Episode #6 - What is Supply Chain Real Estate?
The Industrial Advisors invite Dr. Judy Whipple, Professor of Logistics and Supply Chain Management at Michigan State University, onto the show to discuss supply chain and how it relates now more than ever to industrial and commercial real estate.
Bill Condon: Welcome to our podcast, everyone. Thank you all for joining us today. Our topic is going to be supply chain and how that relates to the industry that we're in with real estate and it is an absolute pleasure to be able to have Dr Judy Whipple join us today. Judy is a professor of logistics and supply chain management at Michigan State University, and faculty director of the Master's of Science in supply chain management program at Michigan State, which is the number one program in the country. Judy has won multiple awards throughout her tenure. She was awarded the Michigan State University Teacher Scholar Award for excellence in teaching and research, and the Council of Supply Chain Management Professionals Educators Conference Teaching Innovation Award. She's also won various best paper awards. So Judy, thank you for joining us. It's an absolute pleasure to have you with us today.
Judy Whipple: Thank you, Bill. Thank you, Matt. Thanks for including me in the podcast.
Matt McGregor: Thanks so much Judy. So maybe we get started. We're eventually in this podcast going to get to supply chain real estate and what is that? But first, maybe we just define supply chain, and Judy, nobody's more qualified than you to define that. So what is supply chain, Judy?
Judy Whipple: Great, thank you. So supply chain involves the planning and management of the movement, storage, procurement, manufacturing, and processing of goods and services from an end to end perspective. So that sounds like a lot, so why don't I break it down a little bit? So if we take an example in the food industry, when we're talking end to end supply chain, we would be thinking of going from seed to supermarket. So how do we integrate and incorporate and collaborate across the network of companies and entities, whether that's agricultural producers, manufacturers, wholesalers, retailers, or restaurants that produce and distribute and sell food products to consumers?
Matt McGregor: Well said. As I was mentioning, it's become such a buzz phrase and such a hot topic in our industry. Everybody's converting over from logistics and transportation to supply chain. Why do you think in the last few years, this term phrase has blown up, Judy? It seems like a lot of the colleges, universities are now offering these advanced degrees in supply chain and supply chain management. What changed?
Judy Whipple: Well, I think a couple things. First of all, supply chain as a term really came about in the late 90's, early 2000's, and the elements of supply chain, logistics, procurement, operations, we've always been doing. But the key in changing from that logistics or transportation perspective to a broader supply chain perspective really comes with the recognition that we need to be integrated across those three sub areas. So if I'm not understanding that a decision I make in procurement, for example, could add costs from a logistics perspective, but then I'm really not looking at that true integrated supply chain. The other thing I think which has really made supply chain much more important in the last few years, one has certainly been globalization. That's added tremendous complexity to our supply chains. So when you think about, research shows roughly 25 different entities will touch your product or your information when you're buying or selling globally.
Judy Whipple: So that creates very complex supply chain networks, and so that's not only understanding different regulations, different tariffs and customs that might affect the buying and selling of products globally, but also understanding customer preferences and economic trends that could be critical impacts to your business. I think also companies are recognizing more and more that supply chain or being great or having strong capabilities in supply chain can lead them to a competitive advantage.
Judy Whipple: In some cases that advantage might be a low cost advantage. Research shows that 60 to 90% of a firm's cost are supply chain related, and so if we could do a good job having an efficient supply chain, we can manage those costs better, but it's also not just about cost. It's also about affecting firm's revenue and customer service. Whether that is launching an innovative product or offering a differentiated service, firms can gain an advantage in the marketplace through supply chain. Certainly a company in your neck of the woods, Amazon, has been a great example of a firm that developed a business model based on differentiated supply chain and that's really changed the way we think about buying, selling, receiving, and returning goods.
Bill Condon: Judy, let's stay on this topic for a second because you mentioned Amazon. I would imagine obviously the growth of e-commerce has highlighted the importance of supply chain and those that can do it well can really differentiate themselves in the marketplace. So can you elaborate a little bit on that e-commerce and the impact on the supply chain?
Judy Whipple: Sure, absolutely. So doubly with the explosion of e-commerce, that impacts our supply chains and our different strategies, consumers really want a seamless, omnichannel experience where they can shop and buy anywhere, anytime. This places huge demands on firms to develop effective and efficient supply chain models so that they can be responsive to those customers. So we used to talk about last mile delivery and think about that as the customer that wants something delivered to the doorstep, and now we're even expanding that to give customers flexibility and greater choice in that last mile. So it might not just be deliver it to the doorstep, it might be actually take it in the house and put it in the fridge and the pantry for the consumer. It might be deciding I want a delivery put in the trunk of my car, or I might be using lockers or other means so that I can conveniently pick up product when I want to. So it's expanding not just in terms of online shopping and choice and selection, but also we're putting significant impact on that delivery piece, and then also any kind of returns management.
Matt McGregor: Great answer. You've started to touch now on tying it in a little bit to real estate, but what should distribution companies, fulfillment, and manufacturing companies consider about their supply chain in the selection process, whether they're going to lease or own a facility?
Judy Whipple: Yeah, great. So I know we always talk about location, location, location, right?
Matt McGregor: That's right.
Judy Whipple: So certainly given today's complex supply chain problems and how we're looking to deal with this e-commerce world, there are a lot more factors to consider in that building selection decision. We were just talking about the e-commerce piece, which is driving firms to want to position inventory closer to customers, given customers short delivery expectations, whether that's today, next day, same day, same hour. When we start expanding those delivery options, we need to be pre-positioning inventory much closer to customers. So that's not only driving up real estate prices, but it's also making firms think more creatively about that space. So can I co-locate with a company who's serving my same customer base? Do I want to rent instead of own because maybe I'm moving into a new market and I want the flexibility of renting in case the market doesn't reach projections I have? Do I want to utilize a third party service provider? But then also we're seeing some differences in the way we think about building warehouses. So building multistory warehouses, so instead of building these large sprawling warehouses, we're going vertical and we're building up.
Matt McGregor: That's right. We just saw Amazon lease the first triple decker built in the United States right here in Seattle. They leased just about 500,000 feet, Bill?
Bill Condon: Yeah, 500,000 square feet. They took the remaining portion of that building, which would the majority of it was left. It's interesting you mentioned last mile because that is a close end building that they leased and although the rate was high because of the market, they leased the whole thing just so they can really get speed to delivery to their customers.
Judy Whipple: Mm-hmm (affirmative). Then in addition, you've got to be thinking when you're picking location, not only the cost of the real estate, but also labor availability, wage rates, transportation, traffic congestion, regulations, and local zoning that may affect the size of a building or restrict the size of transportation equipment. There might be restrictions on delivery hours. Certainly we're seeing companies also thinking more carefully about sustainability. So when they're building a new facility, how do they try to ensure sustainability and minimize environmental impact?
Bill Condon: Yeah, those are all important factors for sure. What are some of the key mistakes that you've seen industrial companies make when selecting buildings without considering the supply chain implications?
Judy Whipple: Well, certainly the wrong location can add to your total cost unnecessarily as well as could negatively impact your service. We like to talk about supply chains are only as strong as the weakest link in the supply chain and I think firms have not always considered location as a potential risk. So a few years ago I was talking with a company that had their main distribution center, which fed other smaller regional DC's, and as part of their risk assessment project they realized that that main distribution center was located along an earthquake fault line. So luckily the firm was able to rethink the network and build some contingency plans, but had they not realized that and had there been an unfortunate disruption, it could have had a significant impact on the firm's operations.
Matt McGregor: That's a great point. It's interesting how complex you make it sound. Now with all these factors in supply chain and picking real estate, you'd be amazed, Judy, with some of the simplification in past years of how we've seen site selection happen. We had one company that we manage their real estate globally would actually ask where the manager of this facility that's going into the place or renewing, where he lives. The nearest facility to where he lives would actually be exed off the list because he knew that so often the key decision making aspect of where that distribution center would go is where the general manager lives, the closest building to his house.
Judy Whipple: That's right, as opposed to thinking of all those other costs, like where your customer base may be, again, where there might be opportunities for tax relief, what are happening in terms of labor rates in that area, skill level. So a lot can go into that decision when we start thinking about that total cost piece.
Bill Condon: So Judy, what's the future of supply chain and what do you think the biggest factors are that will impact it over the next say, three to five years?
Judy Whipple: So supply chain professionals I think will be continued to be challenged to consider and understand the myriad of tradeoffs from a cost to cost standpoint or cost to service standpoint that we're going to continue to face in our increasingly complex global business environment. So really thinking more strategically about the future of our business, about uncertainties and trends. This could be trade pacts, tariffs where suppliers and manufacturers might be moving and locating, resource scarcity concerns. So I think we need to continue to develop expertise in that area and really understanding from a systems perspective, if I make a change in one part of my supply chain, what are the overall implications to the rest of my supply chain and the impact to my customers? I think in the next few years, certainly we're hearing a lot of different technologies and thinking about how technology will continue to play a big role and which technologies are right for which companies.
Judy Whipple: So I like to think about technology in three categories. Information sharing and tracking technologies. These are technologies that would give us greater visibility either to sales data that help us improve our forecasting, where our inventory is so we can be more responsive. Product safety, counterfeit, being able to gain visibility to where our products are going. So technologies like Blockchain, embedding sensors for Internet of Things, those would be examples of those information sharing or tracking technologies. Then we're also exploring efficiency technologies, so technologies that can help us reduce costs or improve resource utilization. So autonomous vehicles, drones, robotics, 3D printing, all things that companies are starting to consider and think about how they might be able to build those into their supply chains. Then finally big data, data and decision oriented technologies. With the vast amount of data that we're accumulating, that data can't generally be managed efficiently on traditional spreadsheets.
Judy Whipple: So how do we utilize things like predictive analytics, artificial intelligence, to help us make better decisions, but also to spot trends or to predict events? Then I guess one other thing I'd mentioned is the need to grow supply chain talent. We do consider that we have a talent gap. Some recent research has shown that for every six supply chain positions, and this is at multiple levels, whether it's entry level or executive level or even faculty at universities, for every six positions, there's roughly one eligible candidate, and so the importance of companies building their supply chain talent pool becomes critical as well.
Bill Condon: Yeah, that's a big factor. So clearly more people need to go to Michigan State and getting involved with your program so we can grow the knowledge base there.
Judy Whipple: Absolutely, and we're seeing growth across the country in universities starting supply chain programs as well.
Bill Condon: It's definitely, I think, the momentum is continuing to take effect across the board and people are recognizing what an important factor supply chain is in a company's business. So really good insights there. Matt, I'm going to ask you this question. Talk about supply chain real estate and elaborate on it a little bit.
Matt McGregor: Well, it's everything Judy said of course, but I would take it a step further. I think that's it's being defined as we move along and everything's changing, right? You take industrial for example, we are grabbing retail, basically brick and mortar retail, and bringing it into distribution centers and fulfillment centers with the growth of e-commerce. As we all know by the stacks of Amazon boxes and other on our doorsteps every day, that the world has changed and that it's going to continue to change to a large degree. I think that's the key of why all of these companies, distribution companies, 3PL's, are paying so much attention to the evolvement of supply chain and then tying it into industrial real estate. Gone are the days of that general manager picking a location because of his commute there. Companies are now looking at a lot of factors, network optimization, logistics and site selection, workforce modeling.
Matt McGregor: You got to make sure, Judy said this earlier, that the workforce is there now and into the future. It's hugely important. Logistics and network optimization I mentioned, 3PL selection and advisory is a huge one. Are there components of your business that should not be inside of your walls and should be particular sourced to a 3PL? Again that can be done through your network optimization study, and facility design is a huge one. Then finally, inbound and outbound freight and overall demographics of where your product is going. These are all major, major factors that are driving industrial companies to decide where to put their warehouses and in what regions with all of these factors in mind.
Bill Condon: It's a really good point, Matt. The other thing I would say the impact on industrial real estate has been the fact that industrial property types are now the number one investment vehicle that public REITs are chasing. A big part of that has to do with e-commerce and supply chain. So I think that certainly it's to your point, it's changing quickly and the companies that can adapt the quickest are going to win, but the e-commerce trend is not going anywhere. So this is going to be a continued topic that we need to follow and companies will need to follow as well.
Matt McGregor: That's right. Now I'm just going to make one last plug for Michigan State University and Judy, what a wonderful program it's been. As a lot of you guys know, Bill and I joined the program this year in their Master's of Science degree, mainly for executives, and it's the number one supply chain degree program in the country and there's a reason for it. They do a phenomenal job. They are really trendsetters and looking into the future and then educating the future workforce on what supply chain is and how these professionals can help industrial companies into the future. So great job, Judy.
Judy Whipple: Thank you so much Matt, Bill, really appreciate it.
Bill Condon: Thanks Judy.
Matt McGregor: Well, Judy, we want to just thank you once again for being a guest on our podcast today. We're going to put your contact information and our podcast notes and Judy, how else can people reach you?
Judy Whipple: Oh, well, they can certainly reach me by email, and that's email@example.com which if you post, that's great, but then they can also look at our college webpage, broad.msu.edu, and find information about the supply chain management department and our different degree programs there. Thank you very much.
Matt McGregor: Thank you, Judy. Thank you so much.