Reducing Volatility in the Supply Chain: An Opportunity for Build to Suit Distribution Centers
Due to the pandemic, e-commerce became an opportunity for build to suit projects. In 2020, industrial space in Mexico reached 2.1 million square meters, an increase of 6% from the previous year. This model offers, among other things, stable and long-term leasing, which can go in line with a company’s strategies and operational needs, especially when it comes to building distribution centers. However, almost four years after the health emergency, supply chain volatility is still one of the challenges that must be overcome in order to maximize the benefits of this type of project.
Causes of Volatility
There are several reasons for supply chain volatility:
Economic Factors
Economic conditions, such as recessions, inflation, or changes in disposable income can significatively affect consumer behavior, leading to fluctuations in demand.
The Life Cycle of a Product
Products at different stages of their life cycle experience different demand patterns. The introduction of new products, the obsolescence of others, and changes in market saturation impact demand fluctuations.
Just-In-Time Strategy
Over the past half-century, just-in-time manufacturing has captivated global businesses. Companies employ this inventory strategy to increase efficiency and reduce waste by receiving products only when they are needed for the production process, thereby reducing inventory costs.
This method requires companies to forecast demand accurately. However, events in recent years have called into question the benefits of maintaining such reduced inventories, as supply chains have proven extremely vulnerable to disruptions.
External Events
Unforeseen events such as natural disasters, political instability, or a public health crisis (such as the COVID-19 pandemic) can alter supply chains and cause sudden changes in demand, creating volatility.
Read also: What to consider when assessing the lease of industrial buildings?
Why is it Important to Manage Volatility in the Supply Chain?
To reduce the impact of supply chain volatility, supply chain managers use strategies such as demand forecasting, flexible production capacity, dynamic inventory management, collaborative relationships with suppliers, and real-time data analysis to be more responsive and adaptable.
Managing volatility in a profitable way can deliver significant benefits to a business, from reducing supply chain costs to improving customer service levels. Effectively managing the supply chain is a competitive differentiator for companies, as they are prepared for a sudden increase in demand by having the right amount of inventory. Competitors who do not have enough products to meet the increased demand will have to face dissatisfied customers and economic losses.
An Opportunity for Build to Suit Distribution Centers
High inventory levels can strain company’s resources as much as low levels can affect customer service. The solution is to find a middle ground with safety stock. This inventory is in excess, but it does not fill warehouses. With predictive analytics, projected demand can be anticipated, and the safety stock can provide a small additional percentage in case of unexpected changes. This solution provides a cushion in case of unexpected demand fluctuations without excess inventory.
This brings us to the distributed warehousing strategy. This is when a company spreads its existing stock across multiple warehouses and logistical centers in different locations to get the products as close to the consumers as possible. This helps create a more efficient freight movement and optimize last-mile logistics, but it also helps ensure that a product will be where it needs to be, when it needs to be, especially when demand volatility reaches its highest point.
Distributing inventory keeps transportation flexible and reduces delivery times to the consumer, but it requires predictive analytics and forecasting technology to ensure that demand is met with the utmost precision.
At Advance Real Estate, we understand how volatility in the supply chain has forced companies to change their logistics strategies. We have therefore included Build To Suit projects in our portfolio, which allow companies to build distribution centers in order to take full advantage of the opportunities offered by the market.
Information sources:
- https://realestatemarket.com.mx/noticias/mercado-inmobiliario/32600-oferta-logistica-en-centro-y-bajio-impulsada-por-modelo-built-to-suite
- https://amzprep.com/demand-volatility/
- https://inchainge.com/knowledge/supply-chain/volatility/
- https://www.mossadams.com/articles/2021/07/3-steps-to-combat-supply-chain-volatility
- https://www.redwoodlogistics.com/insights/how-do-supply-chains-deal-with-volatile-demand
- https://www.linkedin.com/pulse/demand-volatility-its-impact-supply-chain-management-rafael-a-vela/
