GXO Logistics recently briefed Logistics Viewpoints (ARC) on its recent operating progress and its formula for success. I was familiar with GXO as the former logistics segment of XPO and knew about select examples of its warehouse automation investments. But I was not well-informed on the breadth and depth of the company’s warehouse technology investments or the overarching technology strategy. In retrospect, I had been informed about a number of GXO technology deployments but hadn’t pulled it together conceptually.
Warehouse Automation Unbound
The GXO third-quarter earnings presentation summarizes the magnitude of its warehouse technology investments. It says that roughly 30 percent of its revenue is from automated sites. This is substantially higher than the rule-of-thumb estimate that 5 percent of all warehouses are automated. Diving a little deeper, GXO states that year-over-year, total technology and automated systems grew 139 percent, goods-to-person systems grew 110 percent, and cobots (collaborative robotics) grew 341 percent. These statistics show that GXO is advancing its technology foundation even faster than the rapidly expanding technology markets are growing as a whole.
GXO is deploying both traditional automation systems, such as AS/RS, conveyors and sortation, and palletizing systems; as well as emerging technologies such as mobile goods-to-person robotics, collaborative robotics, and three-dimensional robotic storage solutions. Some notable implementations include the Exotec System deployment for Showroomprive.com; the Swisslog AS/RS system for Nestle, the Koerber Riantics layer picker, an agreement to deploy 5,000 GreyOrange robots, and the use of 6 River Systems collaborative robots in multiple sites in Europe and the US. The technologies in use run the spectrum from pallet automation to each picking, highly automated to worker-robot collaboration, and goods-to-person to labor wearables.
I find GXO’s adoption of technology investments to be somewhat atypical in an environment where many 3PLs are hesitant to invest in automation due to the long time-horizon and high volumes required for payback. But GXO has aligned its technology investments with the necessary client contractual terms to assure payback while accomplishing the reduced variable costs that translate to profitable business.
Low Variable Costs and Higher Operating Margins
The financial benefits of warehouse automation can be summarized as operational leverage – fixed cost investments that lower variable costs of fulfillment. There are many different technologies that can reduce the variable cost of fulfillment with a range of fixed costs. They range from fully-automated AS/RS systems to manual warehouses that rely upon software systems and wearable or handheld technology. GXO has embraced the full range of technologies into its warehouse investment portfolio, with the highly automated sites improving operating margins between 2 – 4 percent above a manual warehouse alternative. Interestingly, GXO states the use of technology has increased worker satisfaction. This is understandable since automation typically supports repetitive tasks that can be physically demanding. Also, working with modern, sophisticated technology can contribute to a positive work experience.
Contractual Alignment
Many 3PLs resist large upfront warehouse investments due to the limited contractual terms in the industry. Why invest in technology that requires 5 years to pay back if client contracts last 3 years? Low risk tolerance is understandable in such an environment. I believe GXO’s scale and stability project confidence to its partners and customers, supporting greater risk tolerance, longer contractual obligations, and higher fixed investments that result in better operating margins. The GXO business model is a great example within logistics services of leveraging an organization’s generics strengths such as scale, to expand competitive strengths such as reliability and operational efficiency.
