Four questions to determine if automation is a sound investment
By: Brian Bowers, Corporate COO and Business Unit President at Visible Supply Chain Management
As eCommerce volumes explode, many logistics and parcel companies look to automation and robotics as the solution and the next-big-thing. Many factors, such as labor shortages, wage increases, competitive pressures, falling profit margins, sustainability and increasing expectations from eCommerce consumers, have resulted in the robust growth of robotics and automation in logistics.
According to the International Federation of World Robotics, between 2019 and 2021, it’s estimated that 485,000 units will be sold in total, rising at an 18 percent Compound Annual Growth Rate (CAGR). With the continuing growth in eCommerce, this should come as no surprise to anyone in the logistics world.
Despite the rising use of automation, there is no one-size-fits-all approach. Implementing automation for the sake of automation can be a fatal mistake for nearly all businesses. Without a sufficient revenue stream and profits, companies cannot justify, or in some cases, even survive the cost of automation and robotics in their fulfillment warehouses.
How can your company determine if automation is the right choice? Let’s evaluate this question by answering four questions:
- What is the business model?
For 3PLs that make money on logistics operations alone, every investment of hard-earned cash has to have a return! In the competitive logistics industry, a full payback of a human-free, fully- or mostly automated facility is highly unlikely. Companies leading the automation movement have a different business model – losing substantial amounts of money in shipping and fulfillment annually. They can afford these technological investments because of subsidies from other divisions of the company.
Amazon most aptly illustrates this point – by employing multiple business models that provide the scale required to absorb significant investments in logistics and fulfillment equipment, facilities and networks.
Unless you have the scale and multiple revenue streams external to logistics, you have to consider things differently. Amazon’s business model can afford for fulfillment and logistics to be unaccountable for cost-efficiency, while companies that rely on profitable logistics processes cannot. If your business requires logistics to at least break even, tread carefully in deciding to automate.
- What is the job you are trying to accomplish – Does the task justify the costs?
Is your company looking to augment its workforce? Automation may be a good option in stemming labor shortages and structural unemployment. The problem, however, is that companies try to apply automation and robotics too broadly.
In a comprehensive R&D initiative, our company researched all automation and robotics options currently being employed in the fields of logistics and fulfillment. We studied SKU configurations, order volumes and fulfillment complexities and their fit to various technology solutions. We spent time with automation and robotics manufacturers, parsing out the scenarios in which their solutions would be the most effective and efficient. We spent time with companies (both brand owners and 3PLs) utilizing these various technologies and worked with them to discover their return on investment. In many instances, we saw solutions misapplied to the problem. Unfortunately, those are expensive disconnects.
When pressed, implementers will excuse the performance of their installations on a change in the business case or application. While this is usually true, the takeaway is vexing – of course, our business will change, especially in the era of eCommerce! Many of these solutions will never flex with a business and its customers as they evolve. Our studies show, further, that the right automation applied narrowly to a specific problem has the maximum potential for obtaining a return on investment. If you are unclear about the job you are trying to accomplish, or if you are trying to apply a high-cost solution to a low-value problem, you will pay too much for a disappointing performance.
- What is the ROI of automation? How are robotics companies changing this calculus?
In my two decades of industry experience and overseeing tens of millions of eCommerce packages per year— I know the implications of unnecessary automation and robotics, and it’s easy to be deceived by ROI calculators. Companies make mistakes when calculating the ROI projection of an automation investment because they fail to:
- Factor in the long ramp (how long will it take to get to the equipment running at high levels of performance?) and learning curve of the organization (how long will it take employees to learn the new systems?) in utilizing the new equipment.
- Set appropriate expected productivity gains. Optimistic forecasts of equipment performance are too aggressively worked into capital justifications and achieved efficiencies, thus ROI may take longer than an integrator promises. An investment that was initially forecasted to take 18 to 24 months to reach payback might stretch out to 36 and 48 months. Can your company afford those delays?
- A myriad of maintenance costs is overlooked, including the cost of human technicians required to keep the automated machinery running, programmers to fix glitches and further refine interconnection between the automation and company systems. Also, there can be ongoing consulting fees from the implementer or manufacturer.
Many of the robotics providers on the market today have adequately addressed these classic problems. They are built to take a clean handoff from company warehouse management systems (WMS) to eliminate extensive integration programming. Most robotics solutions eliminate the need for conveyance and allow companies to respond to volume spikes. For specific applications, especially pick and pack activities in high-SKU profiles, robotics are very useful. Robotics companies have also priced with a RaaS-type model (Robotics as a Service), where units are contracted on a service agreement and a monthly fee as opposed to up-front capital expenditure. This makes a leap into robotics much more feasible.
However, the major problem when it comes to calculating ROI for robotics still comes down to the optimism of productivity targets and the actual pricing to provide a return. Targets are set using averages, but actual work comes into a facility in surges (Poisson distribution-based modeling instead of Normal distribution). Therefore, theoretical average productivity is never very close to actual productivity because machines and people are sitting idle during portions of the day regardless of the daily averages.
In this way, there is an inherent lack of flexibility to consider in automation. Efficiencies and speeds are capped— machinery can only operate within specific parameters. We work with other companies that have pursued fully automated facilities. One in particular, at maximum productivity, can only fulfill one-third of the orders we fill because of the automation. Our management and employees can maneuver and adjust to the intense peaks and valleys that eCommerce inevitably encounters.
As it relates to the cost of robotics, our finding is that robotics companies are pricing to match, not improve, daily operating costs of facilities. Many of the eCommerce robotics solutions on the market today require multiple robots to support a single human warehouse worker. One robotics provider requires four robots moving through aisles to support one human picking eCommerce apparel orders. At that point, the cost of the automation works out to be exactly the cost of having a full-time employee making market wages. Throw a demand spike or valley into the mix, and suddenly the productivity calculus comes apart. When robotics begins to provide a flexible solution at 15 to 20 percent below the cost of productive, flexible human labor—watch out — the value proposition will become compelling and overcome the other issues discussed above.
- What are the options for competing in today’s eCommerce marketplace?
The purpose of the cautionary tale above is first, to convince professionals to be careful and thoughtful in selecting and deploying automation and robotics, and second, to help professionals see other ways to succeed in the competitive eCommerce space.
How does a small to medium-sized business (SMB) compete with retailers like Walmart and Amazon if the company is not yet ready to invest in robotics? If pursuing fulfillment and logistics in-house, utilize manual processes that create value and then automate those processes. Prove out the value proposition through practice before taking an expensive leap into technology. Utilize optimization techniques to schedule, pick, pack and ship in the most cost-effective ways. For instance, group all like orders in one assembly line to achieve higher-than-automated output. Isolate small bags and boxes. Separate the fulfillment types by “same-day” or “next-day” shipping mandates. Seek outside consulting help when necessary.
Or look for a full-service fulfillment and logistics partner that is up to the task. With full-service fulfillment and logistics, 3PL providers leverage the same facilities to provide multiple clients with world-class methods and technologies—enabling growth for SMBs that don’t otherwise have the necessary resources or infrastructure. The right 3PL partner allows SMBs to compete as if they are a big player, providing industry-best fulfillment, logistics and shipping practices and rates in multiple locations—offering a cost advantage to compete in this free-shipping world.Forces driving the market are evolving retail as we know it—compelling all eCommerce players to adapt quickly. Taking the necessary time to investigate the potential of automation thoroughly can help to determine when – or even if – fulfillment and logistics automation and robotics make sense.
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