Blog postsJanuary 22, 2019
Q&A at 2018 CSCMP: Cargo Systems, Inc., Walmart, Woodfield Distribution, and FLEXE
Part two of our 2018 CSCMP EDGE panel, "Modernizing eCommerce Logistics: From Start-Ups to the Fortune 1000."
In early October, 2,000+ logistics and supply chain executives gathered at the Gaylord Opryland Convention Center in Nashville, Tennessee for the annual Council of Supply Chain Management Professionals (CSCMP) EDGE Conference. While there, we presented at 2018 CSCMP on "Modernizing eCommerce Logistics: From Start-Ups to the Fortune 1000." Below is the Q&A portion of the panel. You can access the video here.
- FLEXE differs from traditional 3PLs and the types of providers in FLEXE's 1000+ warehouse network
- The benefits of using on-demand warehousing for inventory overflow and DTC fulfillment
- Hear from Cargo, Walmart, and Woodfield Distribution on how costing works with FLEXE
- How implementation works when starting a project with FLEXE and the ways in which projects are operated
- Why companies spanning from Cargo, as a high-growth digital native, to Walmart, one of the biggest retailers in the world, rely on FLEXE and see it as a strategic advantage
Moderator: Dr. Dale Rogers, ASU
- Stuart Clark, Co-Founder and Head of Software and Operations, Cargo Systems, Inc
- Larry Hotz, Director of Marketing, Woodfield Distribution
- Justin Schuhardt, Senior Director, Supply Chain M&A, Walmart
- Karl Siebrecht, Co-Founder & CEO, FLEXE
All right, we're going to open it up to the audience for questions.
I’m Lang Williams with CBRE Commercial Real Estate. Can you explain the difference between FLEXE and traditional 3PLs that are offering similar warehousing options across the country? And is it FLEXE that leases and operates the warehouse or are you finding other providers in those markets that can partner with your customers?
It's more like the latter. FLEXE's warehouse partners are mostly 3PLs. Some of them are first-party operators. FLEXE brings customers and software to the table. We help customers with inventory management, order management, etc. And the software for our warehouse providers, mostly three 3PLs, is WMS. Our suppliers provide space, labor, MHE, depending on the scope of the project. Our role in the equation is to help do the matchmaking. We understand the scope of the customer's needs, and as Justin talked about a little bit, we can syndicate that out to our marketplace. We now have over a thousand different warehouses in the U.S. and Canada.
Which is about double the largest warehouse provider in the U.S., right?
Yes. Not all those facilities are the right match for Cargo's needs as an example, but some of them are. And not all of those facilities have the right capacity in the right place, but some of them do. Again, we work with the operator so there's not a sublease concept. It's pay for the services as you go—effectively costs per unit handling inbound, costs-per-unit storage and costs-per-unit handling outbound at the basic level.
If you think about the LA marketplace, it's 98% occupied. But within that 98% occupancy rate, there are facilities that are not at 100% capacity. One of the cool things about this, as part of the FLEXE portfolio of facilities, is there's probably space where it seems like there's not really space. So maybe somebody leased 600,000 square feet but they're only using 300,000. There’s now an opportunity to utilize the remaining 300,000 square feet.
FLEXE is a smart platform—it's not just a simple matchmaking process. It provides WMS capability. And so the folks that are in the facility are operating the software and using it on behalf the customer to run the projects. FLEXE is a way to penetrate seemingly full markets.
I have a couple of questions. First, how does your costs ultimately compare when working with something like FLEXE to signing a long-term contract? Secondly, for unique solutions, I'm just thinking of like a stationary bike, like a Peloton bike which requires kind of unique assembly, and then delivery, and then communication with the customer, for example, how do you manage getting that provider up-to-speed with that type of training?
When we were looking at facilities, I went into RFP mode and I found six warehousing partners. I rated them across the various aspects of their performance and one of them was cost. For us, everything being variable was very important. Cargo's business, when we were looking for partners, was rather small. If some facility is going to try and charge me X-amount of hundreds of dollars for a client manager, or someone like that, there wasn't anything really to manage. At the time, we were too small.
Variability was very important to us. We're also satisfied with the rates that we pay. And frankly, FLEXE does a lot more for us than just fulfillment. We have a guy on the FLEXE team that is our main liaison, and I actually see him as an extension of the Cargo team.
Just to add to that. Clearly, there's sort of sausage making that happens behind the scenes that a client like us doesn't see. However, I would say the whole concept is novel, right? You're bringing efficiency to where it doesn't exist today for all the reasons that Dale and Karl talked about. There's so many operators out there across the country that have this excess capacity, and I'm a huge advocate for tapping into that. I think it's good for the industry to tap into that. It's good for the operators and it's good for the employees that work for them.
Giving a warehouse operator the opportunity to keep more of their people employed more of the time is good. You think about that and then you also think, “Am I paying a premium for this short-term?” Yeah, I probably am paying somewhat of a premium, but it's short-term. I'm not committed to that during my off-peak seasons. So there are some gives and takes, but by and large I find that, because of our efficiency, the pricing is very competitive and compelling to clients like us.
From the point of view of one of the warehouses, we have a very good relationship with Adrian and FLEXE and we see them as partners. When a proposal goes out, it's after a thorough investigation based on the parameters and the scope of the project. It goes out like any other RFP we would send out to any pharmaceutical company. It's rolled into our normal operations. And, in fact, there are advantages to the entire process because with the volume of shipping that we do around the country, sometimes the shipping rates that we have with our vendors are more favorable than the client would get by themselves. So, there are several different levels of efficiency that can be achieved while keeping people working.
So on your question about kind of customized sort of handling requirements, that like a Peloton bike, I would say two thoughts on that. First, there is a lot of diversity within the network—pharmaceuticals is one example because there are very strict requirements. There are partners in the FLEXE network that specialize in certain sub-segments of the market. Stuart mentioned frozen as another example.
Second, in general, if a process is very customized and requires some capital investment in order to get any sort of baseline efficiencies, then it may just be the case that FLEXE is a bad model for that, right? Getting a lease and a long-term commitment where you can spend the capital required to get the efficiency of scale, that's the right answer. There are use cases that are a great fit for the FLEXE model and there are others that are just not a good fit. And where the rubber meets the road is what is the scope of the client's need and a big part of our service that we provide is that matching stage. If a scope is not compatible with our model, they'll find a different solution.
Brian Kelly, Corporate Realty Advisors. We certainly deal with a lot of clients that have seasonal requirements. How do you match customer needs and their expectations? Help us understand how you bridge that gap.
At Walmart, we do have quite a few firewalls in the requirements. But, our relationship just adapted to the circumstances over time. I think of the technology interface as more of like a middleware. Walmart had our own operating systems and we plugged into the FLEXE middleware, FLEXE middleware plugged into whatever organic WMS or systems that that operator was using. That was year one.
It went very successfully in year one and then we wanted to take that to the next level because we wanted to have more direct access to speed the communication back and forth. They developed new technology so it was more of direct inputs into the warehouse. And that helped, even more, to spread the information, which resulted in higher levels of service for us.
As far as the other requirements, I'd say that they understand their operators quite well. And I don't know how you'd survey them and how they necessarily make the right matching process. But the sales development team that we worked with had a really strong understanding of which operators were good at what. We ship by the units for eCommerce and they happen to know other operators that were doing a very similar type business as us that just happened to have capacity. So it just worked out really well.
Of FLEXE’s 1000+ providers in U.S. and Canada, what percentage are 3PL warehousing providers versus 1PLs?
Probably 80% 3PL, third-party operators is the business they're in serving multiple clients. And probably 20-25% first-party operators. There's a big range of types of providers. We work with some of the largest global 3PLs out there. We work with multi-regional providers. And then some that are in one geo—they usually have a couple of facilities.
Most of our clients are fairly large and even if they're not large, they're quite sophisticated. We typically don't source mom-and-pop providers. When we go out and qualify folks to join our network, we want to make sure that they have experience serving the types of clients who we serve so that we know we're building a baseline of partners who meet the foundational requirements of our customers.
Can you give us an outlook of what capacities are right now in terms of warehouse space? What is it today and where do you see it going over the next three-to-five years?
We started this business about five years ago and one of the very first things we did was to figure out how much capacity is really out there. When you look at it from a real estate perspective, a lot of great companies, like CBRE, will publish research about space available by market over time. But then we went out and did a survey and we asked thousands of businesses that operate warehouses, including 3PLs, ‘Hey, how much underutilized capacity do you have?’ And then we would ask, ‘What are the drivers of that? If you have underutilized capacity, why is that? Because wouldn't you want it fully-utilized?’
And the answer, we've done this, I think four years now, is between 20% and 30% of warehousing space out there is not utilized at any given point in time. And that varies by season. You know, if you're in a market where there's a lot of eCommerce fulfillment and a lot of retail, things get more full in Q4. Some markets are hotter than other markets, but 20% to 30% is where it's been. And, you know, it goes back to that structural issue. You sign a long-term lease and then if you're seasonal, you've got a big part of the year where your facility is not used.
One factor contributing to underutilized capacity is that businesses haven't grown into the capacity that they were planning for when they signed that multi-year lease. If you have a forecast and your business is expected to grow 20% year over year and you need to sign a five-year lease, in order to have enough capacity at the end of year five, mathematically, you're going to be utilizing less than 50% of that capacity in year one. That's just the way the math works. And when you multiply that same dynamic across hundreds and thousands of companies, you really get a sense of the magnitude.
There's 19 billion square feet of commercial warehouse space in the U.S. and 20% to 30% of that is underutilized at any given time. And there's a massive amount of infrastructure ready to be tapped into. It's there but how do we make it easy? How do we actually make it accessible operationally? How can we ensure that we can get in and get to work quickly, that the quality's there, all these things that are nontrivial but ultimately solvable?
I imagine not every implementation has gone 100% perfectly or smoothly from the outset. Could you describe some of the pain points, and how they've been addressed with new clients that you're bringing onboard?
Okay, this is a real case study. One of the challenges that we experienced was having our warehouse technicians adapt to the software. We have very sophisticated systems that we handled internally in terms of reporting and data and location. And it was a temporary challenge to add that layer for FLEXE to make sure that everything was reporting correctly. There was a blip there. We overcame it. And once those SOPs were written and training was established, it's been running very smoothly since. But at the beginning, that was a hurdle that we had to overcome.
The good news is I don't really have too much to speak on regarding pain points. But there are two things about Cargo's operation that is somewhat unique. It’s a somewhat rare ask to have a facility that wants to do kitting operations and is ready and has people that can manage them. That was one of the things that we prioritized when we were looking for facilities. I actually misprioritized that because the majority of our operation is actually in the replenishment, but that was one of the things that I thought was going to be important. Sure enough, we got a facility that could. FLEXE took me to the facility and they were already doing exactly what I needed them to do. So that was an easy decision.
Second interesting constraint for Cargo—we have food compliance requirements because a lot of the goods that we sell in the car are consumable. So, if a facility was not able to carry food, we obviously couldn't fulfill out of it. But those are just a couple areas where we leaned on the FLEXE network and were able to get solid facilities out of it.
To me, the biggest thing when you're evaluating a partnership is the commitment of the other party, right? Everything is not going to go to plan all the time. And that's the case with almost everything that we work on and it's no different with the relationship that we had with FLEXE. Like Mike Tyson said, ‘Everyone's got a plan until they get punched in the face.’ We haven't had anything that extreme and it's been very good to partner with the team because at every turn when a challenge came up, we got calls going and we got the issue resolved.
That's the hallmark of a good relationship. When you're faced with any adversity, no matter how small, that you work together and get through it. I've been happy with the solutions that we've come up with and the reaction in changes to plan that we've had to make. The hardest part that I've had that to deal with was just getting things off the ground and running, and getting the contracts going. Having more parties involved means it's a little more difficult on the front end to agree on all the things that need to be agreed to. That's really the only thing and that's not a showstopper by any means. We’ve been happy with the partnership so far.
How does contracting work, does it depend on the facilities you use or does FLEXE provide a contracting model?
There are three parties involved in the contracting model. There's the provider of services, there's the customer, and there's FLEXE who is also a provider of services, namely the technology as well as some service components. There are many, many areas where we continue to innovate and I don’t think we're going to be done for decades.
Our contracting model is one of those two. At its essence, we've got a standard form where each party, the client and the provider, have a starting place and that starting place is actually based on IWLA’s standard term contract. It is meant to be sort of very neutral between buyer and provider.
Different customers have unique requirements and so you go through the process of accommodating whatever the unique needs may be on top of that standard form. And that's where some of the complexity comes in, some of which can be mitigated even further but it won't all ever go away. But, again, part of the value is you go through that process once and then you've got access to multiple providers. Same with the technology, you integrate the technology once, and then you've got access, from a technology perspective, to a thousand different locations. You don't have to go integrate with any additional locations after that first time.
When you guys have issues with your distribution, are you calling FLEXE or are you calling the 3PL?
We go directly to FLEXE. Now, there may be some extenuating circumstances where we would work with the operator, but not without FLEXE. It's an interestingly transparent relationship that I see. It's not so rigid that every single thing I have to ask FLEXE to go ask the operator. It's not that rigid, but it's very transparent, flows very good and I wouldn't call it an encumbrance at all. It's worked pretty well.
That's great to hear. We view ourselves as a throat to choke. And we hold ourselves to that standard and we want to see ourselves as an extension of our client's team. We recognize that as a big need for the client. If we don't provide that, then the solution has a big hole in it. At the same time, we try to add value to the warehouse partner. That takes the form of when we're implementing new clients, making sure that the warehouse partners understand the SOPs, the unique client requirements. We'll often go onsite and help with the training because, particularly for clients that have multiple locations, we understand the operation and can go help train the locations because we've seen it once or twice already.
Of course, the SOPs and the operations are all tethered to the technology which is FLEXE technology in that given facility. There's a training component there that we take very seriously. Fundamentally, we think of this as a technology software platform business, but we recognize that that doesn't actually work without a layer of service on top because there are edge cases, there are problems that come up. And those need to be handled by trained, experienced people.
To go back to your point on working through some of those pain points, either with a new customer or some of the SOPs and some of the training that you had to do with your own staff, can you help us understand when does it really start making sense for some of these companies to look at an opportunity to tap FLEXE? As an example, if I knew of some companies that had excess space on an ongoing basis or different peak seasonality throughout the year, what is it? When is there gonna be enough scale for it to make sense for them to invest in that technology?
Because I'm assuming there's some startup costs involved. There's, to your point, there's training your staff and getting them familiar with that system and there's a relationship and a bond and assuming the commitment to a certain degree in terms of what you're trying to set up that really there's gotta be some payback at some point before all that effort really is fully seen in terms of any kind of payback to the company.
First of all, the commercial model is we don't charge a fee of any sort to our warehouse partners. It's free to sign up. It's free to be a part of the FLEXE marketplace, and you set your pricing wherever you wanna set your pricing.
The value we provide is we bring clients—our warehouse partners’ customer acquisition cost is zero. And then we provide the software which is the WMS layer. And that's also free. We've had the luxury in a sense to be able to start with a clean sheet of paper and build WMS that is built just for the use cases that we serve, which are not all the use cases.
And there are great WMS platforms out there, some of them are incredibly robust and serve every edge case you might be able to imagine, but what comes with that typically is a long setup time and a lot of training requirements. We're not built for that, we're built for the use cases that we specifically serve.
One of the benefits of that is the learning curve to get up to speed in the warehouse on the WMS is very, very short compared to other systems that may require weeks and weeks of training. From a payback perspective, Larry's chart was pretty good where you get the space and then you can start receiving product in that second month. Warehouse operators can be trained up in a matter of a day or even hours depending on the complexity of the actual work. The payback can start pretty quickly.
I would say that the economics are changing rapidly. It may be a simple calculation in terms of what your ongoing costs are gonna be to warehouse in this manner. And if you determine that it's gonna be cheaper to invest the capital to do it yourself, and I guess that's the point, you do that.
From my experience, in terms of virtual companies or virtual pharmaceutical companies which are a relatively new model than a conventional manufacturer, there's one office and they may have 20 different molecules that they're developing at different stages and everything is outsourced. That is their model. It's not a matter of when are we going to hit the threshold where it makes sense for us to become a traditional manufacturer with all of those expenses. They don't do that, that's not their model, that never will be their model. I don't think that it's a calculation that every company that works with FLEXE imagines themselves at one day to leave it. I think that the way that a business is working today, that's probably less of a norm than it was yesterday and will be less of a norm tomorrow than it is today.
Hello, my name is Juan Castillo from UT Arlington. My question is how much time did it take for this partnership to work—to get up and running in each case? Let's say we want to work with FLEXE in Texas. How much time does it usually take from contract signing to shipping.?
Most of the heavy lifting was done. All the requirements are fleshed out and it's just about you signing the contract and your POs start to show up at your door. In some cases, you may have done some testing—we did to make sure that you can receive the right information we’ve sent, whether it’s bills of lading or EDI or APIs, that’s all been done and ready to go. So, after the contract's signed, it's a matter of weeks, or even the next day in some cases.
I can't actually recall how long it took us, but I think if I did remember that would mean it was probably a bad thing. Since I don’t, I think it was a good thing. It was fairly quick and like I said, when you do these sorts of projects, often the warehouse integration can be a big piece of it, but in this case, I was able to take care of that really quickly.
The training aspect of it is very simple. I packed some orders under the FLEXE system myself and I learned in minutes. So, I think you do a lot of the heavy lifting upfront and then once you sign, you can pretty much get going. Our turnaround was fairly quick.
From our point of view, we're experienced in what we're doing. We understand the nuances of agreements. And if there's one thing that we understand, it's getting medications to patients which is immediate. So, we have the space and if the project makes sense, once the agreement is signed, we're ready right then. And that's our model.
So you can kinda think of, you know, we were talking about a portfolio of warehouses types at the very beginning. And the part of the value of this particular part of the portfolio is that it's very quick startup. If you had 18 months to build your own facility and invest that capital for some reason, okay, that's one thing. But this is a very low investment. It's not your own asset and it should be a quick startup and also quick shut down if you need it to shut down.
The idea is that this is a part of your portfolio of distribution centers that is more flexible and more agile, much more responsive. Walmart has capital to build a jillion facilities. They did already, but some of those facilities aren't necessarily as agile and flexible as they needed. FLEXE helps fill in that need.
So, I have two questions. The first is for FLEXE, it seems Cargo kinda moved in and this is gonna be your home. And Walmart, you're using it more for the peak season, temporary needs. How much of your clients do you think fall on both sides? And then for Walmart, do you anticipate that you would come back to this every season and sort of enter and exit the relationship with FLEXE throughout the year as needed?
So to your first question, I'd say it's about half and half. Half of our clients are a high-growth eCommerce, digitally native companies, so to speak, like Cargo. And for most of those clients, we are their distribution network and so they add nodes and they add capacity as they grow. And they may pop up facilities for their own seasonal peak or for maybe a product promotion; for example, they want a faster delivery promise for a certain promotion, so they may add nodes for that, that then will come offline after the promotional period. But there's just a continual flow.
The other half of our clients work with us in more, what I'll call episodic ways. And many of these companies are very, very large. And so, they have many episodes, and many needs throughout the year and so those tend to stack on top of each other.
And then one of the things that we're starting to see here is that there's an evolution after we've worked with companies for a while where we start to shift from what initially starts as a reactive need. Like, "Oh my gosh, I need space, I need it quickly." We're calling everybody we can think of and somebody had heard of FLEXE and they call us. Very reactive.
Over time, after sort of being a solution to those reactive needs, we start to see the planning teams get more involved to sort of take a step back and say, "Okay, how can we think about this solution for next year's plan and we take a three-year view?" And what are the use cases for which this might be a better model for something that we know is going to keep happening and start to, from a supply chain planning or a network planning perspective, take that into account as you think about your three- to five-year network plan. How can this model fit into that?
And to address the second part of your question, last year was very opportunistic for us. We needed some space. We got partnered up with FLEXE. It sounded like a great idea but with an eye to the future, we knew that with just the eCommerce industry in general comping at 20% to 25% a year, and our growth wasn't gonna be so different than that. There's going to be a long-term need there. So let's get through year one, prove that the model works, identify any opportunities for improvement, and see if FLEXE wants to work with us on those opportunities for improvement.
Now we're starting to think about it more long-term. I can see that we'll have a model like this indefinitely—as long as the eCommerce industry keeps comping the way it is. It's tough to build enough buildings to meet the demand that's out there. Part of the attractiveness of this business model is for the operators too, they get to concentrate on doing the business they want to do. And when you're constantly opening new buildings, it's just such an administrative burden for a short period of time to have to hire people just for the season. It’s really, really difficult. We'd much rather concentrate on our core competencies than have to dedicate and over-index on the other resources.
Great. Let's thank Dale, Karl, and rest of the team for a great panel discussion. Thank you. It was great conversation and it was really interesting to hear the different dynamics of each of these three companies and some of the challenges they're facing, which I'm sure many of us here resemble. Have a great rest of the conference, good rest of the day, and enjoy your evening.