Can Industrial Real Estate Handle The Safety Stock Boom?

U.S. Stockouts

At the height of the COVID-19 pandemic, retailers started to run out of inventory, and manufacturers ran out of raw materials to make more.

As a result, stockouts among U.S. retailers jumped from 14% in 2019 to 35% in May of 2020.

Nearly two years later, many retailers continue struggling to keep goods on the shelves in the face of increased demand.

Many manufacturers still can’t get the essential components they need, such as semiconductors, steel, wood, and much more.

These ongoing inventory shortages have led businesses to reconsider their procurement and inventory management strategies.

What Is Safety Stock? And Why Didn’t Companies Always Do It?

While some organizations may have held some inventory in reserve for emergencies as a best practice, the majority of business leaders around the world have spent decades trying to squeeze every last cent out of operations through Just-in-Time (JIT) production and logistics practices.

Just-in-Time is just what it sounds like - raw materials arrive within mere hours or days of when they are needed on the production line, and goods get produced and shipped out to distributors and retailers just in time to fulfill orders or stock shelves.

By keeping goods on the move or in the sales cycle instead of stored in warehouses, retailers and manufacturers alike could significantly reduce costs associated with holding inventory. So, it’s understandable how JIT got so popular, given that the practice has undoubtedly saved countless billions over the past few decades by helping companies reduce storage costs.

However, the pandemic demonstrated the fragility of Just-in-Time strategies to supply chain leaders around the globe. It has now become clear that extreme Just-in-Time practices pose a critical threat to business continuity in most industries. As a result, companies are looking toward “Just-in-Case” strategies to mitigate the risk of inventory shortages.

With Just-in-Case, a company holds essential inventory in reserve to ensure operational continuity in the event of a supply chain disruption. For a manufacturer, that could be a few weeks of steel or microchips, whereas a retailer might store an extra month of top-selling products.

Of course, the exact amount of buffer stock may vary widely based on forecasting data, storage availability, and numerous other factors. Generally speaking, however, releasing the extra inventory as needed to fill gaps in a disrupted supply chain can help avoid production stops and lost sales.

The Safety Stock Domino Effect

The sudden transition to Just-in-Case inventory strategies has profoundly impacted industrial real estate. With industrial capacity already severely limited, both in the United States and globally, industrial real estate stakeholders must now also find a way to produce enough capacity to accommodate higher held inventory levels among manufacturers, retailers, and distributors.

About Phoenix Logistics

Strategic Real Estate. Applied Technology. Tailored Service. Creativity. Flexibility. These fundamentals reflect everything we do at Phoenix Logistics. We provide specialized support in locating and attaining the correct logistics solutions for every client we serve. Most logistic competitors work to win 3PL contracts, and then attempt to secure the real estate to support it. As an affiliate of giant industrial real estate firm Phoenix Investors, founded by Frank P. Crivello, we can quickly secure real estate solutions across its portfolio or leverage its market and financial strength to quickly source and acquire real estate to meet our client’s needs.