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Creating Spatial Opportunities Out Of Chaos

The growing threat of the novel Coronavirus has created a serious risk to supply chains as manufacturers and retailers face the possibility that suppliers will halt production, and will be unable to find alternatives and run-down stockpiles. According to February’s Logistics Manager’s Index Report, both transportation prices and inventory levels are taking a negative turn, and we can expect the coming months’ indices to continue this downward decline. Now is the time to either revisit or create a real estate strategy that supports an overarching long-term supply chain strategy. This way, once this epidemic is under control, you are ahead of the game.

Many companies are diversifying sources from which they procure components or finished products so as to be less dependent on their Chinese production, but it’s a slow process. It takes time to rework logistics and transportation routes and build alternative fulfillment capabilities to accommodate the changes. Additionally, businesses have to anticipate new movement restrictions.

Let’s face it—when the pandemic ends the problem won’t. A return to normalcy would still see a surge of container movements creating a requirement for additional de-stuffing capacity. Most sectors are already feeling an impact. There's the pharmaceutical industry, where China supplies many drug precursors, as well as the fashion industry, where production for the autumn fashion season should be ramping up, but is currently at a standstill. Also, any industry dependent upon electronic components—as we saw with Apple and Samsung delaying the delivery of their mobile phones to consumers. There are already concerns over goods for the Christmas 2020 market.

Production isn’t the only issue—shipping is also affected. There are already reports of backlogs building on the Yangtze River, airfreight out of China is down, and ship operators are unwilling to visit Chinese ports thanks to the prospect of a viral outbreak on a large—but minimally-manned—container vessel. Avoiding China also reduces service to intermediate ports, such as Singapore. Meanwhile, empty containers are stranded in the wrong locations.

Businesses are doing what they can to mitigate the risks of disruption. It’s too late to start stockpiling Chinese goods, but businesses can load orders onto alternative suppliers—particularly where many of these suppliers are located in other far eastern countries that could be at greater risk from the virus while having similar stocks held up at ports issues. Nonetheless, even sources closer to home cannot be considered secure. Companies may consider bringing forward orders—even from suppliers in currently unaffected areas—before global prices rise. Conversely, buyers of goods whose prices are largely determined by metal and other markets may see opportunities to exploit depressed commodity prices.

This also leads to stockpiling unfinished products in assembling plants while waiting for overseas components. A manufacturer whose production is slowed or halted by the absence of, perhaps, just one component still has other parts coming in. These parts will have to be stored and security will be an issue.

There is little doubt there will be another “cliff-edge” event at the end of the year—such as the presidential election—that will impact import-export strategies due to trade regulatory changes. The likelihood that stocks will build up at different distribution points in their supply chains will add pressure to the one to two day delivery commitment, so it is only sensible to start scoping out contingency arrangements. However, warehouse space in the ‘“last-mile delivery’” zone is already at a historical low for many densely populated cities, such as New York and Los Angeles.

The Coronavirus epidemic is threatening a logistical and transportation slowdown. It’s too early to quantify impacts on production but devising backup plans is a must. Companies must expect that temporary supplier shifts will become permanent, evaluate current warehouse and fulfillment spaces, and make decisive changes while expecting some of these temporary stopgaps to become permanent. Good real estate planning will allow businesses to be flexible in moving operations in such times of crisis.

Adam Petrillo

Adam Petrillo

Senior Managing Director, Head of Industrial Services, Savills
Adam is head of the Industrial Services for Savills, spearheading its strategic direction, leading a dedicated in-house team for advisory and transactions providing integrated consulting and brokerage services to some of the largest industrial companies in the world impacting their supply chain operations, logistics, warehouse, distribution and manufacturing real estate in North America.
https://www.savills.us/people/adam-petrillo.aspx