What is on-demand warehousing?
The Oxford English Dictionary defines on-demand as "soon as or whenever required”.
In recent years the term ‘on-demand’ has become synonymous with technology: movies on demand, taxis on demand, dry cleaners on demand…. the list goes on.
Our business is on demand warehousing, so we thought it worth explaining exactly what that means.
Digitisation is the transformation of analogue signals into digital data. A piece of data can be copied an infinite amount of times so there is no scarcity or exclusivity. The obvious example is music - originally to hear a tune you’d have to be there listening to the band making it. Then when the record player was invented you could buy the vinyl and listen at home. But there was a limited supply of vinyls produced - the scarcity made them valuable and collectible. But then came Spotify. Now anyone can listen to the same music anywhere in the world, whenever they want. The tune has become a digital good and can be replicated infinitely, so in itself is practically worthless and owning it is neither here nor there. What is important in the digital age is not ownership, but access.
“Demand" is a word often linked in people’s minds with the word “Supply". The notion of supply and demand is economics 101 and is central to the free market model for determining a fair price. The term 'on-demand’ implies access on the demand side, and the ability from the supply side to service that demand. In fact, ‘on-demand’ is also termed the "access economy”.
Technology has allowed users access to instant and abundant resources. The value from an economic perspective of the on-demand model is that those resources can be scaled up and down at speed according to the customers needs.
Therefore on-demand warehousing is the ability to switch on warehousing services as and when required. Storage capacity is the principal service, but all other services related to the movement of inventory to and from the warehouse must also be included in the model. It is warehousing services that can be scaled up to meet peak demand, but then scaled back to previous levels when no longer needed.
If the warehouse market is be made truly available on-demand to customers then there are two key points that need to be addressed: speed and access.
Access is essential for any marketplace because it drives liquidity. You need to have as many buyers and sellers as possible: more Supply will result in a better experience for customers, which will in turn result in more suppliers. Barriers to participate need to be low - commercial terms and user experience are key for aggregation.
If a service is to be made available when the customer demands it then speed of delivery is essential.
The warehouse market is structured around leases. Leases that tend to be long term, typically 5+ years. A company calculates how much space it requires based on sales forecasts. Companies tend to be bullish on forecasts anyway, which leads to errors in predictions. Those errors are compounded over time so the further out they go, the less accurate they are. The longer the lease the more likely the space is to be unfit for requirements - resulting in either under-utilised space, or demand for more space.
Landlords like leases because the real estate derives its value from the predictability of the future cash flows - i.e. the rent. It is not in their interest to have a short lease because of the transaction costs. The time and effort to find a customer, negotiate a lease and agree a price takes the same amount of time for a short-term letting as a long-term one so on a percentage basis eats into the margin. As a result it is better to take a long-term letting on a discounted rate and move on. Note that agents are also dis-incentivised to do short-term deals because they get remunerated as a percentage of the value of the transaction, so again may as well do a longer term deal where there are more fees for the same amount of work.
But what if the work could be digitised?
There are two things that take time transacting industrial space:
1.) Searching for a warehouse
2.) Agreeing a price
Finding a warehouse is a nightmare. There is no national databases or way of just Googling. No warehouse has a website (why would it?); companies that own them will, but they don’t specifically list the locations of their sites. The way you traditionally find a warehouse is either by asking an agent (who is limited to their own supply, which means they are biased and by definition restricts your options), or getting in the car and driving to your local industrial site and then start asking around and making calls.
Pricing in the logistics industry is a farce. We have identified three contributing reasons for this:
1. Lack of visibility: Players have little visibility of the competition so pricing is all over the place. Tends to be a race to the bottom.
2. Taxonomy: Logistics is like banking - full of hidden fees. If you go and get 3 quotes from warehouses you can be guaranteed they’ll all be structured differently. Some charge separately for pallet in and pallet out. Some will wrap that up. Some will bundle pallet in with destuffing/devanning/unloading/whatever so that it’s impossible to compare apples with apples.
3. Culture: This one’s important. The industry runs on tight margins so everyone is price sensitive. Apart from the fact that everyone seems set on a race to the bottom, there is also some bizarre expectation for bartering. The back and forth is so uncommercial because it’s baked in to the pricing. Buyers want to feel like they’ve won so all that happens is sellers just start high. The data shows that this just leads to deal-fatigue and less deals get done, thereby reinforcing the status quo.
Then once you’ve done that your search and negotiated your pricing you need to repeat this process so that you have at least 3 options to make sure you have a fair price.
Poor search + poor pricing = opaque, inefficient market
It’s a tricky industry, but the good news is a online marketplace can address these issues.
Because the process has to be digitised it has to be commoditised. When it becomes commoditised processes are streamlined. There is a set taxonomy that allows customers to compare apples and apples, and there is none of the time consuming back and forth - the price is the price. This means that a transaction can be processed in a fraction of the amount of time as was previously possible and the on-demand model becomes a reality.
There are a load of variations on the model, with more springing up around the world every day, but every on-demand warehousing model must have these three features:
- Online, accessible and scalable for liquidity
- Streamlined process for speedy transactions
- Legally enforceable structure to enable flexible services with no long term commitments
That’s it. The final point to make is that it’s worth noting some things on-demand warehousing is not:
- It’s not on-demand in the sense that you can click and buy on the spot like booking a hotel room.
- It is not AirBnB for warehouses either because no rational buyer would opt to pick and choose a particular warehouse rather than put through a tender process via a marketplace. It is B2B and not B2C therefore less emotional in the decision making.
- It’s not real time. No one wants a warehouse this minute, so ‘on-demand’ means 'whenever required' as opposed to ’now’.
- It’s not just storage. It’s services.
Hopefully that provides some clarity on what on-demand warehousing is.
In the next post we will talk about the pros and cons of on-demand warehousing as a business model.