The Warehouse Space Race – The American Prospect
This article appears in The American Prospect magazine’s February 2022 special issue, “How We Broke the Supply Chain.” Subscribe here.
The pandemic shattered the fine art of moving stuff from your fingertips to the front door. Purchases of food, household supplies, and over-the-counter medicines exploded when COVID-19 lockdowns spread across the globe. American businesses fought to keep up as the world’s most voracious consumers, propped up in part by stimulus payments and boosted unemployment insurance, traded in-person movies, sports events, and concerts for new clothes, armchairs, books, TVs, and other creature comforts that could be packed up and shipped to their homes.
This triggered severe strains at every level of the nation’s transportation and logistics system, with cargo buried on offshore ships, in stacked containers, at overflowing ports, and in creaking truck beds and railcars. Many companies compensated for this by ordering “safety stocks”—additional inventory to guard against supply chain slowdowns, ensuring they’d have at least something to sell.
But this led to a new problem: finding a place for the goods once they finally trickled out of ports. The pandemic and the logistics mess exposed a long-standing issue: The United States doesn’t have enough warehouses, or workers to run them, to satiate Americans’ insatiable desires for new stuff.
This has led to a mad scramble for storage, a warehouse space race. Rents for renewing existing leases are at “nosebleed” levels, according to commercial real estate firm CBRE. Almost 96 percent of existing space in the U.S. is in use. Of the 190 million square feet of warehouse space under construction in 2020 across North America, almost half of it was pre-leased. Private equity firm Blackstone, which normally seeks riches in more high-flying deals, recently paid $2.8 billion for warehouse space to lease out.
The race for space heralds a massive transformation for the communities where new facilities land. Amazon has led a warehouse construction surge in rural towns and urban neighborhoods. There are boarded-up shopping malls to be converted, too. Large warehouse-seeking companies promise jobs, pocket tax breaks, and deliver noise, traffic, and air pollution while oblivious consumers sit somewhere else waiting for their cardboard boxes.
In addition, with death and the threat of it closing in every workday, warehouse workers have reassessed what it means to do physically and mentally debilitating manual labor, unappreciated by firms bent on paying them as little as possible now and aiming to replace them with robots later.
But one nagging question is, how did the country get caught so short? How were retailers so ill-prepared for the need for more warehouse capacity, when we’ve known about the e-commerce surge for years? The answer lies with our corporate titans of conspicuous consumption, who are always thinking about how to refine the lean inventory management philosophies that have steered commerce for several decades.
IN THE 1980s, big-box retailers like Walmart embraced an inventory management philosophy that had already catapulted Japanese companies like Toyota into the first rungs of global manufacturers. In a sense, American retailers did an about-face, embracing concepts that auto companies rejected when W. Edwards Deming, an American engineer and New York University statistics professor, first proposed them before World War II.
Deming went to Japan to assist with the postwar reconstruction effort, and continued touting his ideas. His “total quality management” philosophy rested on imbuing a company’s leadership goals with team-oriented approaches. Success meant that everyone, from assembly line workers to executives, worked on problemsolving strategies that could occur at any point in the production cycle. Workers observed problems in producing or moving goods as they developed and assisted managers in resolving them.
Impressed, Toyota executives sought out Deming to refine the company’s inventory precepts into what became known as the “just-in-time” logistics system (later the Toyota Production System). Just-in-time prescribed that component parts should be acquired for manufacturing only when required to complete that unique part of the process. This allowed a company like Toyota to save on warehouse space, for starters.
Almost 96 percent of existing warehouse space in the U.S. is in use.
Just-in-time “is not black-and-white, it’s a continuum in the sense that just-in-time doesn’t mean zero inventory,” says Ravi Anupindi, a professor of operations, research, and management at the University of Michigan’s Ross School of Business. “It means sufficient inventories such that you have smooth sailing; the flip side is you can have too much inventory to hide the problem, so [the question is] how do you gradually show a cycle of improvement to keep reducing inventory and keep removing the problems.”
Toyota’s interest in staying lean in its manufacturing process migrated to Walmart as a desire to stay lean in its distribution of finished goods. Innovations like the barcode gave retailers a better understanding not only of the number of computers or coats sold but also when and where demand was the highest. This served as a transfer of economic power from manufacturers to large retailers like Walmart. Keeping a warehouse well stocked with products “just in case” of a bump in demand lost out to the notion of keeping inventories low and dispatching goods as orders for replenishment came in, that is, just in time.
One primary impact of this philosophy is that it requires fewer warehouses. Inventory sitting around gathering dust is seen as a cost to a retailer; they have to pay rent for the warehouse space. It shows up as a liability on the balance sheet. Inventory moved just in time to store shelves can be sold quickly. Maximizing profit meant predicting precisely how much inventory would be needed at a given time, and only ordering that much.
This is an incredibly lucrative strategy for the handful of sophisticated companies that can manage it. But just-in-time requires consistent, predictable supplies. And the only thing the pandemic has supplied consistently is a cascade of global shortages.
A perfect example of the shortsightedness of just-in-time logistics can be seen in Abbott Laboratories’ decision last summer to destroy millions of BinaxNOW rapid COVID tests, which are in such short supply now. The reason? Demand for testing at that time was going down, and waiting around until it ticked up again would mean storing the tests, and paying for that storage, in a warehouse.
Where Deming advised, “It would be better if everyone worked together as a system, with the aim for everybody to win,” Walmart and other big-box stores opted for a cafeteria approach to just-in-time, picking out the cost-cutting features to boost profits and grossly devaluing the people toiling in warehouses for low pay and poor benefits.
“Just-in-time is hard to implement in practice because a lot of companies are going for efficiency and they mistakenly think of the line workers as a cost rather than a source of problem-solving,” says Senthil Veeraraghavan, a professor of operations, information, and decisions at the Wharton School of the University of Pennsylvania. “They get into this situation of cutting costs, cutting staff, cutting inventory, bringing it down as close as possible to zero,” he says. “Firms then suffer problems because they have lost experienced workers who could solve those problems.”
E-COMMERCE, WITH ITS DIRECT SHIPMENTS to consumers, represents “a fundamental shift” in warehouse logistics, according to Anupindi. A warehouse that supplies retail stores has different expectations for workers, technology, and equipment than an e-commerce fulfillment center that ships packages to homes. Walmart has distribution centers that supply to stores and different distribution centers that ship to individual walmart.com consumers.
Unlike retail stores, where customers interact with employees, most people opening their cardboard boxes have little idea about the harms other people suffered to get their orders into those packages. COVID-19 in particular has pushed warehouse workers over the edge and into the Great Resignation.
Warehouse work is a backbreaking way to earn a living. Walmart normalized punishing daily regimes and low wages, purposely siting warehouses in rural areas far from highways to keep pay at rock bottom, and frustrating union organizers. But if Walmart stepped up maltreatment of warehouse workers, Amazon has perfected what Courtenay Brown, an Amazon fulfillment center worker, called the “high-tech sweatshop” in testimony before a Senate Finance subcommittee this past December.
“Amazon is the innovator in not just warehousing but…