MARK TRUSCOTT: KwaZulu-Natal riots were a disruptor that may change the SA warehouse of the future

In the aftermath of the unrest that rocked SA in July, third-party logistics providers and fast-moving consumer goods (FMCG) manufacturers are rethinking their approach to risk diversification, which could signal a change to the warehouses of the future.

In the corporate world the catalyst for structural change is often some sort of disruptor or disaster that changes the way we approach doing business. And it doesn’t get much bigger than what SA experienced during the July riots.

With trucks moving between Gauteng and KwaZulu-Natal to restock looted facilities not damaged during the riots, the consequences of not being able to turn inventory around, or losing it completely, became clear — especially as the goods in Gauteng originally came from the same warehouses in KwaZulu-Natal that they were now resupplying. Extensive damage to warehouses in KwaZulu-Natal has significantly limited available logistics space, resulting in retail stores using a portion of their floor space to carry stock, at least temporarily, making it the most expensive storage space in the country.

From a food security point of view, the vulnerability of super distribution centres became clear, highlighted by the fact that all three large national retail chain stores make use of super distribution centres, some spanning the equivalent of 15 to 20 rugby pitches. Notwithstanding contingency measures and mitigating factors that existed before July, the loss of one or more of those facilities could have serious and long-term consequences on food security, economic and social stability.

Damage to or total loss of infrastructure is not limited to physical acts of destruction such as looting, civil unrest or natural occurrences such as flooding or hurricanes, but could be cyber-related as well. An Interpol assessment of the impact of Covid-19 on cybercrime has shown a significant target shift from individuals and small businesses to major corporations, governments and critical infrastructure.

With organisations and businesses rapidly deploying remote systems and networks to support staff working from home, criminals are also taking advantage of increased security vulnerabilities to steal data, generate profits and cause disruption. The recent cyber attack on Transnet, which immobilised the country’s busiest ports, is a case in point.

What the past few weeks have taught us is that what was previously thought to be impossible has rapidly become not only conceivable but probable. Despite the presence of force majeure clauses in most supply contracts, the reality is that to maintain food security and social stability goods must still be shipped from somewhere and stored in a safe facility. Food security depends on a solid disaster management plan with significant emphasis on risk diversification.

A robust, diversified disaster management plan is not only applicable to the big retailers but can be extrapolated to any third-party logistics provider, including those with contracts to distribute basic foodstuff and commodities such as bread, toilet paper and washing powder.

It stands to reason, that after the effect of recent events on insurance underwriters,  they will be less likely to insure an entire facility in future — especially the concentration risk associated with super distribution centres. Retailers and other companies have limited options in this regard: they can diversify floor space, insure with multiple insurance providers, which is costly, or consider a split distribution centre model.

Large retailers must lead the charge in diversifying their supply chain infrastructure. A larger footprint of smaller distribution facilities located near major urban centres not only optimises last-mile delivery of FMCG items but diversifies risk considerably.

An ideal size for a distribution centre would be about 30,000m². The challenge for retailers, however, is that a diversified footprint will increase the cost of operation because of duplicate infrastructure and resources such as personnel, equipment and services, for which consumers are likely to ultimately pay.

A further structural shift in supply chain risk diversification is the likely relocation from more affordable logistics facilities in outlying areas to strategically located industrial parks with strong, functional park associations and private security. Although location proved to be a risk mitigant during the July riots, moving closer to urban centres provides a challenge for employers as they will now have to subsidise staff to commute much longer distances.

The face of logistics in SA is likely to change after the July riots. Only time will tell how this will be quantified, balancing longer-term potential against a two- or three-week shutdown.

• Truscott is head of leasing and developments at logistics and warehouse developer Improvon.