Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

The “Soft” Side of Automation Holds the Key to ROI

Guest Commentary | By •

Material handling equipment (MHE) has been around a long time. But, it’s never been more popular. Companies look to automation now (more than ever) to improve throughput while bridging the labor gaps affecting so many warehouses and industries. Fixed automation such as conveyors, sortation, and storage systems are proven solutions within their respective wheelhouses. Warehouse robotics hold great promise for more complex and variable operational needs. These technologies continue to grow in popularity, broaden their applications within the warehouse, and are becoming more affordable.

There’s a third technology that’s just as important to an automation technology stack as robotics and other MHE, but isn’t always top-of-mind. Have you guessed it? If not, you’re not alone.

Recently, we spoke with over 150 companies to do research and discovery about warehouse automation adoption. Of those that have already implemented MHE inside the warehouse, only 7% included a warehouse control system (WCS) from their MHE vendors. Slightly better, 11% of businesses acquired a third-party WCS, while 31% never considered a third-party WCS to compliment the hardware.

In short, WCS is not top of mind in material handling projects. But, that’s going to change.

In our conversations, the top issues with automation implementations are downtime and software integrations issues. These obstacles and other challenges lead to many organizations reporting mixed opinions on automation. To be clear, this is not a functionality issue per se. MHE checks all the boxes. However, just like most machines, the hardware needs help from software to perform complex tasks.

WCS

WCS brings specific capabilities to warehouse automation systems you won’t find anywhere else. My colleague, Sean Elliot, goes into greater details about WCS and the “automation-aware” warehouse management system (WMS) in his Logistics Viewpoints piece. To summarize, warehouse control systems act as air-traffic control interfacing between the WMS and automation hardware.

Functionality varies based on the provider. For example, some WCSs are “hardware-agnostic,” meaning that they integrate with any MHE from any manufacturer, while other WCSs integrate only with specific MHE hardware. For most WCSs, the value proposition is that this software layer allows automated systems to “talk” to each other as well as the WMS. This communication ensures inventory flows with minimal interruption and limited manual intervention.

Operationally, a WCS can direct inventory through the path of least resistance. If there’s a bottleneck at a conveyor, the WCS will divert traffic to mitigate log-jamming and keep throughput targets on track. WCSs also optimize across material handling equipment to ensure that the work is passed to the optimal hardware and the updates flowing back are centralized in one place highly visible to operators. This helps to effectively manage constraints and exceptions.   A WCS also captures inventory status updates and machine health along the way, improving inventory traceability, uptime, and uncovers insights on material flow that help warehouse managers with planning and strategy.

No Software, No Problem?  – 6 Questions to Ask…

As mentioned earlier, businesses are hoping for more from their automation investments. But, we also know that they’re not focusing on the software side of warehouse automation today. With so few businesses implementing WCS, you can see why people aren’t finding value in software—they’re not leveraging the best tools for the job.

  • How will your MHE work together?
  • How will the hardware sync back with the WMS?
  • What is the domino-effect of downtime or bottlenecks in these systems?
  • How many MHE manufacturers are involved?
  • How will automation affect your goods-to-person or person-to-goods model?
  • How do you ensure performance is top of mind?

These are all critical questions to help formulate your automation strategy. WCS is a critical component to the answers.

There’s a mind shift that needs to happen. Unfortunately, it’s not enough to bolt down hardware or flip the switch on a fleet of robots. MHE needs to integrate flawlessly and have real-time capabilities to keep your supply chain operations on track. In fact, we’re seeing companies with existing automation considering WCS technology retroactively to optimize their operations. We expect this trend to grow as warehouse operations become even more complex and businesses try to further increase MHE ROI.

Software and WCS should be considered early and often when putting together business requirements for automation solutions. If you want to learn from past mistakes of your peers, don’t push software to the backburner. Talk to vendors, potential partners, and consultants about the right automation software to fit into your MHE and other supply chain systems.

Jon Kuerschner brings more than 25 years of supply chain experience to his role at HighJump. He previously served as VP of Supply Chain Systems at Ashley Furniture, optimizing the company’s global operations. Mr. Kuerschner has experience developing and deploying a variety of supply chain software including WMS, YMS, TMS, OMS, slotting and RFID.

Dematic and Intelligrated Acquisitions Highlight Warehouse Automation’s Superior Growth Potential

Mergers-Acquistions | By •

The global warehouse automation & control (WA&C) market has experienced numerous mergers & acquisitions over the years. However, most of the acquisitions have been smaller vendors that sell similar solutions that offer a complimentary technology, capability, or additional geographic presence to the acquirer. In contrast, the recently announced acquisitions of Dematic and Intelligrated represent major shifts in the global WA&C market. Dematic announced on June 21 that it is going to be acquired by the KION Group, one of the world’s largest suppliers of forklift trucks. As this information was being digested, Intelligrated announced just 10 days later that it is going to be acquired by Honeywell.

The KION group offers solutions within the material handling sector, so  operational synergies are apparent. However, Dematic made a conscious decision years ago to reduce its manufacturing footprint and shift its focus more on intelligent systems. Merging with KION will now put Dematic back into an organization with a strong manufacturing focus. Honeywell is a large, diversified industrial company. Although Honeywell does have the Intermec and Vocollect businesses, only a small percentage of its overall business is focused on warehouse technology. Many acquisitions, in general, ultimately fail to meet the expectations of the participants. How will these acquisitions meet the expectations of the acquirers and affect the acquired? In fact, what are the motivations and expectations behind these acquisitions? And through what characteristics do Dematic and intelligrated offer value to their acquirers?

KIONThe KION Group and Dematic
The KION Group describes itself as the world’s second largest supplier of forklift trucks. KION’s revenue has been essentially flat for the last three years. The company acquired Egemin Automation last year and noted, “The fast-growing market for automated logistics and material flow systems is another area where we want to become a leading player.” KION made a similar statement referencing its intended acquisition of Dematic and noted that Dematic’s revenue has recently been growing at about 12 percent a year. So clearly the growth rate of the warehouse automation & control (WA&C) market is a factor. Additionally, KION stated in its Stategy 2020 documentation that it wants to accelerate its growth and sees future potential by offering increased connectivity and automation. KION specifically notes in its investor presentation Dematic’s strong R&D capabilities, broad automation footprint, and leading integrated software platform as cornerstones of a complete material handling offering. Dematic has been investing in its software for some time, and recently extended its footprint with the Reddwerks acquisition. So I believe that Dematic’s past shift in focus toward intelligent systems is an integral part of what drew KION to Dematic.

KION also noted in its Strategy 2020 document a desire to increase its market share in strategically important regions, specifically China and North America. The Americas is Dematic‘s strongest region and it also has a well-established presence in Asia. So Dematic’s regional footprint offers KION great opportunity for access to an installed base and resources within strategically important regions. KION also noted China’s fast growing e-commerce sector as driving demand for forklift trucks. I believe that e-commerce likely stimulated growth in the WA&C market much more than it has in the forklift market. In fact, I see forklifts as primarily focused on pallet movements. Whereas e-commerce is increasing the demand for movement and handling of smaller loads such as cartons, parcels, and individual items. Dematic is a leading provider of systems for the movement of smaller load sizes within e-commerce fulfillment. This is the other primary reason I believe KION was attracted to Dematic as it was well positioned within fast growing market segments.

HoneywellHoneywell and Intelligrated
Honeywell is a large, diversified industrial company with a presence in the warehousing market mostly limited to the handheld and voice recognition products obtained from the Intermec acquisition. Honeywell’s revenue, like KION, has been flat over the last few years. As has the Automation & Control Solutions business unit, where Intelligrated will reside within Honeywell’s corporate structure. In contrast to Honeywell, Intelligrated has grown at a CAGR of approximately 13 percent over the past three years. So clearly the revenue growth potential of the WA&C market, and Intelligrated in particular, is a factor for Honeywell too. In fact, Intelligrated has also invested heavily in its software platform since it acquired Knighted a few years ago. Honeywell’s press release on the Intelligrated acquisition specifically mentions e-commerce and its contribution to increasing demand for warehouse solutions that increase productivity and reduce costs. I don’t see in Honeywell’s acquisition of Intelligrated the same operational synergies as I see in the Dematic acquisition. However, Honeywell is a larger company with ample resources that can be deployed toward future development efforts or complimentary acquisitions.

Key Takeaways
Dematic and Intelligrated are both growing their revenues at a faster rate than their respective acquiring companies. The growth of Dematic and Intelligrated can be attributed to both the capabilities of the individual companies as well as their presence in a fast growing market. In particular, the market for warehouse automation & control in support of e-commerce fulfillment operations is a major contributor to growth that shows no signs of letting up; as retailers, manufacturers, and parcel delivery companies reconfigure their operations for the ongoing shift in the retail landscape.

For information on ARC Advisory Group’s market study on the global Warehouse Automation & Control market, please click here. For information on the forthcoming update to this study, please contact the author at mailto:creiser@arcweb.com.

Retailer Takes New Approach to Optimizing Direct-to-Consumer Warehouse Operations

Material Handling | By •

A few months ago, I talked to a specialty retailer that operates both stores and a direct-to-consumer channel. Five years ago the company decided to bring its direct-to-consumer operation in-house and it built a 500,000 square foot distribution center (DC).

The retailer implemented VARGO’s COFE warehouse control system (WCS) to increase warehouse efficiencies at this DC and to help decrease its overall cost of the project. COFE (Continuous Order Fulfillment Enterprise) was designed with an e-fulfillment focus. It is quite different than traditional WCS solutions. Most WCS solutions work to improve the efficiency of one or more material handling systems, such as the conveyance and sortation systems in this DC. However, the COFE solution also seeks to optimize human efficiencies. When it comes to improving human efficiencies, part of what differentiates the COFE solution is a very different way of looking at waves.

In traditional warehouse management systems with waving functionality, a large batch of work orders is dropped to the floor simultaneously. For example, a warehouse planner may know that a UPS truck is scheduled to arrive at dock #4 at 3:30 PM. In this instance, the wave of orders that is released is focused on all the outbound orders that need to be loaded on that truck.

The Vice President for Distribution explained to me that there are inefficiencies associated with the WMS waving process. First of all, several floor-level workers may have a period of time where they have no work to do as one wave nears completion but a new wave has not been released to the floor. Secondly, the creation of waves also requires spending money on planning labor; at least one planner’s efforts are required, and in large distribution centers, more than one planner is sometimes necessary. In contrast, COFE releases orders nearly autonomously; very little human intervention is required.

At the retailer’s e-fulfillment DC, floor personnel pick distinct order lines into totes; workers do not pick complete orders. Once a tote is full, or if COFE recognizes that the last order line to complete an order has been picked, the tote is placed on a conveyor. The tote then moves to a pack station where the completed order is packed and moved to shipping.

Typically, about 15,000 orders per day are shipped. The COFE work queue contains about 1,000 active orders, orders available to be worked on, at any one time. Orders move up or down this queue based on ever-changing operational realities and consumer demand. As one order is completed, another order is added to the queue. Workers are directed to pick certain items based on the priority of an order, the proximity of the last item picked to another line item in the queue, and in a manner that ensures efficient walk paths. Once a tote is on the conveyor, logic in the WCS ensures that the totes with SKUs most immediately needed to complete an order are efficiently moved by the cross belt sorter to a pack station. Other totes on the conveyor, not so immediately needed, are buffered. The “pull” process helps to minimize the possibility of totes getting out of sequence. This results in less of a need for conveyor buffering.

The VP of Distribution is very happy with the solution. This retailer has benchmarked its performance against a select sample of other e-commerce warehouse operations (using the customer orders picked per hour metric) and it was at the top of the pack.

More importantly, the VP believes the system paid for itself the day the DC opened! How could this be? It is because the VARGO solution allowed the retailer to open both a smaller warehouse and a warehouse with a significantly smaller conveyor and sortation footprint than would have been the case without the WCS.

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.

Robots for the Warehouse: Options Other than Kiva Systems

Material Handling | By •

In previous postings, I’ve written about Amazon’s acquisition of Kiva Systems and on how the Kiva system works. At the CSCMP Annual Conference last week, Mike Roth, the VP of North American Fulfillment Services at Amazon, talked about using automation sparingly to preserve flexibility. He pointed, for example, to the exploding number of product categories Amazon has added over the last several years. If Amazon had built distribution centers (DCs) just for books, it would have been in trouble as e-readers have shrunk sales of printed books. Meanwhile, a DC designed for books would not have been well designed for other product categories like appliances or pet supplies. Amazon’s acquisition of Kiva Systems validates the idea that a new generation of more flexible distribution automation systems has a strong business case.

But the acquisition also raises a question: What now? Kiva is going to be very busy implementing its solution at Amazon distribution centers; it is not looking for new customers.

Fortunately, there are other choices. Swisslog offers a solution called AutoStore that, like Kiva, is also a robotic solution that automatically moves goods to pick/pack stations. You can watch a YouTube video of this solution, but below is a short description of the system along with my views of its pros and cons.

AutoStore makes use of standard-sized totes. The totes may contain just one stock keeping unit (SKU) or may be subdivided so that multiple SKUs are put in a tote. Once loaded with products, the totes are stacked on top of each other in a column. The stacks can be up to 16 bins high and reach a maximum height of 25 feet. Multiple columns of totes are tightly stacked into a rectangular grid.

There is a light infrastructure supporting the columns of totes. On top of the totes is a mezzanine deck that supports the robots. When a tote needs to be selected, a robot goes to the correct grid location on the mezzanine level and extends its clamper hands down through a hole in the deck to pick the top tote. If the required tote is at the bottom of a column with 16 totes, the robot will raise 15 totes to the mezzanine level and place them aside. The robot then selects the required tote and moves it to an induction station for routing to the correct pick station. The robot then puts the other totes back into their grid column stacked upon each other.

Clearly, the process of raising totes to the mezzanine level and placing them aside until the right tote is selected does not sound efficient. But that really does not matter. In comparison to humans, robots work cheap. All that matters is that the software controlling AutoStore correctly calculates how long the process of getting a tote to a pick station will take so that the system can keep the human at a station continuously busy. Further, the very layout that makes the robots work harder is what contributes to very high storage density.

I want to explore the flexibility of this solution in a bit more detail.

1. If throughput needs to increase, you can add more robots. This provides much more flexibility than conveyor/sortation systems, but is probably similar to the flexibility of Kiva.

2. If sales increase and more goods need to be stored, you can add more columns of totes to increase the size of the rectangle. The supporting infrastructure, and the mezzanine layer on top of the totes, is then extended to sit upon the new columns. This type of storage expansion flexibility is far better than traditional automation. It may also be better than what Kiva can achieve. With Kiva, only about 8 feet of vertical storage space are used. In theory, Kiva bots could operate on traditional warehouse mezzanine levels (as opposed to an AutoStore-style mezzanine deck), but when I’ve asked Kiva Systems if there are any DCs where their bots are doing this, the response I’ve received is, “Not at this point.” In contrast, I’ve heard that Kiva was de-installed at one site because of its vertical storage limitations. In theory, Amazon would have done thorough due diligence. Perhaps this problem has been solved.

3. Another form of flexibility is network-based flexibility. If a DC where the automation system is used has to close, can the equipment be reused at a different DC in the network? With traditional conveyors and sortation equipment, that is usually not possible. When the DC closes, the conveyors and sortation equipment are junked. With Kiva, you can march the bots into a truck and move them to a new DC at a very small cost. The AutoStore solution would fall somewhere in the middle. You could take down the columnar infrastructure and mezzanine deck and rebuild it at a different DC, but that does not sound easy or cheap.

The Kiva acquisition will lead companies to pay new attention to flexible material handling solutions, which I expect will benefit other solution providers like Swisslog.

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.

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