Automated vs. Manual Warehouses: A Different Way of Thinking About ROI

How does your company think about ROI?  Your answer may largely determine how much distribution center automation your company is willing to invest in.

First, some quick definitions:  My definition of “manual warehouses” is synonymous with “man-to-goods” warehouses, where workers move to a pick location, pick the goods, and then move to the delivery dock.  These facilities aren’t necessarily completely manual; they might employ forklifts and conveyors in certain locations in the warehouse.  In contrast, automated warehouses use extensive conveyors, sortation equipment, automated storage and retrieval systems (AS/RS), and other material handling solutions that move the goods to the workers-i.e., they are “goods-to-man” warehouses.

The traditional thinking has been that automated warehousing is much more popular in places like Germany and Japan that have expensive land costs and restrictive labor policies.  But companies in the UK have never invested in automation to the same extent as their European neighbors, even though they face similar constraints.  I think this is because, in general, American and UK companies think about ROI in different ways than companies in Germany and Japan.  Companies that buy a WMS for a “manual warehouse” tend to focus on the payback period, and they are usually reluctant to buy a solution that has a payback period of more than two years.

In contrast, the payback period for automated warehouses with extensive material handling equipment is typically around five years.  How can companies justify such projects?  By basing the ROI on driving down, to the maximum extent possible, the warehouse costs associated with order fulfillment.  For example, companies might ask, “If it currently costs us $7.32 to perform all the activities associated with receiving, put-away, picking, and loading pallets onto trucks, would extensive material handling allow us to drive that cost down to $5.17?”

I personally like this way of thinking.  However, automated warehouses do increase risks.  Very-high-throughput automated warehouses are not nearly as flexible as manual warehouses, although there are new types of lower-throughput “goods-to-man” solutions that are extremely flexible.  With a manual warehouse, it is not that difficult or expensive to move racking, change warehouse flows, or add new value added services.  In a warehouse with extensive AS/RS or miles of conveyors, however, making these types of changes is often very difficult and costly.  (In fairness to conveyor technology, their flexibility is improving).

Whatever type of warehouse a company operates, a key danger to avoid is silo thinking.  If your upstream suppliers can perform certain activities more cost effectively than you can at your warehouse, then your partners should perform these tasks and you should pay them a little extra.  Similarly, if performing certain tasks at your warehouse (for a marginal increase in labor costs) results in significant labor savings downstream (e.g., faster receiving and shelf replenishment at the stores), then those tasks should be done at your warehouse.  However, it is easier for a manual warehouse to recover from a poor supply chain design than it is for an automated warehouse.  For example, if you want to do high-throughput flow through, this needs to be considered from the very beginning as part of the automation design and the warehouse layout.

The risks of automation are less for companies with the most clout in a particular supply chain.  Large retailers, for example, have a great degree of influence over their suppliers.  They can make demands about how goods should be packaged, containerized/palletized, bar coded, and what sort of EDI messages are required because they are the “800-pound gorilla” in their supply chains.  In short, their ability to remain flexible and responsive to market changes can be enabled, to a large extent, by driving requirements upstream to their suppliers, thus reducing their risk of implementing an automated warehouse.

There can also be market risks associated with automation.  You do not want to build a $20 million warehouse and then discover that because of shrinking sales you have far greater throughput capacity than you need.  Big distribution automation projects make the most sense for companies that are growing and are not likely to be sold within the next five years or so.

Another set of risks associated with automation exists for companies that have done a poor job of optimizing across a network of warehouses.  Before building a network of automated warehouses, companies should make sure they have good global visibility to deliveries and have worked closely with suppliers to reduce lead times and (just as importantly) lead time variability.  You do not want to build ten automated warehouses only to discover you really only needed eight if only you had only done a better job of network inventory optimization.

In conclusion, while I have pointed out various reasons automated warehouses can be riskier than manual warehouses, some companies, like Walmart, have proven that automated warehousing can provide a competitive advantage.  There are many reasons why Walmart’s supply chain offers them a competitive advantage, but their network of automated warehouses is certainly a key contributor to their low cost operations. Deciding to move to an automated warehouse needs to be a careful exercise in balancing risks with rewards.