bikes, and TV sets consumers couldn’t get enough of are now languishing on shelves, with people spending more on services or cutting back altogether as inflation and rising energy prices eat into their budgets. The resulting bullwhip effect has firms facing another supply chain headache in the form of decreasing consumer demand and excess inventory.
How 2021’s just-in-case measures morphed into 2022’s bullwhip effect
The pandemic marked a shift from just-in-time to just-in-case throughout global supply chains. Firms rushed to buffer their operations against delays, shortages, and market volatility by near-shoring, extending production cycles, and warehousing more inventory.
As demand for goods soared, warehouse space became a prized commodity. The move toward e-commerce, combined with just-in-case inventory stockpiles, drove warehouse occupancy and rents to record highs.
Now, in the face of rapidly declining consumer spending, these cautionary measures have backfired into a bullwhip effect. Firms overwhelmed with inventory are driving up the price of storage, reducing the supply of shipping containers, and moving congestion inland.
Adding to just-in-time reserves and growing unsold stock are large quantities of out-of-season goods that failed to make it to shelves on time due to shipping delays. Many retailers opted for warehousing these goods in hopes of selling them once their season came back around. Firms now face a quandary: they must weigh the rising cost of warehousing against the depreciating value of goods in their caches.
Dwindling warehouse capacity and tied-down shipping containers
Facing single-digit warehouse availability and fluctuating demand, firms have turned to more flexible, temporary arrangements. The most common one has been storing goods in shipping containers and truck trailers—a practice that’s worsening already-low numbers of available sea containers and trailers, causing congestion at warehouses and distribution centers, and disrupting supply chain efficiency.
Aside from congestion due to slow-moving goods, warehouses at near capacity are trading off lower productivity and higher operating costs to satisfy demand. Warehouse operators have responded to skyrocketing demand with plans to expand aggressively, but supply chain issues and labor shortages have hampered those efforts. And as e-commerce growth slows and consumer spending tapers due to inflation, the industry may experience a temporary slowdown in rent prices.
Still, outlooks are bullish. A permanent shift to e-commerce and growing adoption of “just-in-case” approaches means that demand for warehouse space is likely to remain above pre-pandemic levels. While consumer behavior is unlikely to return to pandemic patterns, everything points to rising demand for increased warehouse capacity moving forward.
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