The Planets Align for Warehouse Automation

While the global economic downturn over the past few years has put the squeeze on business expansion, several success stories have managed to take shape. One in particular, the strong growth in warehouse automation, continues to flourish due to a convergence of factors that are creating a near perfect environment for both equipment and software providers and their customers.

 

Setting the stage for expansion

The current interest in warehouse automation is being propelled by several overarching drivers, according to Mike Kotecki, senior vice president at Dematic, and they are generating nothing short of a “revival” in the industry, he says.

For starters, the economy is coming back, albeit in spurts, and companies are spending again. However, unlike previous turnarounds in the food and beverage industries that were characterized by a rehiring bonanza, companies are not interested in bringing back excessive headcount.

“There’s a clear trend to apply technology where possible and reduce manual labor,” says Kotecki. In addition, the warehouse automation technology that’s available on the market today allows companies to “leapfrog competitors and improve flexibility,” he says. “If I implement a system that allows me to work with fewer headcount, then I’ll be more flexible as the economy changes and I’ll be more recession proof the next time around.”

Intelligrated’s executive vice president, Greg Cronin, looks at labor from another aspect, primarily from a cost standpoint.

“Baby boomers are retiring, and many of the younger generation aren’t interested in manual labor jobs,” he says. Moreover, an aging workforce coupled with the physical demands associated with warehouse jobs means the medical coverage for staff is also very high. “Many companies are willing to make capital expenditures today that they weren’t willing to make before to try and offset the labor situation,” says Cronin.

Other trends are at work, continues Dematic’s Kotecki. “There’s a good deal of consolidation going on; merger and acquisition activity is up. There is also a move to more regionally-based retail outlets and a surge in small format, neighborhood stores.” This includes smaller stores that are geared to appeal to a specific demographic, he notes. The result is “less on-site storage and a need for more deliveries, all of which cranks up the number of SKUs.”

Intelligrated’s Cronin adds e-commerce to the list of external factors that are fueling growth in warehouse automation. “E-commerce is definitely starting to make a play in the food and beverage industry. And, what it brings is so different. You’re not just shipping pallets and cases anymore, you’re opening up the cases and picking individual pieces.”

This requires an entirely new level of sophistication. “It requires different software and different automation equipment,” says Cronin. For instance, “A lot of the [older generation] WMS systems out there today don’t work well with automation and they don’t really work well in the e-commerce and each-picking world.”

Intelligrated’s response, therefore, “is not only to bring in new physical automation solutions, but increase our capabilities on the software side to be able to handle all of these new requirements on the automation side and the each-picking side.”

In a related development, home delivery is also experiencing a comeback, explains Dematic’s Kotecki.

“There were a number of false starts some years ago,” he says, referring to the Internet-based grocer Webvan. “But, home delivery is growing in popularity, especially in high population areas,” he says, which “presents a whole new set of challenges for the material handling group, including many sub-categories of product and so forth that each need to be available and stored for a long period of time, in some cases, but then must be available in a moment’s notice. Inventory levels are a little higher; visibility is a little lower because it’s instantaneous; and you also need a transportation network that’s phenomenal.”

Meanwhile, new federal regulations related to food security along with consumers’ changing demands are doing their part to drive changes and heighten interest in automation.

“Traceability is a significant external driver,” remarks Pete Hartman, president of Retrotech. He points to last year’s listeria outbreak in cantaloupes as a recent example of the visibility gaps that exist in the supply chain, and which the Food Safety Modernization Act (FSMA) attempt to address. “[Officials] knew it was the melons, but they couldn’t find out where they came from.”

 

A new breed of automation tools

Fortunately, the automation tools being introduced today are better than ever at addressing the challenges brought about by the proliferation of SKUs, longer and more complex supply chains, and traceability requirements, says Hartman.

“The automation market is maturing,” he says, much like the computer industry has over the past few decades. “There was a time when the computer industry was very fragmented,” recalls Hartman. The consumer was very focused on a particular manufacturer and its hardware technology, whether it was IBM, DEC, or Compaq, for instance. “But, if you go into someone’s office today and ask him what kind of computer he has, he may not even know. What he does know, however, is the functionality and capabilities that he enjoys by having a computer and software on his desk. And, that’s similar to what’s happening in the material handling and automation business.”

In other words, “People are becoming more focused on the application driven issues as opposed to the specific equipment or technology,” explains Hartman. “There’s a growth in what we call the ‘systems engineering’ aspect of developing these capabilities within an organization that is much less dependent on hardware. Just like in the computer industry, there is a wide range of providers with very good, very stable, very workable technology.”

Hartman is quick to note, however, that, “Most technologies are just an enabler. Unless the linkage has been made between the technology and the business problem to be solved, you don’t achieve success.”

In fact, one of the biggest challenges for potential buyers “is to understand—and to move past—the glitz of the equipment and be sure that the business problem is being properly addressed,” Hartman emphasizes.

The good news is that more sophisticated modeling and simulation tools are being developed to accurately identify those business problems so that the right automation systems can be implemented, says Hartman.

“We now have simulation tools that actually replicate the physics of a given situation. For example, if something goes wrong and a box falls on the floor, the simulation tools depict that box on the floor, its movement, and the result. We have the ability to see what’s happening in the systems with an incredible degree of accuracy, which in turn gives us greater certainty around the solution to the problem, before we commit to spending big bucks on the equipment.”

For Retrotech, their role is to provide customers with in-depth knowledge to make an informed decision.

“We are not an equipment manufacturer,” says Hartman. “Our value proposition to our customers is that we’ll do the front-end work,” which entails a comprehensive analysis that’s conducted before the equipment is purchased. Then, “Once a decision is made by the customer to proceed with an implementation, we’ll get the equipment from the manufacturer(s), Daifuku or Swisslog, for example. We then incorporate that equipment into the overall system that has been conceived.”

Indeed, Retrotech used three different equipment manufacturers for one system they designed for Cargill. “So, it’s not vendor specific, whereby one vendor can do this and the other can’t, the equipment is largely interchangeable,” explains Hartman. “What isn’t interchangeable is the design of the equipment and its alignment with solving the business process at hand.”

 

Adapting to a changing environment

Perhaps one of the best features of the new generation of warehouse automation is its ability to adapt to changing environments, explains Hartman. “Flexibility around information processing is one example, and that’s having the ability to alter, change, or override the decision rules that are built into the software and control systems to accommodate changing requirements in the marketplace.”

Another example includes “path flexibility,” which Hartman describes as “the ability to take anything, anywhere in your system and put it anywhere else, as opposed to being constrained by a very specific path.”

Although much of the previously installed warehouse automation systems didn’t offer these types of flexibility, “Quite often that existing technology can be upgraded for a reasonable cost,” he adds.

For its part, Dematic has rolled out several solutions designed to address the challenges of today’s marketplace. One is “a buffering system to decouple the inventory pulling activity from the shipping activity,” explains Kotecki.

“For example, let’s say you’re shipping a tremendous amount of SKUs to regional liquor stores. [The goal] is to make sure that when the truck pulls up to the liquor store that there’s a pallet, six cases, a bunch of loose items, and maybe some totes, all in precisely the order that the person in the truck needs them, and that the order is complete and the truck did not spend a lot of time at the dock door at the distribution center. So, I’m going to accumulate that order at the case or tote level in a buffer, called a Multishuttle. It’s a multi-access, high density storage machine for cases and totes that can accumulate an order, not necessarily together physically, but in the system. Then, we electronically ‘push a button’ and out comes everything in exactly the proper sequence for that order, it goes to the dock door exactly when you need it, totally complete, and goes on the truck in reverse order of the deliveries.”

Kotecki says there is also more interest in solutions targeting three common issues—slow moving inventory, automated pallet storage, and removing labor from the distribution center.

“Many people are starting to look at their warehouse and say, ‘Okay, I’m automated, I’ve got all the high speed stuff, but I’ve still got three quarters of my warehouse dedicated to pallets and pallets of sardine-flavored Jello that no one is ever going to use.’”

Dematic’s answer is RapidStore, a modular automated storage and retrieval system (ASRS) for unit loads like pallets. “You can stuff this thing with all of your slow moving inventory and the machine is super fast, it rotates the SKU at the pick-face, which is at floor level, so if the worker is on a pallet jack, he takes one lap around the ASRS and the system is constantly presenting the slow moving stuff needed to fulfill the order.”

And, while it’s admittedly “not sexy,” says Kotecki, “there is a tremendous desire to automate pallet storage. We’re going in to existing facilities that are already pallet racked and rather using a whole bunch of people on fork trucks, we use automated guided vehicles (AGVs), map the system in three-dimensions electronically, then the AGVs perform the task of storage and retrieval in that warehouse.”

Removing labor from the distribution center is another ongoing quest. Dematic’s LaserTrucks+ is a seamlessly integrated, voice-directed and driverless laser guided pallet truck that increases case picking productivity by eliminating non-productive steps.

“The amount of walking is cut down, productivity goes up (by about 20 to 40 percent), and workers aren’t deadheading back and forth to the dock,” explains Kotecki.

 

So, how much does it cost?

Not only is warehouse automation more robust, it’s decidedly more affordable today. And, while larger companies are making sizeable investments, there’s plenty of activity in the mid-level market too, according to Intelligrated’s Cronin, “because they also realize that they need to respond to the various issues in the marketplace.”

Cronin says that medium-sized companies are “looking to phase-in the automation so that it’s more of a realistic and economic reach for them.” Typically, that may include starting with conveyor and sortation equipment, he explains.

“Yes, warehouse automation is capital intensive, it can be expensive, and it’s a long term commitment. But, the payback for many companies is within two years and often times within one year. That’s pretty amazing compared to five or ten years ago.”

Naturally, many companies contend that they can’t afford to invest in warehouse automation. However, “It’s rare for us to look at an opportunity that doesn’t generate an internal rate of return of at least 15 percent,” counters Retrotech’s Hartman. “Where can you invest money today and make 15 percent?” he asks. “The answer, of course, is nowhere.”

Dematic’s Kotecki reports that companies are becoming more comfortable with longer payback periods. A poll he conducted a few years ago at Dematic’s annual user conference revealed that many companies were seeking an ROI in 1.8 years. “Now, many companies are saying that while they would still like to get that, they tell us that if they can figure out a way to get more accurate orders, faster, to the customer with less damage, with less people involved and less fingerprints on the product, then they’re willing to look at three, four, or even five years for payback.”

Meanwhile, “The actual electromechanical operation, things like robotic palletizers, conveyors, that type of equipment is generally available now at a level where smaller organizations can afford them,” adds Retrotech’s Hartman.

Although companies are understandably inclined to put the price tag at the top of their list when considering an investment in warehouse automation, an equally important, but often overlooked part of the equation is risk mitigation.

“We’re at a place where software and technology are so advanced that the risk level has never been lower when it comes to automation,” says Dematic’s Kotecki.

In the meantime, Kotecki advises companies “to make sure you’ve got someone good for the dance.” In other words, “Both the suppliers and the customers have an opportunity to be selective now. We’re seeing more people evaluating the skills of the marketplace, selecting partners that they’re comfortable with and that match their culture, and then really working together. It requires a heightened level of trust, transparency, and both have to take on some shared risk and gains.” However, in the end, the collaboration results in lower risk, increased productivity, and ultimately a lower overall cost.

Like risk, sustainability is sometimes difficult to measure in terms of dollars, yet it’s another component that relates to warehouse automation and the associated benefits.

“In most cases, when people look at overall energy consumption and stakeholder value, they tend to ignore savings in human energy [that results from automation]. But, they’re not doing that as often these days,” according to Kotecki. Moreover, when it comes to sustainability, “more people are focused on stakeholder value rather than just pure ROI,” he adds. Today, “People have the cash, the consciousness, and the responsibility to prioritize things like energy and consumables.”

Kotecki makes another, astute link between warehouse automation and sustainability. When it comes to a distribution center, for example, even though it may be LEED certified, it may not necessarily be “green,” he says. “You can build a big, flat warehouse on acres and acres and it may be LEED certified, or you can build a rack supported building that’s one-fifth the size with a much smaller footprint with less people, less lighting, less energy consumption. But, you don’t get credit for that alternative, which was really made possible by automation.”

 

Real estate is also a factor

In the meantime, while industrial real estate was generally cheap in most U.S. markets over the past few years, a turnaround is expected this year, which means using automation to help maintain a modest warehouse or DC footprint is becoming more important.

According to Randyl Drummer of the real estate research and marketing firm CoStar Group: “The vacancy rate for U.S. warehouses continued to decline at the end of 2011 as the property sector was buoyed by its strongest quarter for net absorption since late 2008,” led by a gradual return of economic growth, including higher levels of manufacturing and consumer spending.

In particular, the vacancy rate tracked across 210 markets declined to 9.6 percent in the fourth quarter, down by a slight 24 basis points from the previous three months, and a nearly 80-basis-point decline from the same period a year ago.

“With six straight quarters of positive absorption now, warehouses racked up about 110 million square feet of net absorption in 2011, the strongest year since 2008,” says Drummer.

Southern California’s Inland Empire was a bright spot in the recovering industrial real estate market, with more than 12.2 million square feet absorbed in 2011, he says. “That market benefited from a rise in container traffic at the ports of Los Angeles and Long Beach, which posted their highest volumes since before the recession. The Inland Empire saw the top deal of 2011, Hewlett Packard’s lease of 1.4 million square feet in two buildings in San Bernardino.”

Dallas and Atlanta were also leading metros, as expected. “However, in one of the year’s biggest surprises, Detroit, which has suffered economic doldrums for the past decade, logged 6.4 million square feet of net absorption as the auto industry and other Midwest manufacturing has recovered, the fourth-highest total among metros for 2011,” states Drummer.

A senior economist at CoStar explains that large deals are being generated by consumer goods companies, third-party logistics firms, and online retailers that are driving “large takedowns of space,” such as Amazon, which acquired space in Phoenix, Indianapolis, Philadelphia, Seattle, and Nashville totaling more than 3.5 million square feet. Furthermore, Amazon, and other companies, is in negotiations to establish two more DCs, each 1.2 million square feet, in New Jersey.

And it needs the space, considering that it sold one million Kindles every week this past December, helping the company achieve its most successful shopping season in history.

Not only is e-commerce continuing to drive sales—and real estate acquisitions—for Amazon, the world’s largest online retailer, it’s making a stronger argument for warehouse automation in order to keep pace with online sales, which is forecasted to keep on growing.

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