Warehouse risks in an age of e-commerce

Over the last year the Nasdaq stock price of Amazon has grown by almost 75% - a figure that would have been almost unimaginable at the beginning of 2020, before the COVID-19 pandemic changed everything.However, Amazon is far from being the only successful story in the e-commerce sector.

In the UK, these changes in behaviour have pushed online shopping and e-commerce to record levels, while simultaneously suppliers have also been forced to revaluate supply chains as Just-in-Time models began to suffer disruption as the flow of goods around the world was interrupted.

All of these changes in behaviour from consumers and from businesses has had a clear knock-on impact on the logistics and warehousing sectors, as demand has significantly grown.

Figures from the real estate firm JLL, indicated that over 35.8 million square feet of “Grade A logistics” space was taken up in 2020, up 64% on 2019. E-commerce was responsible for nearly half of this total, driven in part by the need for warehouses to be located closer to customers in order to meet expectations around delivery speed and to minimise disruption – not only from COVID-19 but also from wider supply chain issues such as trade tensions and legislative changes.

As a result of this massive increase in demand for space, a shortage in supply of suitable warehousing facilities is a real possibility; the vacancy rate of modern logistics space now standing at only 7%, which includes facilities under construction.

While this surge in demand is great news for those companies operating and building warehouses, it does create some issues for those looking to make use of the facilities, as they may be left having to choose facilities which rely on sub-standard or inappropriate levels of risk protection.

This is particularly true for those organisations having to look at leased facilities, where a third party is responsible for infrastructure and where other tenants and their goods may be present.

For organisations all over the world, it’s vital that they identify where risk mitigation might be lacking and then take actions to build resilience and protect their products, particularly as demand is expected to rebound over coming months.

So what hazards could businesses and their warehouse facilities face?

Fire is one of the most damaging risks that a warehouse can face

Fire-risk is one hazard that could be exacerbated by inadequate risk protection within a warehousing and logistics facility. While the cause of a fire can vary, ranging from arson or hot-work to equipment failure or human factors such as on-site employees smoking for instance, the damage that fires can cause should not be underestimated.

According to FM Global’s statistics, fire was the second most impactful and fourth most frequent cause of a loss between 2016-20 to affect the warehousing sector, causing almost $440m of damage across 271 incidents.

We’ve seen plenty of examples in the UK and also around the world in recent years, resulting in facilities being burnt to the ground and goods going up in smoke – often causing serious material harm to the businesses using those warehouses.

Climate hazards are a threat as well

Outside of fire-risk, hazards such as storms and flooding can also have a significant impact, especially as some experts claim climate change causes either an increase in frequency or intensity of certain hazards. With warehouse space in such demand, businesses might be forced to use facilities where such risks are likely, leaving them more exposed to losses.

While the average storm or flooding loss is not as damaging to warehouses as fires (causing an average of $930,653 and $826,214 of damage per incident respectively, according to FM Global data), storms are becoming more frequent.

Businesses must consider the threat of the high winds, heavy rains, dirty flood waters that storms can bring, or risk seeing goods, profitability, and reputation with customers damaged.

Proven risk management concepts are always valid

No matter the threat that a warehouse might face, proven risk management concepts will always remain valid. These strategies will be even more important given the growing economic importance of the warehousing and logistics sectors, and where possible warehouse users should be following best practice.

With regards to fire risk management, the 200 year history and success of sprinkler systems highlights why these systems should almost always be considered when building resilience. 

According to the Business Sprinkler Alliance, 96% of fires in sprinkler-protected buildings are controlled or extinguished by the system, protecting goods and facilities from becoming little more than a pile of ash.

These systems should be used in combination with smoke alarms and good working practices (like banning smoking on-site and refraining from conducting hot work and electrical maintenance unless absolutely necessary), backed up by regular training to make sure staff are aware of protocols and correct processes, should a fire occur.

If these measures are followed in combination with a continual review of how the facility is being used to manage changes in exposure, a high-level of property protection can be ensured.

For climate hazards, physical measures that can keep wind and water out of a warehouse are both vital and effective. After taking steps to review exposures by assessing local flood and windstorm maps, actions such as checking that the building envelope, the windows, doors, the roof, can withstand the high winds that a storm can bring are key. For flooding, ensuring that flood barriers are in place to prevent floodwaters from entering the warehouse is also vital.

Coupling these physical protections with adequate business continuity and emergency response plans, updated to account for changes to working and operational patterns as a result of the pandemic is also important.

Only when these adaptions have been made, can warehouse operators and users can be confident that property and their goods will be appropriately protected, preserving reputation, market share and profitability.

As parts of the world begin to reopen economies and restrictions on individuals lift, it is important to remember that trends which have been exaggerated by the pandemic, such as the rising demand for e-commerce, are likely here to stay.

With the expectation that the need for large-scale warehousing and logistics space is only going to increase, organisations need to remain on top of protecting their property and their products. Taking adequate precautions can give businesses a competitive advantage, protecting their operational ability, profitability and reputation over both the short and long-term.

Russ Kirby, is vice president, operations engineering manager for London Operations at FM Global.