Ep 28: Why online orders are still being delayed
Supply Chain challenges persist two years from the start of the COVID-19 pandemic. Our podcast reveals the hurdles around the flow of goods and how warehouses are evolving to cope
Meet our speakers
Greg specialises in negotiating industrial sales and leasing transactions on behalf of institutional and private clients, corporate occupiers and tenants. He can articulate supply pipelines, sales and leasing evidence, industry activity, geographical trends, and proposed rezoning and surrounding infrastructure upgrades to support his customers.
UTenant is an on-demand warehousing platform and provider of digital and physical supply chain solutions. It was co-founded by Kyle, who developed his knowledge of manufacturing, warehousing and distribution while working for his family business in Ireland. He has also worked for some of Australia’s largest 4PLs and 3PLs.
Chris has 15 years’ experience in supply chain and logistics, specialising in 3PL and freight optimisation.He built a national 3PL service of seven warehouses across five states for EWE Group within three years. His expertise is in managing complex business transformation, productivity and process improvements, and customer-focused projects to achieve growth and profitability.
One of the most interesting storylines to prevail from the pandemic has been around the phenomenal increase in online shopping and demand for certain products and materials.
On previous episodes of this podcast, we’ve spoken about the chaos this has caused for supply chains, distribution and logistics, as well as the impact on warehousing — put simply, there’s hardly enough of it anymore.
But two years into the pandemic, and that’s plenty of time to get things in order, right? Well, not quite. We’re in peak shopping season, and retailers and other businesses are still apologising to their customers for being out of stock on certain items, or for those items reaching them so long after they’d been ordered.
So, what’s going on?
I’ve got three experts with me to shed some light:
Greg Pike, who heads up industrial and logistics brokerage in Australia for JLL, Kyle Rogers, co-founder of on-demand warehousing platform uTenant. Kyle is also director of supply chain at the Supply Chain and Logistics Association of Australia. And Chris Wang is the chief operating officer at warehousing, logistics and distribution provider EWE Group – an Australia-wide operation that has spent the past two years tackling everything from pallet to people shortages, while trying keeping customers happy.
And I’m Rebecca Kent, host of this JLL Perspectives podcast.
Kyle, here we are in the 2021 pre-Christmas shopping, rush. What are the current hurdles around the flow of goods and what have we learned over the past two years to improve things?
What's happened over the past two years has been the proverbial move from shop to shed. When shops are open, we can go in and try or buy stuff. But over COVID-19, with frequent lockdowns in different states happening at any moment for long periods of time, shops were closed. Retailers couldn't sell via their shopfronts so they had to move into sheds. Their websites became their shopfronts. This means they had to quickly have their stock available at any given time, in specific locations, and had to be able to fulfill orders in a timely manner to make sure the customer wasn't disrupted and got whatever they ordered for their birthday or wedding or whatever.
So that caused massive challenges because you had all this stock in shopfronts, but limited stock held in warehouses, which were just used as replenishment for stores.
Over the past two years businesses at a board level have quickly had to change strategy. Their deliberate strategy might have been to open up 100 extra stores in the next five years and slowly grow their online omni-channel ecommerce volume by 5% to 10% in line with growth forecasts. But quickly, all of a sudden, 80% to 100% was being bought online. So, all that investment was like, ‘slow down, don't open up any more stores, get all that stock out of there and let's get another warehouse’. You’d talk to JLL, who we work closely with a number of our clients, and that has led to mass uptake in industrial property across the country.
Another saying that we have here at uTenant is, in the perfect supply chain, the warehouse doesn't exist. Because in a perfect supply chain, things would rock up in a container at the wharf in Melbourne, or at the port in Botany Bay, unpacked and go straight to your home. But that doesn't happen.
There are the four P's of supply chain: ‘people’ — there are some massive people issues, which I'm sure Chris can elaborate on more than me because he's actually running facilities around the country with 400-plus people, for a number of clients.
Then there’s ‘property’ — there are property issues in massively low vacancy rates across the country. Every industrial property across the eastern seaboard is full. Greg can talk about that.
‘Pallets’. There are major pallet issues because of the demand for stock globally. That’s to do with wood and a number of other supply chain challenges, which has meant there’s a cry out for pallets which everything moves on. Goods come in on containers and they generally move on pallets.
Fourth and finally, ‘ports’. There are port issues. Two major things on that is industrial strike issues. And number two, container issues, that’s being able to get containers and ships in and out of Australia and around the globe fast enough. It's going to take some time for those things to regulate if they ever do.
How does this translate to end consumers getting their goods on time for Christmas? Will they? Are they?
There are number of factors. And there’s no panacea. From what I’m reading day-to-day, and from working with clients, I know that there are major issues in China. Environmental sustainability targets mean manufacturers have to use less coal, they’ve also had factory shutdowns due to COVID-19. They have a zero COVID-19 strategy which is unbelievable for a country of a billion-plus people. An embroidery supplier for our uTenant apparel is struggling to get certain T-shirts and certain garments for us because of not being able to get a spot on a container ship because the cost is so exorbitant, and there's a lack of supply into the country.
But I would take a different lens to this. People talk a lot about supply chain, but not enough about demand chain. You’ve got to be able to predict demand, but that's really, really difficult.
Humans are emotional beings, we buy on emotion, we walk into a store and we might buy something that we never planned to. You might be sitting at home, and you see something on an ad on TV, or pop up on a website that you're reading and you just buy it. It's really hard for companies to prepare for that and have the right stock levels in place because they either have too much, and then you've got to pay those supply chain and inventory costs for stock to sit in your network, or you have too little and then you miss out on a sale, which is lost revenue and potentially someone goes to your competitor.
It's also known at the bullwhip effect, that is if you over-order or under-order. There's no perfect supply chain and steady demand. There's no forecasting.
I’ve got two things on that point: First of all, people know when their birthdays are, generally speaking, or when their kids’ birthdays are, and people know Christmas comes at the same time every year. So, if you wanted something badly enough for Christmas, maybe you should have ordered it three four months ago.
So I hope COVID-19 encourages a realignment in consumers’ expectations, the realisation that there is an onus on them as much as the retailer. Of course, the consumer is king, we've all heard that. But at the same time, consumers have to be on the front-foot if they want a product badly enough. They have to be able to order it on time.
Greg, Kyle was talking about the perfect supply chain not needing warehouses at all, but I feel like we're a long way away from that scenario. How has warehousing evolved since the pandemic?
What we’ve seen is an acceleration in take-up rates of large-format warehouses to satisfy increased demand due to ecommerce purchases coming into Australia. Couple that with a move from the just-in-time supply chain scenario to just-in-case, and a lot more local manufacturing assembly, all because people don’t want to get caught short, like they did at the peak of the pandemic when online retail went through the roof and all these big retailers weren’t able to serve their customers.
The knock-on effect has been that groups like EWE and Linfox, and a number of other major 3PL, businesses who we deal with on a daily basis, their customers, the retailers or product owners, have very big expectations on behalf of the consumer at the end of the supply chain getting what they ordered.
But unfortunately, the knock-on effect of not having enough property, of delays in being able to get supply of timber and metal and rivets and screws and sheeting and all the bits and pieces needed to actually design and construct a facility, and then of a COVID-19 construction lockdown, is a property cycle completely out of whack.
We’re normally at an equilibrium in Sydney of 1.2 million square metres of warehouse take-up each year and 850,000 square metres of new supply. But all of a sudden, we’ve still got the same demand if not higher, but supply has been halved. That has exacerbated the need for large logistics companies and retailers to secure space to continue fulfilling the growth in demand as well as having to backfill holes in supply chains because they need to keep more stock on hand.
So there’s been a real dynamic shift for us from when COVID-19 first hit and everyone went into lockdown and thought ‘oh my god the world is going to stop’. It’s now very quickly shifted to, ‘there’s a huge wave of product coming into Australia and we’ve got nowhere to house it.’
Many of our key customers and clients are seeing their tenants use their facilities at 120% to 130% capacity. They’ve got pallets stored in aisles, they’re racking from 1.4 metre bays to 1.2 metres, they’re reshuffling products, and trying to become more efficient with their picking methods. Rather than pick to carton from a pallet they’re starting to put things away and shelving. They’re talking about mezzanines, they’re really sweating their assets quite hard because they know that it’s not an easy scenario to go and get a property for six or 12 months while we wait to get something built for them that’s two or three times the size. Capacity has been a huge challenge for a number of tenants.
The upshot, I suppose of that is in Australia, while we are one big country, there is limited land supply, especially on the east coast. And there are finite resources in terms of people who can build sheds and physically put them together. As a result, rents have gone through the roof and as a result of that there’s a multiplier effect on the cost that 3PLs have to charge their customer, which is the retailer or the corporate, and so forth down the line to the consumer. That’s across the whole throughput of the supply chain and returns as well. Now a lot of people are over-ordering, making sure they got the right size and the right colour. Shoppers are getting a free returns policy or a cost-effective returns policy.
Someone like my wife might order three dresses online, choose to keep one and then send the other two back for free. That’s now causing a reverse effect back on the return supply chain and further exacerbating the problem. We keep telling our clients, the major institutions in Australia, please just build, build, build because we will continue to fill these facilities. But as a result of land prices going through the roof here in Australia and rents following that trajectory, coupled with a lack of supply, it’s going to continue to cause huge supply chain problems for 3PLs from now all the way through to 2023.
There is not a great deal of warehouse supply coming in 2022 across the east coast of Australia. The supply that is coming is pretty much already been committed so we’re working with tenants now to do deals in 2023 and 2024 and help pre-plan their supply chain for those years. I think it’s going to take a couple of years for property and for the supply chain to really level itself back out again.
Is building more warehousing really the only way forward? Could addressing the demand for goods be an alternative solution?
Because we're so far out of kilter due to the previous lack of supply, construction, and not being able to physically get construction materials to build warehouses we’re already in Sydney at least 100,000 square meters short of where we needed to be to fulfill requirements for this year and next year. As quickly as warehouses are being built, they're being leased, and we just cannot keep up with that demand.
I'm sure demand from ecommerce will start to peter out and we'll probably go back to a much more natural growth trajectory. But everyone is so well versed on online shopping now. And if you're anything like my wife – as I said, she's ordered plenty online for Christmas and she’s scratching her head going, ‘where is it? When's it coming?’ To Kyle’s point, everyone knew Christmas was coming on the 25th of December. But people are so used to leaving it to the last minute because they don't want the kids to see, or they've got nowhere to store things at home. Unfortunately, as much as the retailers in the supply chain groups are trying to facilitate and keep everyone happy and give the end customer what they want, I just don't think physically goods are going to get to people who order at the last minute on time, and people are going to miss out.
The fact that Australia post had to shut down its entire distribution centre network for four days not long ago was a massive jolt to the overall supply chain, particularly for business-to-consumer (B2C) organisations. Australia Post is arguably the number one for B2C deliveries because it has got a store in every town and every suburb. It’s got those the Aussie post lockers and all the rest of it. There are other great courier companies out there also trying to keep up with demand, but Aussie Post closing down was a big jolt to the supply chain system. And I don't think the consumer realised at the time when that was on the news, the impact that would have on them and everybody else in Australia.
Just to clarify, Australia Post closed down why?
They stopped receiving orders. They said ‘no more. Don't send us anything further until we clear our backlog’, which is incredible. Did I get that right, Chris?
Spot on it? Yeah.
That's scary in a country of this size, in a mature country with a stable government. That is very scary that probably your largest distribution network had to shut down to clear a backlog. That means retailers couldn't get stuff out. People weren’t getting stuff in the mail. The follow-on effects are only just starting to be felt now.
I just want to add to that further what it means for consumers. Consumers don't really care about supply chain as much as we do. They don't care about supply chain, they don't care about industrial property. They don't care about 3PLs and whether they’re picking up stock on time or not. They just order something today and they want it tomorrow or Thursday or Wednesday. Their right is just to be able to give goods to their kid, or to their friend, on time.
But let me tell you what happens subconsciously in that case: You order from a Nike, an Adidas, or a Puma, or you go to Coles, or Woolies, or Aldi and you want to buy your veggies, or you want to buy your Heinz tomato ketchup. So you order it or you walk in to buy it, but it's not there or it doesn't come. Then what happens in your mind where you still need tomato sauce, or you still need Vegemite, or peanut butter for your breakfast, or you still need a pair of running shoes or running gear, is you might turn left or right in a store and look at what else is on the shelf and then pick up a competitor product that you've never tried before and love it. Or if you're shopping online, you couldn't get the shorts that you wanted or the running gear that you wanted, you might jump on to a Nike or Adidas website and buy it there. And you might try their product for the first time I'd love it.
The sale of peanut butter for $5 or the cost of a pair of shorts at $50, they’re one-off costs, but the lifetime cost of that to a brand could be massive. Imagine I love a new product so much I go share it on my social media, and I have a big social media following, which means other people start to buy it. That loyalty to the old product is gone forever.
But then also on the flip side, if a consumer orders a new product and it doesn't arrive on time because Star Trek or Australia Post has stopped taking orders for four days, who do you think the consumer gets angry at? Not Star Trek, not Australia Post. The consumer gets angry at the brand. But little does they consumer know the brand had the stock ready to ship in time. The LSP, which stands for Logistics Service Provider, which is Linfox, DHL, Toll or Australia Post, they're actually an extension of the brand.
It's something we call the last mile. So you can get everything right up to manufacturing, for example. The goods are packed in a container in Shanghai, they get to Australia and are stored for three months. They’re ordered online, and then it all falls over on the last mile. Then the customer doesn't get the product, or there’s a return and an unhappy customer and potentially a bad review.
Thanks, Kyle. Chris, let’s bring you in here. Give us an insight into the pace and the challenges of your operations at this time of year.
It's not just Christmas. It’s ever since Covid started. It's the whole service industry like 3PLs combined with last mile solutions teams. We’ve always said that to be a good logistic company you need to be agile and you need to be flexible. You can't just have a plan A, you also have to have a plan B because plan A just may fall down sometimes. But in these years of COVID, plan B is not enough. You need a plan C and D because things just change every day.
Kyle mentioned the 'four P' challenge. We actually feel that every day. At the start it was probably 'people'. Over the past few months it's been ridiculously hard to recruit people. In 2018 you could put a job online and usually get 50 resumes within two hours. Now you are lucky to get one in a week. And the person may not be fit for the role. The first interview question, rather than checking their experience, is 'have you been fully vaccinated? And if you're not, are you open to it? And are you open to getting a test every three days?' That was probably in June (2021) at the end of the second wave of COVID-19.
We had a confirmed case in mid-August, in our office, in the same building as one of our 3PL warehouses. It was very hard to deal with. We had 40 percent of our people straight away who didn't want to come back the next week. You can't blame them. We checked the regulations and followed everything we had to do to stay open. But staff get extremely paranoid and they say they want to stay home for a week. Then you've lost 40 percent of your manpower straight away. How do you commit to what the customer wants then? You've got to work that through in terms of what your priorities are, what orders can wait for a few more days – and even then you’re not knowing if you can bounce back to full power. You just have to work through day by day. A lot of that has been happening for the past two years now.
The pallet issue is a funny one. That hasn't really transpired until the past six months. Over 2020 it wasn't an issue. But over the past six months we've had to say ‘no’ to new businesses simply because of short pallet supply, which has never happened to us. We've got a supplier that used to send us a bottle of wine if we bought from them every year at $30 a pallet. Now it's the other way around. You couldn't even get something if you put money right in front of them. It's just a very interesting market. We start picking containers now where goods come on pallets. We prefer to take that work not because it's easier to do, but because it comes with pallets. On one of our warehouse sites in Sydney, we had some construction happening and the guys left some pallets behind. In the old days, you'd demand them to take it away. But now we ask them to leave them there for us because every pallet counts now.
Another disruption for us as a service provider is the last mile. We do run a last mile service ourselves, but we largely rely on Australia Post and a few other carriers. As Greg mentioned before, there were multiple strikes happening every week. We have a relationship with probably 15 different carriers so that we have flexibility and as a result we really feel like we are controlling the traffic. The good thing for us is we have been building that last mile solution and networks for the past two or three years which gives us the flexibility to always provide a solution to keep our customers' businesses going. We really have to work with our customers together. They’ve been pretty good if we have to work with a carrier or supply chain model that's not preferred by them. They understand the challenges and accept we’ll review things when they get back to normal.
On container delays, we get backlogs of containers. You'll have two weeks where it's light on work, then the next two weeks, your yard is full. Then I'll be on Kyle's back, saying 'please can you get me some space anywhere, nationally'. We don't want to say no to business. We always want to be helpful to our customers. And sometimes it means we have to absorb a lot of costs, with transits, for example, in order to transfer stock to where there’s space. That's just what we have to do. The good thing is that with a national footprint, we can try to divide workloads from one state to another if that's the only way to make it work.
A lot of businesses that were running half business-to-business and half business-to-consumer models are now more heavily the latter. That gives us a better ability to move them from one state to another, which we recently just did with one client. We moved them from Melbourne to Adelaide because they turned into a 100 percent business-to-consumer model because they don't run a retail store anymore. We had to throw an incentive on the table to facilitate that move just to open up offer more space in Melbourne.
We work with Chinese companies - DW Group, Alibaba, this big market giant in China, and the new one is Tik Tok. Starting last year, in 2020, we've seen direct shipping to Australia drop off from China.
At one point, companies changed their entire models because there were not enough freight airlines because of COVID border shutdowns. The output of airlines was slashed to 20 percent capacity from pre-COVID. There were simply no aircraft to move your freight from Australia to China. China had this zero COVID-19 policy which sounds crazy. This meant any hint of COVID-19 and they would shut their borders, shut a city. They would take three days to deep clean a terminal which would create excessive delays. We'd have to try one airline, and when that didn't work, we'd try another. It was like playing chess. A lot of moves we had never tried before we have tried over the past two years
I’m trying to think of a way to summarise everything that has happened in the supply chain. When you think about pre-COVID times, it all seems like a long time ago, pre-2019. You think of containers moving around the globe, containers being unpacked of pallets, and goods put in warehouses and delivered.
In this time, ecommerce has been growing. It's almost been like a Formula One track - Melbourne or Dubai, where cars go round and around and around and for the most part you can predict what's going to happen, apart from when sometimes someone turns the wrong way and there's a bit of a crash. We’d consider that disruption. During COVID-19, take that scenario and throw stones onto the track, and change its course every two minutes so all the Formula One drivers don't know where they're going. That causes oversteer or understeer, and it's going to cause more crashes. In COVID, the disruption is caused by things like the lack of people labour due to COVID and international travel, plus weather issues, which we haven’t even touched on - storms and whatnot.
Speaking of storms, there were geopolitical storms, like Brexit, and the Trump saga as well which changed things a lot globally in terms of trade wars. Then you’ve got sustainability issues in China affecting the use of coal, which has in turn affected manufacturing. So, there have been a number of issues and it helps to think of it all like a Formula One car that can’t predict that track anymore because of the disruption. So, there are massive impacts right through the supply chain, from the very start right through to the end. I can't say the end is in sight. I don't know how long all of this will continue, but all I do know is companies like EWE, JLL, and UTenant are better prepared for what the future will hold, because the experience so far has built resilience.
Thanks, Kyle. And Greg, what does the future hold from a warehousing perspective in your view?
I’ll have a crack at the crystal ball from a property perspective. I think warehouse supply will start to free up a little bit from by Q3 next year. But I think the smart occupiers are already planning for 2023 to 2024. Even if occupiers have got leases until 2027, at least half of them are looking for change. They're going to look to move early, taking advantage of more land supply which comes on board across the east coast of Australia during that 2023 to 2024 period. They’re going to walk away from their lease tails or take a punt and sublease. Occupiers that opt for automation in their warehouses will potentially take longer-term leases. But I also think 3PLs will be expecting longer-term and more robust commitments out of their customers if they are truly going to partner with them, rather than customers just looking to get the cheapest rate card around the country.
It sounds like the evolution of our industrial, supply chain and logistics sectors is still very much underway, but consumers can get their goods on time if they shop smart, and consider all the factors we’ve lifted the lid on here. Even then, I feel we’ve only scratched the surface. Nonetheless, Chris Wang, Kyle Rogers and Greg Pike, thank you for sharing everything you know, it has been fascinating. Thanks for listening to this JLL Perspectives podcast. I’m Rebecca Kent.
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