Demand in emerging markets is soaring
In the world’s emerging markets, demand for contract logistics – the business of engineering supply chains and optimizing warehousing, transportation, distribution and inventory – is growing rapidly.
Market intelligence firm Transport Intelligence (Ti) estimates that the contract logistics market will grow at 6.8 percent per year between now and 2018, driven primarily by expanding demand in emerging markets. This trend is most notable in Asia Pacific, which is set to overtake Europe as the world’s largest contract logistics market. By 2018, Asia Pacific’s contract logistics revenues are expected to approach $100 billion. Other high-growth regions include Africa (11.6 percent CAGR), Asia Pacific (10.7 percent CAGR), Central America (10.2 percent CAGR), and the Middle East (8.6 percent CAGR), Ti says.
There are two parts to this story. First, e-commerce is reshaping demand for industrial real estate in mature markets, driving significant rate increases that in turn are seeing companies offshoring warehousing, storage and other destination supply chain activities. In the United States, for example, industrial rents (75 percent of which go toward warehousing) rose 3.4 percent in the last year and are coming close to pre-crisis 2008 levels, according to The Economist. As a result, there has been a push for contract logistics in emerging markets where industrial space is cheaper. Asia, in particular, has benefitted from the trend as logistics providers increasingly offer solutions like “direct to store” shipments or distribution center bypass models that get goods to market without an expensive intermediate stop in the mature, high-rent country where they are to be sold.
Agility’s flagship facility in Dubai has allowed major pharma, retail, and auto customers to consolidate dozens of national distribution centers into one regional facility.
The second driver is the explosive growth in consumer demand in emerging markets themselves. It has been powered by increases in population, size of the middle class, spending power, and urbanization rates, along with steady progress in health, education and poverty reduction. Of note has been dynamism in the economies of ASEAN, GCC and Sub-Saharan African countries, and growth in the economies of Indonesia, Nigeria, Bangladesh, Mexico and Pakistan. Consumer demand has fed the need for upgraded warehousing, transportation, systems and supply chain expertise in those countries as they shift to higher-value exports and pivot to meet the demands of the new consuming class at home. What does this mean?
Demand for infrastructure, value-added services
The nature of contract logistics in emerging markets is being redefined. As markets such as China, India, Indonesia and Nigeria continue to mature, simple structures for storage and rudimentary inventory management are no longer enough. Businesses in industries ranging from retail to technology expect modern industrial infrastructure and facilities, no matter where they operate. Increasingly, they demand value-added services within the four walls of the warehouse – from technology upgrades, to labeling and managing of returns. They also are seeking the same supply chain solutions that allow large multi-national companies to optimize how they run their businesses by enhancing reliability and cost effectiveness. “We clearly see this changing dynamic play out in our business,” says Tarek Sultan, Agility CEO.
- In the Middle East, Agility has been able to consolidate costly national distribution centers of customers in pharma, retail and automotive into a more efficient regional distribution hub at Agility’s flagship Dubai facility.
- In Asia, Agility built the largest polymers mega-hub in China, constructing it to world-class specs with an intense focus on Health Safety & Environmental standards.
- In Africa, Agility is building 70 sophisticated distribution parks for FMCG, life sciences, and oil and gas customers.
“The very definition of contract logistics in emerging markets has shifted dramatically. Companies like ours are reshaping what it means to do contract logistics in Asia, the Middle East and Africa,” Sultan says.
Home-grown SMEs are leveraging systems to grow
Small and medium-sized local companies based in emerging markets are also beginning to take advantage of supply chain management tools and techniques once available only to multi-nationals and regional giants. In the past, especially in the Middle East and Asia, local companies tended to manage their warehousing and distribution in-house. That is rapidly changing, says Morten Damgaard, CEO Agility Southeast Asia.
One of Agility’s customers in Malaysia is a local retail company that grew from two stores to more than 100 in just two years.
“In Indonesia, we work with the biggest multi-brand sports retailer in the country. They have close to 2,000 stores in 65 cities. They aren’t a mom-and-pop, they’re a highly sophisticated supply chain customer,” he says. “We offer warehousing and domestic distribution for their products, including from their e-commerce sales, as well as value-added services like labeling and tagging. More than 1,000 orders and 110,000 pieces of throughput volume are processed every single day.”
Damgaard says homegrown companies across Asia are looking for answers. “One of our most interesting customers in Malaysia is a local retail company that grew from two stores to more than 100 over the course of just two years. They use our inventory management systems via an online portal to increase reliability and reduce costs. That was a major factor in their tremendous growth.”
Beyond track and trace
A third factor driving contract logistics demand in emerging markets is the critical role of technology investment. There is a demand for greater visibility across the entire supply chain. Customers that once looked only for simple track and trace capability are today looking for business intelligence and analytical tools that help them manage day-to-day flows of goods and identify areas in their supply chains where they can wring out cost.
“Customers are looking for providers with horsepower and confidence in this area,” says Colin Mewburn-Mercer, VP/Global for Agility’s Integrated Supply Chain Solutions. “One size does not fit all, and an agile offering in IT is essential. Customers are frequently concerned that deploying IT processes can take months and that the process is vulnerable to mission drift.”
One size does not fit all, and an agile offering in IT is essential.
Agility offers customers the ability to integrate with their Enterprise Resource Planning system (ERP). For larger customers with more sophisticated needs, Agility is also able to integrate with vendors, clients and third parties via Electronic Data Interchange (EDI) or web services.
Agility customers have access to a web-based customer portal that offers configurable reports, online shipment booking, and management of documents, exceptions, vendors, and stock and inventory.
The advantages are clear: 100 percent elimination of manual rekeying, improvements in data quality, and the ability to allow venders to directly submit – and take accountability for – their information online.
“It comes down to fundamentals: drive efficiency, reduce process cycle times, improve reliability and performance, and empower customers,” Mewburn-Mercer says. “Now customers in emerging markets want the same thing the big MNCs have been getting.”
E-commerce, nearly 7 percent of all sales in the United States, is creating demand for warehousing space. Rents and property values for this space are increasing rapidly. Many companies, particularly those producing in Asia, are looking to ship goods direct to stores to avoid the expense of consolidation, fulfillment and distribution in the United States.