Frank Crivello of Phoenix Investors on the security stock boom

At the height of the COVID-19 pandemic, retailers began to run out of inventory and manufacturers ran out of raw materials to make more. As a result, stock-outs at US retailers have increased from 14% in 2019 to 35% in May 2020. Nearly two years later, many retailers continue to struggle to keep merchandise on shelves in the face of increased demand. . Many manufacturers still cannot get the essential components they need, such as semiconductors, steel, wood and more. These continuous stockouts have led companies to reconsider their sourcing and inventory management strategies.

While some organizations may have kept inventory in reserve for emergencies as a best practice, the majority of business leaders around the world have spent decades trying to get the most out of their operations through production practices. and just-in-time (JIT) logistics. . Just-in-time is exactly what it sounds like: raw materials arrive just hours or days after they are needed on the production line, and goods are produced and shipped to distributors and retailers just time to fulfill orders or stock shelves. .

By keeping goods moving or in the sales cycle instead of storing them in warehouses, retailers and manufacturers could significantly reduce the costs associated with holding inventory. It is therefore understandable that JIT has become so popular, considering that this practice has undoubtedly saved countless billions over the past decades by helping companies reduce their storage costs.

However, the pandemic has demonstrated the fragility of just-in-time strategies for supply chain leaders around the world. It has now become clear that extreme just-in-time practices pose a critical threat to business continuity in most industries. Therefore, companies are turning to “just in case” strategies to mitigate the risk of out of stock.

With Just-in-Case, a company holds essential inventory on reserve to ensure operational continuity in the event of a supply chain disruption. For a manufacturer, that might be a few weeks worth of steel or microchips, while a retailer might stock an extra month of top-selling products. Of course, the exact amount of buffer stock can vary greatly depending on forecast data, storage availability, and many other factors. Generally speaking, however, releasing the extra inventory needed to fill gaps in a disrupted supply chain can help avoid production stoppages and lost sales.

The sudden shift to Just-in-Case inventory strategies has had a profound impact on industrial real estate. With industrial capacity already very limited, both in the United States and globally, industrial real estate players must now also find a way to produce enough capacity to cope with higher inventory levels at manufacturers, retailers and distributors.

According to Prologis, efforts to build and stock an average 10% safety stock, combined with additional efforts to address existing inventory shortages, could create up to 800 million square feet of future demand in the United States. Meanwhile, vacancy in industrial real estate in the United States fell below 4% for the first time in the fourth quarter of 2021. New industrial inventory is picked up as it becomes available, as evidenced by absorption industrial space of 100 million square feet in the first quarter of 2022.

Safety stock is now joining e-commerce, relocation and supply chain restructuring as a driver of demand for industrial real estate. Even with 375 million square feet of new inventory being developed this year – and various other creative strategies in play to produce usable space – there’s no doubt that industrial real estate demand will remain strong for at least the next few years.

Founded by Frank Crivello in 1994, Milwaukee-based Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation and repositioning of industrial facilities across the States -United.

Comments are closed.