The rise of mega distribution centers and the impact on logistical uncertainty

Abstract

Between 1998 and 2005, employment in the U.S. warehousing industry grew at a compound annual growth rate of 22.23%, and the number of establishments increased at compound annual growth rate of 9.48%. Over this same period of time, the price for transportation fuels increased dramatically and became much more volatile. In this paper we examine the microeconomic and macroeconomic forces that have enabled such rapid growth in the warehousing industry. We also analyze structural change through employment and warehouse construction starts data and show that a new breed of warehouse has emerged - the mega distribution center, or mega DC. Mega DCs serve mega markets, which allows them to gain advantage through economies of scale and by employing push-pull supply chain strategies that decrease the uncertainty associated with forecasting market demand. Our geographical analyses suggest that this new breed of mega DC is attracted to locations that optimize access to multiple regional markets (and possibly national markets) at the expense of optimizing access to any single market. On average the length of the final leg of the supply chain becomes longer. Because the last leg must be made by truck — which is the least fuel-efficient mode of transport by far — the location requirements of this new breed of mega DC increase supply chain exposure to the related risks of rising and increasingly volatile fuel prices.