Microscopic Disrupters

We all know that there are currently some pretty serious disruptions in supply chains around the world. Without rehashing why this is happening lets look at how we got into a situation that might not have occurred 15 or 20 years ago.

One of the industry related groups that I have enjoyed over the last few years is focused on the warehouse and distribution markets. While it might seem that these types of buildings pop up at random there is actually quite a bit of research about the specific location where one of these facilities will be built.  The obvious purpose of these buildings was to build a buffer into the overall supply chain by providing space to hold goods and materials until they would be needed at the next step in the chain.  In the case of retail goods the next step in the chain was a store with adequate shelf space and backroom space to accommodate demand for several days, if not weeks.  When I was much younger one of my first “real jobs” was at a food distribution warehouse where we had racks and racks of goods simply waiting for the next grocery store order.  When the time came for me to hop on my fork truck and fill an order it generally involved pallet loads of products that would last a store for at least a couple of weeks.  The concept was the same for manufacturing related products and materials.  Factories would place orders for several weeks or months of anticipated demand that was stored at a warehouse some days away.  The factory had their warehouse space and the supplier had theirs.  Plenty of buffer time.


But as we also all know inventory is money that is not returning value until it is used.  So stores and manufacturers started to get smarter about inventory and utilizing “just in time” processes.  Those processes were, at first, pretty manual calculations.  Walmart was among the first companies to automate the process with sophisticated computer programs and, soon, other companies followed.  This thinking started “backing up” the supply chain.  If Walmart needed less inventory in their stores then the warehouse/distribution center could get by with less also if they employed the same thinking and automation.


As companies started stripping out costs through better inventory management and sharing some of those savings with their customers in order to build market share they had to also look for other cost reductions.  Pushing production offshore to take advantage of much lower labor rates provided that gain in profit margin but added another level of complexity to the supply chain…transportation time.  Once again sophisticated computer models were applied to the logistics and “just in time” transportation became real.  Original manufacturers of products followed the same thinking and only produced what was needed for the next computer programmed delivery cycle.

But…..all of this did one significant thing….it removed almost all the time buffers along the entire supply chain. Any glitch along the way would result in a shortage.  A ship gets stuck waiting to unload at Long Beach…a trucking strike keeps things stuck in Long Beach….a critical component has a defect…or just bad weather…could all create a serious problem because the computer programs that drive the supply chain are focused on creating the shortest possible time from source to site under normal circumstances.  Recovery from many of those events is usually relatively quick because the source factories are still up and running...and logistics companies can anticipate those events and have backup simulations ready to go.  Factory lights are still on, machines are still on and available, employees are doing maintenance work at the plant and are available to start up again in hours.


This time though those source plants are not still up and running.  Nobody is there.  Lights are off, machines and computers are turned off, employees are at home.  Restarting a factory is not as simple as flipping a switch and we are seeing the results of that today.  The entire supply chain needs to be “rebooted” and filled in again from the source end.  Four weeks to produce enough product to fill the open orders, one week from factory to port of exit, three weeks at sea, two weeks waiting in the queue to unload, another one or two weeks from port to local warehouse, and another week to the point of use…all after the source factory is cleared to reopen.


So file this one away under the category of unintended consequences.  We have created really smart computer programs to streamline the time from source to site but as a consequence we are vulnerable to even microscopic disrupters.

The Amazon Effect

I recently attended an interesting conference on the impact of E-commerce on the world of logistics and warehousing.  Of course, virtually everyone knows about Amazon and their E-commerce model.  "The Amazon Effect" is used to describe E-commerce in general and the economic impact on communities of having an Amazon facility in their area.

But I think that the part of the story that is not discussed enough is the changing nature of the facilities and the people in the facilities. 

Years ago a warehouse was a warehouse.  These big, uninsulated, boxes were filled with metal racks stretching to the ceiling and covering the floor from wall to wall.  Those racks were at least partially filled with finished goods that would eventually be located manually and pulled from the racks with a human-driven forklift.  From there the finished product would be taken to a truck at the loading dock and sent on its way.  I actually spent a summer during my school years, eons ago, locating products and driving the forklift to the truck.  I had a clipboard (that was like a tablet computer but held actual paper and used something called a "pen" to mark things off on the paper) and the process was tedious.  The building itself was hot in the summer and cold in the winter but we just dressed for it.

An E-commerce facility today is only similar in that the box is still big and there are still metal racks but that is about it.  In the first place, those racks may not be used to store finished goods but components that can be used to create a finished good.  Maybe it is a shirt and tie that are packaged into a set.  Maybe it is a cell phone, battery, charging cable, etc packaged into a retail package. 

This approach is designed to give the end customer flexibility.  Order the color, size, accessories that you want to make the purchase unique to you and the E-commerce company "fulfills" that order to your specification.  So, now, you have "fulfillment" centers instead of warehouses and they are occupied by dozens of workers using computers to configure your package to your needs.  In many cases the components that these workers put together are not retrieved by a human but by a robotic retrieval system.  The robots, and the human workers, all receive their instructions from on-site servers processing thousands of orders a day.

So, the old warehouses of my school days are now air conditioned, filtered, well-lit, high tech "factories" with their own small data center.  The challenge for the HVAC systems is how to handle three different requirements in those buildings.

The area used by workers to fulfill the orders needs comfortable temperature conditions but only in the lowest 7 or 8 feet of the building height.  The rack area where the robots run around might need temperature control for the entire 35 or 40 feet of the building height depending upon the product storage requirements.  And the on-site data center needs filtered fresh air, or evaporative cooling, to keep the servers running at an affordable operating cost. 

And to compound the problem the E-commerce company is probably growing so fast that the system configuration today will be obsolete in 2 or 3 years.

In order to satisfy all of those requirements, and provide future flexibility, requires the kind of analysis that a tool like CFD can provide.  Being able to create the building and experiment with equipment locations and sizes before the space is built, or reconfigured, has tremendous value.  Mistakes can be avoided and performance can be optimized to the requirements of the area being served.  Mestex has invested heavily over the last 15 years in CFD software, computers, and training so that we can perform the kind of analysis required.  We use this tool almost daily to help designers and owners make the best equipment selection for their project.

If you are involved in the E-commerce world and need to know the best type and location of the HVAC equipment for your project please feel free to contact us at www.mestex.com.

The Changing Face of Real Estate

One of my more enjoyable activities that I have is to act as chairman for a developers forum as part of the NAIOP organization.  This activity provides insights into the thinking, planning, and expectations of commercial and industrial property developers and owners across North America.  At our annual meeting a couple of months ago there were many presentations and discussions that focused on 2013 and beyond.  I thought I would share just a few of the points from that meeting.

The NAIOP Research directors provided some interesting factors to consider going forward that tended to revolve around the way technology is changing the office and industrial markets.  E-commerce is projected to have a negative impact on mom-and-pop retail and small start-up retailers until the housing market makes a big recovery, according to Cassidy Turley-Terranomics.  They went on to say that while middle market retailers will continue to struggle, the luxury and discount retailers will continue to expand and open new retail and distribution facilities. 

Speaking of distribution facilities, Jones Lang LasSalle indicated that they believe that distribution center users will continue to push for higher bays...up to at least 36 clear feet...in order to increase efficiencies in handling e-commerce transactions.  Another interesting impact of e-commerce that was highlighted by IMS Worldwide and by Liberty Property Trust is that changing real estate requirement for an e-commerce focused distribution center.  The number of transactions per day in an e-commerce site can be 10 times greater than for a traditional distribution center.  Each of those transactions must be touched by someone so the number of employees in an e-commerce center is much higher.  Parking for up to 1,000 cars in addition to trucks means the land required for these centers can be 40 or 50 acres greater than a comparable "traditional" distribution center.  Implied in this scenario is also the need for a temperature controlled work environment for those 1,000 workers instead of the old "just keep the pipes from freezing" distribution or cross-dock environment.

Another impact of technology and e-commerce is that a DC ("distribution center") for e-commerce has an element of "mission critical" to it in order to process all of the transactions.  Developers and users of these new types of distribution centers look for locations that have reliable fiber optic and cable network access, as well as dual primary power substations in order to minimize downtime in the event of a power disruption.  Other location related decision criteria include being in a right-to-work state and in a state that does not charge sales tax on e-commerce transactions.

Shifting back to the office market, CBRE-Canada, noted that employees are changing how they work and the traditional office with walls is going away.  They also noted that employees, especially the younger ones, communicate with each other by text message versus phone reducing the "noise level" in the office down to the clicking of small touchscreens...reducing the need for walls to control cross conversations.

PPR/CoStar commented that the average lease that they see in the office market has decreased from 5,000 square feet to 3,600 square feet.  This statistic is reinforced by the results of a CoreNet survey of 500 corporate real estate executives who have changed their office plan metric from 225 square feet per employee down to 175 square feet in 2012 with a projection of only 150 square feet by 2017.  This change means that development of new buildings will continue to be pressured as it will take longer to absorb space in overbuilt markets. 

The final point from the annual meeting is that while there is abundant capital available for the right deal all of these other factors are driving developers to spend that capital on remodeling and repurposing of existing space. 

Social Media and Building Construction

Today marks the IPO date for Facebook.  The press is all abuzz over the stock offering of a company that does not produce a single tangible item...yet, will be valued at over 100 billion dollars.  Would anyone have considered that even possible 10 or 15 years ago?  How could this be happening?

Whether or not you believe that Facebook is worth that kind of money it is a highly visible example of a trend that is accelerating so rapidly that building developers can barely keep up.  That trend is social media driven e-commerce.  The value placed on Facebook is derived from its ability to generate sales of goods and services through both its paid advertisements and through the massive database of user preferences.  When retailers know what you like and don't like they are armed with information that allows them to tailor their sales message directly to you in a way that makes it very difficult for you to resist.

Personalized advertising...not just to groups or subgroups of the population but down to YOU...is not quite there yet but it is coming fast. 

Another highly visible example is Amazon.  While Amazon lacks the social media aspect it has quickly become the largest "retailer" in the country.  Tracking and using personalized shopping patterns is already part of the Amazon business model and they use it very effectively to "suggest" other items that you might want to buy while you are on line making a purchase.  Combined with simple transactions this has made Amazon a success.

So, what does this have to do with developers and the construction industry?  Regardless of how a consumer makes that buying decision and places that order there eventually needs to be a physical transaction...even if it is only to hand over a tangible item to the purchaser.  The problem for developers and logistics companies is speed.  The speed of the e-commerce transaction is almost instantaneous.  That creates an expectation on the part of the consumer that the rest of the buying process will also go that quickly and be that personal.

So how do you quickly transport goods from their point of origin, to the port of entry, to the point of regional distribution, and then to the point of local distribution?  Many logistics experts will tell you that it is "the last mile" that can make or break the deal.  The "front end" of this distribution problem has been analyzed to death over the last few years.  Now that "last mile" needs to be addressed.  Does it mean repurposing US Postal Service facilities for commercial use?  Does it mean developing and constructing thousands of mini-hubs all around first and second tier cities? 

If it is the former then I would speculate that a significant amount of HVAC equipment will need to be replaced and upgraded for energy efficiency in order to help control costs.  The postal service has been running so lean over the last several years that the building infrastructure will probably need to be completely rebuilt with efficiency as the number one objective.

If it is the latter then what type of buildings and HVAC products will be required?  These will likely not be "big boxes" as we are used to.  High bays and cross docks will probably not be part of the mini-hub but something more like a large auto dealership service department.  This will call for smaller capacity HVAC systems to serve the smaller spaces but also have the sophistication to respond to carbon monoxide concentrations as delivery vehicles move in and out of the space.  And because all of this will be driven by computers what will be the data processing and data transmission demands?  These buildings will likely be "hybrid" facilities with a need for both simple and sophisticated HVAC solutions depending upon the part of the building that is in use.