The growing battle for space in logistics

The Dutch province of North Brabant recently decided to temporarily suspend the construction of new large-scale distribution centres in most of its locations, and dozens of counties have imposed similar moratoriums in the USA. In the case of urban distribution, research increasingly shows that vans and other delivery vehicles spend the majority of their time standing still. Meanwhile, the space needed to store containers in and around ports is increasing faster than containers can be processed.

In today’s lengthy supply chains, goods are increasingly stationary rather than in motion. Inventories increased sharply worldwide between 2010 and 2019. When we think of home deliveries, we imagine vehicles driving around. However, they are left idling for much of the time, whereas their drivers cover considerable distances on foot each day.

All those stationary goods take up space: in distribution centres, parking areas, container yards and silos. And that’s not to mention the inventory in stores, which is clearly still on the rise because more stores opened than closed in many countries last year. From a supply chain perspective, we mainly measure the throughput in such locations – expressing it as the inventory turnover rate in days, or the number of container movements per hour.

Not a consideration in supply chain design

A growing share of the total storage space is required in densely populated areas because urban consumers want to receive their online orders quickly, which means that the stock may not be held too far away. However, the amount of space taken up by all these non-moving goods has not been a consideration in supply chain design. For many years, we have assumed that space is more or less unlimited. Discussions such as those now unfolding in the Netherlands and parts of the USA show that we actually do need to factor space into our decisions.

Economic performance

Therefore, I suggest that we start explicitly linking space utilization to economic performance. A good starting point would be to think about productivity per square metre for fixed locations such as distribution centres. Productivity can traditionally be measured as realized value added. Since the formal added value of inventory is often realized elsewhere in the supply chain, however, this should also include the contribution of inventory to added value throughout the chain. After all, stock in an XXL distribution centre or in a city hub ensures faster delivery to consumers and a larger product range. Marketing theory tells us that this means we can also sell more and therefore generate a higher gross margin.

Dynamic use of the available space

To support the dynamic use of the available space in towns and cities, productivity should be calculated per unit of time in addition to the space, i.e. per square metre (or per square foot in American units) per hour. That way, the productivity of vehicles would be assessed based on how much added value they create per unit of time in combination with how much space they require to do so. In that case, a delivery van might prove to be much more productive than a cargo bike, because cargo bikes can carry only around 10% of the number of parcels that a van can – and ten cargo bikes take up more space than one van.

Jan Fransoo, Professor of Operations and Logistics Management at Tilburg School of Economics and Management