Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

Guest Commentary: Not So Fast: How Technology is Slowing Express Delivery

Guest Commentary | By •

Over the last few years, FedEx and UPS have seen significant shifts in how domestic and international customers are shipping. The shift from express to ground products is growing at an unprecedented rate – impacting carrier financials and even their own networks. As recently as last month, UPS posted a four percent drop in revenue with CEO Scott Davis calling the financials “disappointing.” He, like FedEx’s Fred Smith, acknowledges the shift to slower – and less expensive – services as key to the company’s current financial turbulence.

Obviously, one factor is the seemingly unending rise of e-commerce. According to comScore, e-commerce sales increased another 13 percent in the first quarter of 2013. A second factor is the economy, which is still lethargic despite recent indicators that manufacturing and consumer confidence is up. Perhaps there is another factor bending the curve from express to ground product, one that underlies e-commerce, business optimization and consumer knowledge: the growth of transportation management technology.

According to ARC Advisory Group, transportation technology software and services will increase through 2016 at a compounded annual growth rate of 10 percent, including a high adoption of cloud-based applications. This growth may be even more pronounced as smaller businesses are adopting these technologies, which were once reserved only for larger operations. Regardless, the growth in transportation management software has a cascading effect on how a package is shipped for businesses, consumers…and even the carriers themselves.

Since 2008, rate increases have driven businesses to optimize how they ship a package. On the desktop, transportation management technology allows companies to have better control over how a package is processed. Through optimization of workflow and the implementation of specific business rules, such as who can ship a package, when it can be shipped and at what service, businesses have better control over transportation spend. In many cases these business rules dictate a deferred service be used over an express services – just because an express service is not needed.

In the converging worlds of e-commerce and brick-and-mortar retail, optimization through technology is gaining ground as more retailers are fulfilling online orders through the local store. This “ship from store” concept allows retailers to process orders as close as possible to the consignee. Because carriers are also optimizing and improving ground service performance, the need for a time-definite shipment is greatly reduced. This harmonization of online sale and enhanced offline fulfillment is becoming an extension of a company’s brand, enabling them to improve customer service, while reigning in expense.

From the consumer’s perspective, shipping is no longer a service, it’s a commodity. The veil has been lifted. What was once the domain of burly guys on the loading dock can now be accomplished from the desktop or a web browser or a local retail shipping outlet. Of course, e-commerce helped to commoditize shipping too – by giving consumers choice. The simple fact of breaking out shipping charges in a shopping cart allowed consumers to decide if there was added-value in buying online or going to the mall. The technology allowed parcel shipping to be used as promotion. According to Shop.org, the website of the National Retail Federation, about 90 percent of major retailers said they offered free shipping during the 2012 holiday season. Companies like Amazon.com offer free shipping on thousands of items, through its $79 Prime membership. Shipping as promotion moves more parcels from express to ground services as customers want the cost savings over the immediacy of having the product in their hands.

But in the end, what is Amazon or any large e-commerce retailer? Their online presence is nothing more than a highly integrated and sophisticated Order Management platform, which gives users choice and visibility to how and when they receive product.

Another reason for the mode shift from express to ground services lies squarely with the carriers themselves. Both FedEx and UPS’s networks are more efficient, whittling down transit times between the two services in shorter zones; and hybrid postal products, like FedEx SmartPost — adopted by more retailers and promoted by the carriers — further shifts packages away from express. But even as networks are optimized for physical fleets and residential deliveries are made more efficient through partnership, carriers need a technology backbone to bring it all together.

FedEx and UPS embrace technology — whether their own or third-parties — to drive out costs in the tendering, tracking and delivery of packages. Transportation management technology is increasingly the bridge between the carriers and their customers.

With better networks, better product portfolio and technological infrastructure that gives complete visibility to costs, transit times and final delivery, this shift in mode seems like a natural outcome.

Technology advancement in TMS, e-commerce and package management has made the process of shipping a package better, faster and more efficient — and a by-product of this efficiency is the shift in mode from express to ground. Shippers will continue to adapt as the technology becomes more commonplace and integrated into other business applications. Carriers will benefit from the increased parcel volume, but just now at lower revenue.

John J. Kruzan markets the Pitney Bowes portfolio of Distribution Solutions, including the global logistics platform, SendSuite™ Live.  Prior to joining Pitney Bowes in 2011, Mr. Kruzan held management positions with Airborne Express and DHL Express, specializing in marketing, business development and technology applications.

This Week in Logistics News (April 1-5, 2013)

Cloud/Software-as-a-Service | By •

Welcome to April. One quarter down, three to go in 2013. It was a relatively quiet week for news, so let’s get to the items that caught my attention.

JDA Software announced the release of JDA eight that brings together “more than 30 different products on a single platform, unifying supply chain planning, optimization and business analytics for deployment in the cloud.” Here are some excerpts from the press release:

JDA eight offers a comprehensive framework to address challenges impacting key business processes across the extended supply chain including forecasting and planning, procurement planning, promotion, transportation management, production planning and scheduling, network and inventory optimization, and supplier collaboration.

 

“JDA eight establishes a new standard for advanced planning and optimization software,” said Hamish Brewer, CEO, JDA Software. “Historically, manufacturers and retailers have only seen end-to-end solutions in traditional transaction processing systems from the ERP vendors. The launch of JDA eight introduces a completely new paradigm to the market, complementing those ERP platforms and enabling businesses to orchestrate collaborative planning and optimization processes across the enterprise.”

I have not seen a demo of the solution, so my comments below are solely based on what’s in the press release.

  • Of the traditional supply chain software vendors — i.e., those that started out selling on-premise solutions — JDA is arguably the most aggressive in moving its platform to the cloud. Overall, I believe this is a smart move because it’s important to give companies a choice of IT deployment and payment options, and a growing number of companies today are choosing the cloud route. However, it’s important to note that in JDA’s case, cloud deployment generally implies a hosted solution, not a multi-tenant or network-based solution (see “JDA Software Focuses on Time to Value” for related commentary). Does JDA’s strategy and future roadmap include a move to network-based solutions too?
  • “In-line analytics” and “in-memory processing” are key features of the platform. These capabilities are becoming “must have” in supply chain software applications as the volume of supply chain data companies must analyze continues to grow and the timeframes for making smart, informed decisions continues to shrink.
  • “The intuitive user interface [emphasis mine] offers a consistent look and feel, reducing training time and alleviating operational silos” — this underscores a trend I’ve discussed before, i.e., how supply chain software vendors are focusing on improving user interfaces, which is becoming a competitive differentiator.

In other technology news, Roadnet Technologies announced the release of MobileCast On Track®, “a real-time management and tracking tool that enables organizations to more effectively track and manage mobile employees, sales representatives and merchandisers.” According to the press release:

MobileCast On Track includes a number of reports, such as a Resource Stop List, which provides a comprehensive overview of the workday for an organization’s mobile workforce. The report reveals each of the stops completed, including arrival, departure and total stop times, which can be used to analyze and improve behaviors and interactions with the customer. The “Manage by Exception” feature provides visibility to those mobile employees who are off-schedule. Managers of mobile employees have the ability to pinpoint the location of employees instantaneously.

 

MobileCast On Track is available for use on GPS-enabled mobile devices and smartphones such as Google Android™, Apple iOS, Windows and Java enabled phones.

This is mobile resource management + workforce management + routing and scheduling, which equals a big market opportunity. A few years ago at an ARC conference, representatives from Kraft talked about their deployment of a similar solution and the benefits the company achieved, as well as the challenges involved in getting your mobile workforce to adopt this type of solution (for related commentary, see here and here).

On the 3PL front, CEVA reported disappointing financial results for 2012. While the company’s revenues increased 4.8 percent compared to 2011, its adjusted EBITDA was down 21.8 percent. “These are difficult times for everyone in the global logistics industry and CEVA has not been immune to those pressures,” said CEVA CEO Marvin O. Schlanger. “While our revenue line has been resilient, we have seen a marked deterioration in EBITDA in both our FM [Freight Management] and CL [Contract Logistics] businesses. This simply isn’t good enough and we have taken action to reverse this decline in profitability. We will continue to take actions necessary to establish satisfactory levels of profitability.” CEVA also announced details of a financial recapitalization plan “that will reduce substantially CEVA’s overall debt and interest costs, as well as increase liquidity and strengthen its capital structure.”

Finally, after Google and Walmart announced new initiatives around same-day delivery and in-store delivery lockers last week, Amazon.com upped the ante by unveiling a new service called Amazon One Step Ahead that delivers goods to customers before they even order them. Is this taking things too far? Read the posting for more details and the punchline at the end.

Have a happy weekend!

Song of the Week: “Mountain Sound” by Of Monsters and Men

(Note: JDA Software is a Logistics Viewpoints sponsor)

In Logistics, Somebody Has to Own the Assets

Logistics Service Providers | By •

In most aspects of life, an asset is an asset, “a useful and desirable thing or quality,” as Dictionary.com defines it. But not in the logistics world, at least not to private equity investors and venture capitalists who view a 3PL with assets like an overweight runner, wearing a lead track suit and cement sneakers, in a field of sprinters.

Non-asset is non-fat, it’s sexy and desirable, it’s what every start-up 3PL tattoos on its forehead in case you missed it in its business plan, press release, and website.

But somebody has to own the trucks, warehouses, pallets, forklifts, IT, and other assets that make logistics — and the whole non-asset 3PL industry — possible.

It’s time for asset-owning 3PLs to take off that scarlet letter and embrace a better definition of an asset: “something useful in an effort to foil or defeat an enemy.”

In the retail industry, you can view Amazon.com as a non-asset retailer because it doesn’t own any stores, giving it a financial advantage over brick-and-mortar retailers that are “burdened” with real estate on their balance sheets. But if you look closely, Amazon’s real advantage comes from its logistics assets — the 89 distribution centers it has, including 20 opened last year, with more scheduled to open in the months ahead. And its technology assets too, like the Kiva robots Amazon purchased last year and the data centers that power its cloud computing services. What’s even more interesting, in my opinion, is that Amazon is leveraging these assets to provide fulfillment services for other companies.

Yes, Amazon.com is an asset-owning 3PL and proud of it.

And so is Sears, which is also positioning itself as an asset-owning 3PL. According to a recent article in Internet Retailer, Sears is rolling out a new service called Fulfilled by Sears that “enables other retailers to fulfill online and offline orders in the United States through Sears’ warehouses and stores.” The article provides some details about the service, including pricing. “We have the ability to ship orders much faster and more cost-effectively than other sellers do based on our national footprint of stores and warehouses,” says Imran Jooma, Sears’ corporate executive vice president and president of online, marketing, pricing and financial services. Check out the short video below from the Fulfilled by Sears website:

Fulfilled by Sears from Gisteo.com on Vimeo.

Simply put, the headlines you see in fashion magazines also apply to 3PLs: highlight and accentuate your assets — especially when retailers and other emerging competitors are encroaching on your turf by doing the same.

And investors also need to rethink their definition of what is an attractive investment in the logistics industry. Just like investors are becoming less enamored with consumer-centric websites and are falling in love again with business-to-business software, they also need to take a second look at the opportunities offered by asset-based logistics service providers.

Yes, somebody has to own the assets in logistics. But owning them is not enough — you also need the vision, talent, and will to leverage them creatively to foil and defeat the competition and provide differentiated value to customers.

Amazon Plans Carefully Its Distribution Capacity Growth

Material Handling | By •

It’s that time of year again, when shoppers hit the stores on Black Friday and go online on Cyber Monday, the biggest day of the year for Internet sales. Experts predict that Internet sales will increase 12 percent this year; Amazon’s sales this holiday season will grow much faster.

At the CSCMP Annual Conference in October, Mike Roth, Amazon’s VP of North American Fulfillment Services, gave a speech titled “Supply Chain Technology Powering Earth’s Biggest Selection.” Mike spoke about many items related to Amazon’s strategy, but what interested me the most was the careful planning the company needs to do to support its tremendous growth.

Because Amazon opens so many warehouses — 40 in North America — the company believes in rapid build cycles, which allows it to build capacity as the company needs it. Amazon is challenged by ever growing sales, year-over-year growth of 35 percent, and hockey stick seasonal demand, which is 3X greater than non-seasonal demand. Amazon’s CFO has made it clear that he does not want to pay for unused capacity. Mike showed a photograph of one site that had just broken ground, and another photograph of the completed warehouse five months later. And this was not a small facility — it was 1.2 million square feet with 40 foot high ceilings and four story pick modules complete with automation.

Since a highly-automated warehouse would take months longer to complete, Amazon uses warehouse automation sparingly to preserve scalability. The company  has opened four distribution centers this year with many more scheduled to go live in the coming months.

Amazon also improves its capacity utilization by carefully tracking DC capacity usage and by including forecasts of the capacity it will need in its S&OP process. Amazon uses population density maps overlaid with its DC locations. Mike explained that demand growth is largely located in high-density population areas. Finally, because Amazon is not building facilities to support peak demand, the company uses drop shipping and works with 3PLs to supplement its internal efforts.

Just as important as being able to scale with quick build cycles is the need for flexibility. Mike pointed to the exploding number of product categories Amazon covers today versus years ago. If the company had built distribution centers (DCs) just for books, it would have been in trouble as e-readers have eroded sales in that category. Meanwhile, highly automated systems designed for books would not support newer categories like pet supplies or appliances.

Mike was asked about the use of Kiva robots. He said they are still trying to figure out how to implement them in their warehouses. I’m not sure I fully believe that. It strikes me as unlikely that Amazon would spend $675 million to buy a company that builds flexible and scalable automation systems without having a pretty good idea of what that technology brings to the table.

But perhaps Amazon will conduct some experiments. There are a couple of ways the company can go. It can continue to build DCs with their existing layout – big DCs with four mezzanine levels — and use the Kiva bots on each mezzanine level. This approach would not affect the speed new DCs are built.

Or Amazon can build smaller warehouses, with ceilings as low as 10 feet high. Obviously, these warehouses would not have mezzanine levels. This option would greatly speed up the company’s ability to build new warehouses to meet new demand for distribution capacity. And it would make the job of purchasing suitable sites much easier too.

But small footprint warehouses would also complicate Amazon’s decision of where to hold inventory.  With its existing large format DCs, if a customer orders multiple stock keeping units (SKUs), there is a good chance they can be shipped together on the same truck.

With smaller warehouses, that would happen less often. DC efficiencies are already improved by analyzing the likelihood of one item being simultaneously ordered in conjunction with another item, and then placing those items near each other. This form of analysis becomes more important, with the difference being that co-ordered SKUs will need to be placed in the same warehouse, but would no longer need to be placed near each other inside that warehouse.

It will be interesting to see which way Amazon goes. I’m betting we will see a mix of small and large warehouses.

The New Amazon Distribution Model

Labor | By •

Recently, Kiva Systems told its existing clients how its acquisition by Amazon would affect them. But the news also revealed something about Amazon’s distribution strategy.

So here is the news: Kiva will not be selling any new systems to new customers for the next one and a half to two years. Instead, Amazon will be filling its new one million square foot distribution centers (DCs) with Kiva robots. In its second quarter financial statement, Amazon said that it had opened 6 DCs this year, with 12 more scheduled for the remainder of 2012 (17 were built last year).

I wrote a strategic report in 2009 titled “Warehouse 2025” (available to ARC clients only) that looked at the economics of the new generation of distribution robots.

Amazon appears to practice mainly pick-to-cart. Each cart has multiple totes. Its warehouses have mezzanine levels; workers often have to push their carts onto a lift to change levels. Once a tote has been completely picked, it is placed on a conveyor and transported to pack stations. Amazon’s labor goals are roughly 160 picks per hour.

In contrast, Kiva Systems leads to higher productivity per worker. Workers work at combination pick/pack stations and the Kiva bots deliver the inventory to them to pick. The pick rate will depend on what is picked — if it is small items picked in multiple quantities, you might go as high as 1,500 items per hour; apparel is closer to 200 items per hour. In my report, I used 600 line items per hour as an average for Kiva empowered workers.

So what would this mean in terms of workers? My initial estimate was that Amazon would employ 45 percent fewer workers per DC. But one of the contacts I interviewed for my strategic report told me that number was too high; his warehouse employs 30-40 percent fewer people by using Kiva.

If you conduct a Google search on “Amazon distribution center,” you come across announcements over the past year for DCs in Virginia, New Jersey, and South Carolina. According to these articles, warehouses costing roughly $50-65 million will employ 1,500 to 2,000 workers.

But then I came across an article about a new Indiana DC. This DC is costing $150 million and the company is only promising 1,000 new workers. Could this be one of the new warehouses that will be using Kiva? The employment numbers seem to add up. This DC will employ at least one third fewer workers.

The total cost of the new Indiana warehouse also seems roughly right. Kiva is sold as a system – robots plus their warehouse control system software. But if you take the total cost of the system and divide it by the number of robots, I estimate that the cost per robot is about $20,000-$30,000. There will be about 6 to 9 robots serving each station. With a two shift operation, and the understanding that the great majority of workers will now work pack stations, you can see how the Kiva robots would add $40 million to the cost of the new DC even if Amazon buys the robots for half of the purchase price of the general market.

Let’s tackle that last assumption, that Amazon can buy the robots for half price. Part of that is based on the fact that Kiva Systems sells premium-priced, high-margin product, which Amazon will now buy at cost. But I also see falling unit costs based on a huge increase in production volume. Word on the street is that Kiva did about $100 million in revenues last year. Based on my back of the envelope calculation, one of Amazon’s new DCs will require more than 80 percent of Kiva’s total production from all of last year. If even half of the unbuilt DCs scheduled to come online this year use Kiva robots, we are looking at 5X production ramp.

Again, doing a little rough math, and depending on what you think a fully loaded warehouse worker costs and exactly how many workers become unnecessary, Kiva warehouses could save Amazon more than $20-35 million in wages and benefits per warehouse per year. If it implements Kiva at 6 DCs this year, and 20 more over the following two years, the company will get its payback for the Kiva investment.

There are some other advantages. Without buying Kiva and ramping production volumes, Amazon could never implement Kiva across its network of new DCs. Further, the company’s backlog prevents other e-fulfillment competitors (that are not Kiva’s existing clients) from copying what it is doing for at least a year and a half.

Finally, as Adrian Gonzalez pointed out in a recent posting, Amazon appears to be on a quest for same day deliveries. Kiva robots provide a blend of automation and flexibility that traditional forms of heavy automation cannot match.

What at first glance looked like an absurdly high acquisition price for Kiva Systems becomes completely rational. But the success of this investment will depend on how quickly and successfully Amazon can ramp the production.

Kiva Systems Acquired at a Very Steep Price!

Material Handling | By •

Amazon.com’s acquisition of Kiva Systems keeps coming up in my conversations with industry peers and colleagues. Kiva is a provider of advanced robotic material handling systems — or looked at in an alternative way, the company brought to market much more intelligent Automatic Guided Vehicles (AGVs) than we had seen before. Adrian wrote about the acquisition shortly after it occurred. Now I’d like to add my two cents.

Back in 2009, I wrote a Strategic Report titled “Warehouse 2025” where I talked about how a new generation of more intelligent AGVs and goods-to-man robots would change warehousing. Here is an excerpt:

Robotic solutions offer the prospect of achieving a highly automated warehouse with less risk, based on a more scalable investment path and more process flexibility. These solutions change the way we think about optimization in the warehouse, the way various warehouse processes will be conducted, what types of companies will be willing to invest in highly automated warehouses, and even what a warehouse will look like in the future.

What made me particularly bullish on this new technology was its ROI and risk profile compared to existing forms of high-end automation. I talked to a material handling consultant who had done a warehouse analysis for one of his customers. The analysis looked at using Kiva versus using conveyors with pick-to-light zones and A-Frames for a customer.

The consultant found that the warehouse productivity between the two scenarios would have been almost the same. The cost was also similar.

However, in order to simulate the conveyor scenario, the consultant made five-year assumptions about volume growth and order profiles. He knew that these assumptions could prove to be invalid in just a few years. Further, even if the estimates proved roughly right, for a few years the conveyor automation would have been underutilized. Then for several years the system would have been maximally cost efficient. Then, as volumes grew past the design parameters, there would be a period where labor-intensive workarounds would be needed to handle parameters beyond what the system was designed to do.

In contrast, Kiva scaled. When volumes were lower, you bought just the number of “bots” needed. As volumes grew, you added bots. Kiva was the obvious choice because the risks were so much lower.

Further, the only reason productivity was roughly the same between the two scenarios was because the conveyors were to be used in conjunction with A-Frames. In a conveyor warehouse without automatic dispensers, which do not make sense in many warehouses, the productivity of bots is clearly higher. Automatic dispensers also need to be frequently loaded and require careful planning on an ongoing basis.

Despite being a real fan of this new technology, I was stunned by the acquisition price. Kiva, as a private company, did not report revenues and Amazon did not disclose the company’s revenues either. Nevertheless, my feeling, based on staying periodically in touch with one of the company’s executives, is that Kiva generated about $100 million in revenues. One of my industry peers had a conversation with someone in the investment community who also felt Kiva was about $100 million in revenues. If true, Amazon paid 7 to 8 times revenues for Kiva, which is an extraordinarily high multiple.

Because Amazon is a public company and $775 million will almost certainly be considered “material,” we should eventually know what Kiva’s revenues were at the time of the acquisition. But we may not know until Amazon publishes its 10-K/annual report next January.

Other companies that have come to market with intelligent AGVs, such as Egemin and Seegrid, have to be thrilled. However, they are not quite apple-to-apple comparisons with Kiva. Kiva’s sweet spot is “each picking,” while the other solutions are a better fit for mixed-case pallet building and unmanned full pallet moves.

I concluded my 2009 Strategic Report by saying that “the adoption of new business technologies is often surprisingly slow and it will be many years, if ever, before these emerging robotic solutions obsolete (traditional) warehouse technologies. That is why this Strategy Report is titled, ‘Warehouse 2025.’” That is how long I thought it might take this form of technology to “cross the chasm.” It could happen faster, I felt, if there was some big event that generated lots of publicity and buzz. Amazon’s purchase of Kiva could be that event.

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