With interest rates lower than they have ever been, there have to be some impacts upon the structure of supply chains. The first thing that comes to mind is the reduction in inventory costs. Firms are undoubtedly tempted to hold more inventory where possible in order to fulfill customer demands more rapidly. But another possible impact could be occurring; the increasing tendency to centralize facilities in response to low costs of capital. As the costs of capital have decreased, it makes more and more sense for firms to invest in large, complex facilities that are highly automated. But this has resulted in the closure of smaller facilities that offer some redundancy within supply chains as well as offering a smaller carbon footprint, as inbound freight is generally less energy intensive than outbound freight to retail locations.
So will centralized facilities make sense in the near future? There are two looming issues that could make these facilities less cost-effective. First, interest rates literally have nowhere to go but up. Inventory costs as well as the cost of all those automated systems will rise as this happens. Secondly, centralized facilities are more vulnerable to fuel price increases as their outbound movements are longer.
The trend of centralizing facilities has been happening over the past few years in Canadian supply chains, for example in the grocery sector with the construction of Sobey’s new facility in Vaughan[1], as well as their recent announcement of the creation of a similar facility in Quebec[2]. Another example is the consolidation of Canada Bread facility[3]. Now, there are of course other reasons for consolidation, especially in the food industry when you consider the increasing costs of compliance with health and safety regulations. And, when labour costs are high, then a consolidated facility with more automation and less total workers across the entire supply chain is cost effective.
Further counterpoints must be considered as well. The increased use of technologies and practices such as virtual inventories have been reducing the costs associated with, and amounts of inventories required across supply chains. The increased visibility across supply chains may lead to the outcome of managing more expensive inventories cost-efficiently, mitigating the impacts of higher financing costs. The increased use of technologies is making it possible to use slower, cheaper transportation, which is evident in the rise of domestic intermodal transportation to all time highs, along with harder-to-coordinate supply chains like Ikea’s Direct-to-Store Truckload strategy.
Predicting the future is always fun, because we are almost always wrong. The firms that are consolidating facilities are reducing their costs today because of the low cost of both capital-intensive facilities and high but still affordable transportation costs. The risk exists that a spike in interest rates, along with sustained increases in transportation costs will render the consolidated supply chain strategies incompatible with future cost structures.
[1] “Sobeys Opens Leading-Edge Distribution Centre.” November 10, 2009. Link: http://smr.newswire.ca/en/sobeys/sobeys-opens-leading-edge-distribution-centre.
[2] “Sobeys to open Quebec DC.” January 28, 2011. Link: http://www.canadianmanufacturing.com/distribution-and-transportation/news/sobeys-to-open-quebec-dc-21781.
[3] “Canada Bread to close facility.” January 6, 2011. Link: http://www.canadianmanufacturing.com/food/news/canada-bread-to-close-facility-19836.
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