Scarcity as a Strategic Imperative

Jeff Immelt succeeded Jack Welch as CEO of General Electric on Sept. 7, 2001. His world, and ours, changed dramatically four days later. With a new CEO and a post-Sept.11 world, it was a given that GE’s corporate strategy would change. The only question was, how?

Immelt recently laid out his strategy: GE will invest in four key areas that it predicts will increasingly share the common element of economic scarcity: scarce access to quality healthcare, national and personal security, safe drinking water, and energy resources.

Could we, like GE, use the scarcity principle to predict trends for the logistics industry? What developing areas of economic scarcity will cause major shifts affecting manufacturing, distribution, and supply chain strategies, and related real estate and economic development issues?

As GE believes, if you can accurately identify the areas of scarcity that will develop tomorrow, you can pinpoint the compelling investment opportunities of today.

We’ll apply two of GE’s targeted areas of scarcity—energy and security—to our industry and add a third, prime industrial land.

Energy Scarcity

Increased geo-political turmoil in the Middle East has reduced access to the region’s supply of carbon-based resources, and OPEC’s output has not kept up with the worldwide demand for crude oil, especially in fast-growing economies such as China.

With a number of nations’ economies on the path to recovery or thriving, economic recovery in developed markets, and economic and population growth in developing markets will further increase energy needs over the long term.

Back home, gasoline and diesel prices are hovering around record highs. Further increases could potentially cripple the transportation industry.

Here are the implications to the logistics industry:

  • Rising diesel prices and energy surcharges pushing freight rates up.
  • Shifts from air and truck to slower but more fuel-efficient shipping methods such as rail double-stacking or intermodal combinations.
  • Shifts to manufacturer direct-to-retail or direct-to-customer, bypassing traditional distribution midpoints.

Security Scarcity

The U.S. security situation requires multiple government and trade agencies to deal with new threats, spawning a confusing short-term situation and an alphabet soup of new security-focused government entities.

The DHS (Department of Homeland Security) was created to oversee enforcement activities for borders, waterways, transportation, and immigration. For U.S. ports, DHS’ Port Security Grant Program has authorized nearly $200 million for projects to improve seaports’ dockside and perimeter security.

Also, the U.S. Bureau of Customs and Border Protection has issued rulings requiring disclosure of “actual shipper” name for ocean imports and a manifest filing at least 24 hours before ships leave a foreign port as part of its Container Security Initiative. For global port security concerns, the International Maritime Organization has published an International Ship and Port Facility Code, requiring security plans to be in place to protect vessels, ports, and terminals.

Another branch of the DHS, the Transportation Security Administration (TSA), has begun requiring random inspections of air cargo as part of its Air Cargo Strategic Plan, and pending legislation calls for inspection of every air and sea container that comes into the United States, vs. approximately three percent at present.

On the ground, American Trucking Associations members are being trained by the TSA on its Highway Watch program, an effort to identify and report roadway safety and security situations and link with intelligence and law enforcement agencies to combat terrorism.

Other federal agencies and trade organizations are involved in port and transportation security as well.

The implications to the logistics industry include:

  • Increased need for buffer stock inventory due to concerns about supply chain disruption caused by increased time for goods to pass through security checkpoints and random inspections.
  • Development/deployment of electronic seals and other technologies to improve tracking and tracing.
  • Heightened importance of corporate security and contingency plans, and increased need for trained security personnel in private corporations.
  • Increased use of personal background checks for employee and contractor hiring.

Prime Industrial Land Scarcity

We’ve begun to see land shortages for top logistics/distribution markets, especially near valuable port, airport, and intermodal hubs. That shortage creates a handful of interesting trends in industrial real estate.

Urban brownfield reclamation and progressive redevelopment of existing industrial facilities is increasing, especially in more mature industrial real estate markets such as New Jersey and Chicago, despite lengthy permitting lead times. Even former military bases are in play, such as March Air Force Base in Riverside, Calif., which is being turned into a 16-million-square-foot air cargo development project.

What’s more, industrial/distribution buildings are getting taller. Due to land scarcity, developers have begun experimenting with ultra-high bays and vertical warehousing concepts.

Implications to the logistics industry:

  • Rush to lock up remaining land near airports and seaports.
  • Shifts in port volume, as shippers try to avoid congested ports, as well as those with real or perceived labor union problems.
  • Increased investment in port facilities to reduce congestion, and capital improvements to increase productivity in nearby freight yards.
  • Creative re-development and adaptive re-use of older facilities in prime locations.

Factors such as the RFID deadlines imposed by Wal-Mart and The Department of Defense may cause short-term blips among supply chain and distribution patterns. Yet they may pale in comparison to the slower, but more profound, long-term impact of these emerging areas of scarcity.

How will scarcity affect your company, industry, or career? Think about how you and your company can take advantage of the opportunities that await those first-movers who act on these trends. GE’s shareholders shouldn’t be the only ones to benefit.

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