Today is an exciting time in the world of warehousing and fulfillment operations. The exponential growth of e-commerce is creating an abundance of opportunity for retailers. At the same time, it’s causing serious changes to the demands placed on fulfillment operations. These fulfillment changes are themselves creating a spike in demand for warehouse automation and other fulfillment technologies. But the automation requirements are different than they were in the past. Order volumes and SKU variability are higher, the number of items per order is smaller, and load sizes are smaller and lighter. In response, a new wave of emerging warehouse technologies is hitting the market to support today’s requirements. As with any wave of emerging technologies, it can be difficult to determine which ones will provide value and flourish in the market and which ones will falter due to a number of potential shortcomings. As I was taught in business school, it’s important to distinguish practical technologies from the “gee-wiz” technologies.
Developing Perspective on Feasibility and Growth Potential
Analysts at ARC Advisory Group receive periodic inquiries from potential investors such as private equity firms and venture capitalists looking to get a better feel for a technology market. I imagine that the venture capital business must be incredibly stressful. Venture capitalists typically cannot value start-ups using the same ROI methods used for established companies. How can you use discounted cash flow to value a company without any notable revenue, never mind free cash flow? In essence, they are faced with higher levels of uncertainty. To reduce the inherent uncertainty in their business, they can evaluate an emerging technology’s potential to deliver value to a given end-user market segment, and the probability that it will succeed at doing so.
My colleagues and I at ARC also consider it critical to evaluate new technologies from the perspective of the potential user. I find it useful to look at the technology from the perspective of a potential buyer or a salesperson responsible for selling the technology solution. Adding the responsibilities and the pressure placed on the person or people in the purchase/sale decision is effective in bringing out the details, and making them seem all the more important.
Applicability to a Given Warehouse Operation
The fact that warehouse technology is used to support a specific set of warehouse processes provides a practical “anchor” to the investment due diligence process. For example, a warehouse executive can evaluate a given technology by looking at the operation’s existing process and determine the steps in the process that the potential new technology will support. Existing manual labor costs and/or technology costs can be used as a base line for any potential throughput gains or variable cost savings. This rough-cut analysis can provide a good starting point for evaluating the technology and its applicability to a given operation. Essentially, some variation of activity-based costing can be used to evaluate variable costs and overhead costs. Of course, throughput and cost per item in a static state is far from the final determinant of a warehouse technology’s applicability to an operation. In fact, a technology’s adaptability – namely the ability to adapt to a wide range of item shapes, sizes, and weights; and the ability to scale up or down to changes in throughput requirements – has greatly increased in importance with the growth in e-commerce fulfillment. But all of these considerations also hinge on management’s appetite for incurring an upfront fixed cost in an effort to reduce future variable costs. These costs make up a large percentage of the denominator in an ROI calculation.
Technology, System, and Supporting Factors
The cost of a warehouse technology is clearly a primary consideration. Especially when it is an emerging technology with limited proof of concept. An operation’s legacy and peripheral costs need to be considered as well, such as potential changes to the warehouse structure, process reconfigurations, the time to get the technology up and running, and any system integration or worker training that is necessary. For example, the extensive installed-base of conveyors in the US has made adoption of shuttle technology slower here than in Europe. Of course, the reliability of a given technology and maintenance costs are also critical inputs into the decision.
On a more positive note, there are also potential sources of savings or future investment returns that may be overlooked at first glance. For example, producers of emerging technologies may subsidize the costs of early adopters due to the producer’s desire to prove it technology in the field and to build a list of referenceable customers. Finally, adoption of a novel warehouse technology may offer the buyer “real options,” or the option to obtain value from the investment in slightly different ways than initially considered. The learning process may uncover other ways of improving upon the company’s process, or it may be determined that the technology would work better in a different operation within the same company.
I often find myself trying to balance an open mind and positive outlook toward new technologies with a healthy skepticism about the hype that tends to surround them. This desire to strike a balance underlies my perspective on evaluating new warehouse technologies. Hopefully this article provides some perspective on ways to view these and other technologies in a way that balances the importance of accepting some risk with the practical considerations that should be given to any investment that is expected to deliver business value.
Please contact me if you are bringing an emerging warehouse technology to market. I would greatly appreciate the opportunity to learn about your technology.