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Rising Fuel Costs Highlight Need for Stronger Distribution System Efficiencies

John Bell (July 2011)
(page 2 of 2)
And Arndt agrees with him. "We don't see a move out of large regional distribution centers. Moving is too expensive, and these centers are focusing on ways to achieve cheaper fuel costs."

According to Arndt, the emphasis today is on flexible warehousing. "Customers require change, so warehouses need to be in a position to react quickly without a lot of investment. Inventory control and small-lot processing are two of the primary tools used."

To help defray fuel costs, Feemster says companies are bidding out rates and farming strategic partnerships with truckload carriers. They foresee that demand for truckload business will exceed capacity. However, he notes that there's also a move to intermodal versus truck transportation, as well as the use of all-water transportation to Eastern and Gulf Coast ports instead of shipping to West Coast ports and transporting product by rail from there across country.

Under the heading of intermodal, Quinn cites the Heartland Corridor, a high-capacity rail line linking Norfolk, Va., to Columbus, Ohio. Total investment in the corridor by Norfolk Southern was more than $500 million, as the work included raising 22 overpasses to allow for double stacking of containers on railcars.

A Healthy Outlook for Warehouses
Sources agree on a positive outlook for warehouses. Arndt cites the trend to flexibility, meeting customer changes quickly. Feemster says warehouses are improving labor-management systems and upgrading their scoring, voice picking, and RFID (radio frequency identification) systems. Schultz comments, "Warehouse demand is up. There's a flight to quality with more efficient buildings, better clear height loading capacity and truck parking, more efficient lighting, and generally newer buildings."

Underscoring the healthy outlook, the U.S. industrial market finished 2010 with a notable surge, capping off three consecutive quarters of positive net absorption according to Colliers International. In its fourth quarter 2010 North America Industrial Highlights report, Colliers said solid demand for warehouse space in most regions, coupled with minimal new construction, has created the conditions for a sudden reversal in vacancy and almost certainly heralds the beginning of the next cycle. Demand for warehouse space is expected to increase as 2011 progresses, according to the report.

A giant positive for warehouse markets is the continued rise in import-export activity, which benefits port markets and also any distribution modes that are part of the supply chain. Another positive for warehouse markets is manufacturing, which continues to show surprising growth, Colliers noted.

Further affirmation of growth in the warehouse market comes in the first quarter 2011 PricewaterhouseCoopers Real Estate Investor Survey report. PwC says positive trends in the U.S. economy continue to impact the performance of the national warehouse market. The report cites a 7.1 percent increase in final sales of American products in fourth quarter of 2010. "This means that both consumers and businesses are again spending, which, if sustainable, will translate into more good news for the U.S. economy and the warehouse sector in 2011," the report concludes.

What are some industries leading the distribution parade? Arndt cites the food and electronics sectors. "Those bananas aren't going to sell if they hit the store overripe," he says. "The electronics industry must also respond quickly to changes in technology. They don't want to be sitting around with older product."

What is the single biggest concern facing distribution operators for the remainder of 2011 into 2012? It can be summed up in three words: rising fuel costs.
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