Beyond Digital: The Physical Transformation of Supply Chain Distribution Networks

There are two sides to the supply chain transformation coin: the digital and the physical. While digital transformation has been getting the lion’s share of attention from analysts and technology companies, you cannot overlook the importance of physical transformation — that is, the importance of recognizing that your supply chain and distribution networks, which were originally designed to flow truckloads of products from large distribution centers to stores, are becoming outdated in this new market where speed of delivery and inventory reduction are paramount.

I wrote that over two years ago in “Supply Chain Transformation: Not Just Digital, But Physical Too.” Since then, digital transformation initiatives have continued, with COVID-19 accelerating the journey for many companies. The same is true for the physical transformation of supply chains.

A January 2019 report published by CBRE, the world’s largest commercial real estate services and investment firm, highlights a growing trend in the industry: the conversion of retail real estate into warehouses and fulfillment centers. According to the press release:

CBRE found various types of retail-to-warehouse conversions, including demolition of obsolete malls to be rebuilt as warehouses in Baltimore, Atlanta, Chicago, Detroit and several markets in Ohio. Other retail structures were left standing and repurposed for industrial uses, including a former Toys ‘R’ Us in Milwaukee now occupied by a business that remanufactures transmissions, and Sam’s Club’s conversions of several of its stores to distribution centers.

“These types of conversions were once unthinkable, and now they’re not only happening, they’re gaining traction,” said Adam Mullen, Americas Leader of CBRE’s Industrial & Logistics business. “That industrial uses can overtake what are usually higher-rent uses illustrates the strength of demand for industrial real estate, especially last-mile distribution centers.”

Not surprising, the latest example comes from Amazon. As reported by the Wall Street Journal this week:

Simon Property Group Inc. has been exploring with Amazon the possibility of turning some of the property owner’s anchor department stores [like J.C. Penney and Sears] into Amazon distribution hubs, according to people familiar with the matter. Amazon typically uses these warehouses to store everything from books and sweaters to kitchenware and electronics until delivery to local customers.

The talks reflect the intersection of two trends that predate the pandemic but have been accelerated by it: the decline of malls and the boom in e-commerce.

I’ll just repeat what I said two years ago: Digital supply chain transformation is not enough; companies also have to transform their physical supply chain networks to adequately meet the more demanding challenges and opportunities before them. Physical transformation will be a costly, multi-year process for many companies. But the sooner you bite the bullet and get started, the sooner you’ll be able to remain relevant and competitive.