Warehousing Archives

Global Warehouse Investment Driven by Secular Trends

Warehouse Automation | By Clint Reiser • 08/19/2015

Earlier this month, I published a Logistics Viewpoints article discussing the prevalent factors affecting the global WMS market. I mentioned that the research process leading to the publication of ARC’s WMS Global Market Research Study includes interviews with executives from numerous WMS software companies. However, the interviews are only one part of the data gathering process. We also utilize trends from our many years conducting this research and complementary ARC research such as our Warehouse Automation & Control study. Finally, there is much third-party research that provides valuable context for our analysis. This includes macroeconomic data and research on complementary markets. Warehouse and logistics property investment is among the most complementary to the WMS and warehouse automation markets. CBRE and Prologis are global organizations that publish insightful logistics property research for regions across the globe. I find trends in this market to be especially effective at providing color to the developments in warehouse technology markets.

Globalization and International Trade
Prologis recently published a paper on logistics property obsolescence, the causes, and the implications of the process. This report provides useful insight into property dynamics and points out structural shifts in the global demand for warehouse capacity. For example, Japan’s economic transition from manufacturer to large importer of goods has led to insufficient quantities of institutional distribution warehousing to support imports. Prologis quotes CBRE research that estimates the Japanese institutional logistics market grew almost 200 percent, or an annual rate of over 10 percent, from 2006 through 2014. So, although the Japanese economy is growing slowly, this shift in supply chain networks and distribution patterns is supportive for warehouse and distribution investments and I believe it will likely spur investment in warehouse automation as well. Similarly, European trade growth has been substantially higher than the region’s GDP growth. This growth has led to warehouse property development in northern European port areas and inland hubs such as Lyon France and areas of Poland.

The E-Commerce Impact
CBRE has identified “technology” as one of three long-term structural shifts affecting industrial property markets (the others are globalization and demographics). The firm published a report discussing results from polls and discussions about technology’s impact on industrial property. The results, obtained from its Power of Three conference in Paris, show that e-commerce and online retailing is the factor expected to have the greatest impact on logistics occupancy decisions in the near future (50% choosing it as the technology likely to have the greatest impact). This is consistent with ARC’s research on the WMS and Warehouse Automation markets, showing that investments to support e-commerce and omni-channel fulfillment is still the predominant dynamic stimulating growth of these markets as well.

CBRE also publishes quarterly Marketview reports that provide updates on the regional industrial real estate markets. In its US Industrial Q2 2015 report, CBRE further notes that the structural changes of omni-channel retail and e-commerce will drive logistics facilities investment in markets of all sizes to enable quick delivery access to as many customers as possible. The growing demand for warehouse space in secondary markets in the US is partially driven by this e-commerce competition to deliver orders same day or next day. Amazon’s fulfillment center expansion into smaller facilities closer to population centers is probably the most frequently noted example.

The strength of the US dollar was noted a transitional factor. I agree, as exchange rates typically adjust over time unless they’re constantly pegged in a similar manner to China’s policies in the past. In contrast to US logistics property demands, Canada is coming off a situation-specific downturn in logistics property demand resulting from Target’s former facilities coming onto the market after the company’s retreat from Canada. Target Canada’s warehouse automation stock is likely to affect the warehouse automation market in Canada and the US as well.

CBRE’s recently published Asia Pacific Market Outlook noted much of the same factors impacting that region, stating that demand for logistics warehousing space will remain strong due to organized retail in emerging markets and strong growth of e-commerce. Similar to the US, e-commerce providers in China, India, and Japan are also locating fulfillment properties closer to population centers to reduce delivery times. Other factors positively impacting the region include increased use of 3PLs to achieve efficiency improvements and China’s gradual transition to increased consumption. Notable exceptions to the region’s growth include Thailand, due to political instability, and Singapore, due to labor shortages.

Conclusion
ARC’s ongoing research on the global WMS market recorded a post-recession uptick in WMS revenue growth. Although signs of this rebound appear to be moderating, numerous secular changes are contributing to ongoing investment in WMS and warehouse automation. Since the warehouse technology markets are clearly complementary to warehouse property, it is useful to monitor developments in this segment of real estate. The structural changes impacting the global industrial real estate market are consistent with the major contributors to growth in warehouse technology adoption. These changes, notably globalization and e-commerce, are contributing to warehouse space and technology growth rates above those of global GDP.

Global currency fluctuations have impacted trade and financial markets significantly over the last year. However, these foreign exchange rate effects typically have only temporary impacts on global imports and exports. Regardless, the logistics sector is likely to obtain a net benefit from increased outsourcing and trade. Meanwhile, investments in logistics technologies are also likely to increase as planning tools will be required for distribution network planning and facility reconfiguration will stimulate additional investment in WMS software and warehouse automation.

“Would’ve, Could’ve, Should’ve” Invested in Warehouse Automation

Warehouse Automation | By Clint Reiser • 03/11/2015

I wish that I had access to investing in warehouse automation companies. I wish they were publicly traded. Then I could’ve made some hefty gains on those investments. I think many private equity executives, aware of what they missed, are thinking, “Ah, I should’ve invested in X or Y warehouse automation company when I had the chance.” And I’ll just about guarantee that some distribution operations executives must have used “would’ve, could’ve and should’ve” in a sentence when they received those surprising increases in e-commerce orders.

Limited Public Information
I am currently in the final stage of my market study on the global warehouse automation and control (WAC) market. I picked a good time to research the market because it is in the midst of a large growth spurt driven by the global boom in e-commerce. In fact, my estimate puts the 2014 growth rate at around 10 percent. For context, real global GDP growth was 3.7 percent (IMF) and growth in US software investment was 3.9 percent (US BEA). But I must admit, prior to embarking on this project, I was unaware of the degree to which the WAC market was growing. The growth isn’t obvious on the surface because most of the vendors are privately held companies. And those that do report their warehouse automation revenues bundle them with other material handling revenues, dampening the reported growth rates.

Where is the Investment Going?
The e-commerce boom is really showing its effects across the distribution world. For example, just last week I referenced a Financial Times article that reported European investment into properties including warehouses and distribution hubs amounted to €19.8 billion in 2014, representing a 34 percent increase over the previous year. And the UK experienced the highest growth rate, showing a 65 percent increase. Amazon’s spending on warehouse automation tend to receive the greatest amount of press, with the company’s high-profile acquisition of Kiva Systems in 2012 being the most well-known. However, Amazon continues to invest in new distribution centers that utilize a broad array of automation. But other e-commerce companies and brick and mortal retailers with e-commerce operations are investing heavily as well. One large warehouse automation vendor informed me that they received a billion dollar project order recently. This project will take multiple years to complete, but that is still one impressively large order. And these investments are not just limited to North America and Europe. In fact, Asia and Latin America are responsible for much of the growth, as the growth in e-commerce is truly a global development. The development extends up the supply chain as well. The requirements of e-commerce are creating automation demand from channel partners including parcel carriers and manufacturers that need to meet the changing requirements of their retail partners.

What’s Delivering the Value?
The increased demand for warehouse automation is primarily to support the changing requirements driven by high volumes of small, individual orders. But this is creating demand across material handling types including AS/RS, shuttles, AGVs, pick to light, and conveyors and sortation. Although I mention the types of material handling, it is really the software and intelligence of the warehouse control systems (WCS) that are delivering the incremental value realized by these customers. The WCS are becoming more intelligent, more productized, and are well-serving to the agility needed in fast-paced, dynamic e-commerce fulfillment operations.

I’m looking forward to ProMat 2015 later this month in Chicago. If you are attending and would like to share information about a warehouse automation and control case study, a recent technology advancement, or ARC’s market study on this market, please feel free to contact me at creiser@arcweb.com.

Hiring Effective Temp Workers for the Warehouse

Labor | By Steve Banker • 09/23/2013

I heard an interesting speech by the director of logistics at a consumer goods company at the S&OP Innovation Summit. Like many companies, this company has highly-seasonal demand. To meet this demand at the warehouse, the company relies extensively on temporary workers. This is a story of how this warehouse went from a highly ineffective process for sourcing temporary labor to a highly-productive process.

Before the company improved its hiring process, it had turnover of about 50 percent among temp workers. Workers who struggled to do what was expected of them were not happy with the work. It was also an environment where new employees worked for two weeks with trainers, and yet after four weeks on the job, the pickers were still only 95 percent effective.

After improving the hiring process, the turnover rate fell to just 6 percent. Further, in the improved process, the new hires spent only two days with trainers and yet got to 95 percent picking efficiency in less than two weeks.

What was the secret? This company established a good partnership with a temporary employment agency that specialized in logistics; it developed an effective test that potential hires needed to pass before being hired; and it worked to continuously refine the test. Because the company did not have to provide as much lead time to train workers and make them effective, and because of the much lower turnover rate, it could hire fewer workers closer to when they were actually needed. In short, there were substantial payroll savings associated with the improved process.

The director pointed out that this was a win/win for the temp agency as well. It cost the temp agency about $100 for a background test and $50 for a drug test. When turnover was 50 percent, that was a big investment for the temp agency. With a low turnover, the agency achieved greater profits.

The company moved to testing that was much more skills based. At the temp agency, prospective employees would actually be tested on their ability to do an RF region scan (to certify they were in the right zone), followed by bin location scan (to make sure they were selecting the right product), and a product scan (to ensure they selected the correct number of items). The handheld scanner was programmed to score them on whether the right scans were made and how long it took them to do the scans. If a prospective employee could use the RF scanner in multiple order picking scenarios, close orders correctly, and indicate to the WMS pick discrepancies (like a slot not having enough product), the company was confident that worker would be productive within a few days.

This director took inputs from his workers on what questions they felt were important to ask. He also emphasized the importance of communicating effectively with the temp agency on which pickers were working out. Finally, he stressed how important it was to take a data-driven analytic perspective to revising the test, over and over again, until it had high predictive value.

A Revolution is Coming to the Spare Parts Warehouse

Warehousing | By Steve Banker • 07/23/2012

Inventory management is very difficult in a spare parts warehouse. For example, if you are a car or truck manufacturer, your warehouse network needs to carry spare parts for a vehicle you might have stopped making decades ago. Further, your network of dealers and repair shops don’t want to wait for spare parts; industry standard is to provide them with next day delivery of requested parts.

What this means is that a spare parts warehouse might have to carry a number of slow-moving C items and incur their associated inventory carrying costs.

A spare parts warehouse can also end up storing tens, or even hundreds, of thousands of stock keeping units (SKUs). That means a large warehouse and high capital expenditures. A large warehouse means longer picking paths, which means higher labor costs. Finally, it is not unusual to distribute slow-moving parts in two steps: a national distribution center air freights the part to a regional warehouse that then ships it out to the dealer. This means high transportation costs.

But the spare parts warehouse is on the cusp of a revolution when it comes to managing slow-moving inventory. These DC’s are going to become manufacturers of C items.

ARC Advisory Group recently published a report by Dick Slansky titled, “3D Printing: Creating Physical Parts and Products from Virtual Models” (available to ARC clients only). Here are a few excerpts from the report:

While a bit misleading, the term “3D printing” refers to a manufacturing process in which three-dimensional computer-aided design (CAD) files are downloaded to a machine that creates multiple layers of material (paper, plastic, metal, etc.) that are then fused together to form a three-dimensional object representing an exact replica of the 3D virtual model.

From a technological perspective, 3D printing is an outgrowth of traditional 2D printing in which a layer of material (usually some form of ink) is applied. The layer is so thin there is no noticeable height. What 3D printing does is to greatly extend that height by applying multiple layers of materials, adding the third dimension and actually building the object. Software that takes a series of digital slices through a CAD model defines the layers. These digital slices can be put together using different techniques that involve a variety of technologies.

To produce auto parts, for example, “metallic powder can be spread onto a tray and then solidified by using a liquid binder or by sintering it with a laser or an electron beam.” A tailpipe, for example, can be made by adding layer after layer of stainless steel powder and then cooking it with an electron beam laser. The SKU would need to be lightly finished at the end of the manufacturing process.

“Today, 3D printers are mainly used by design engineers to build part prototypes,” Slansky writes in the report. “However, this is changing rather quickly as manufacturers look to use 3D printing to build production parts that will be used in larger assemblies, as well as direct products for the consumer.” Further, “as 3D printers have become more sophisticated, reliable, and capable of working with a broader range of materials and processes, the machines are increasingly being used to make actual production parts. Today, more than 20 percent of the output of 3D printers is for production parts rather than prototypes.”

From a spare parts perspective, one advantage of this process is that there is no long tooling set-up process, which would make it uneconomical to produce small lots and would require warehouses to store more parts than they really need. Also, when spare parts are made of expensive raw materials, such as titanium for an aerospace spare part, this form of manufacturing has the advantage of being “additive” — i.e., you don’t have to bore out and waste an expensive raw material.

Additive manufacturing represents a disruptive technology that will support a significant change in the way companies manage a network of spare parts warehouses. Eventually, it is a technology that might, as Slansky put it, “help usher in a new economic model for manufacturing in which mass customization and manufacture-to-order will prevail.” But in the nearer term, as the cost and reliability of additive manufacturing continues to improve, it is apt to transform warehousing first.

Kiva Systems Acquired at a Very Steep Price!

Material Handling | By Steve Banker • 04/09/2012

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.

Guest Commentary: Cultural Transformation is at the Core of Continuous Improvement in Warehousing and Distribution

Guest Commentary | By Carl Fowler • 01/19/2012

Today, more than ever before, companies are looking for ways to implement Lean manufacturing concepts into their distribution and warehousing network as a way to control costs and improve operational performance. This research often leads to the purchase of new technology or equipment. But while investment in these tools might create incremental savings, there’s a far more effective resource that’s often overlooked: employees.

The successful implementation of Lean in a warehouse setting truly begins with a cultural transformation. An organization’s people are its most valuable asset — one that is already in place, and with training and information, is poised to deliver sustainable savings and create operational efficiencies with staying power. It’s this cultural transformation that enables a continuous improvement environment to exist. The Lean journey begins when employees are empowered to act as the primary agents of change.

Think of the employee as the surgeon and the warehouse as the operating room. The surgeon’s time is the most valuable. He or she is the one that is essential to the care of the patient, the one that makes the biggest impact on their health and recovery. It’s the responsibility of the support staff, which in the warehouse case would be the management team, to make sure the surgeon has all of the available tools, training and equipment, as well as a room that is prepped to allow them to deliver the highest level of value in the shortest amount of time to maximize their efficiency.

Employees on the warehouse floor are “the surgeons.” They know exactly what they need in place to do their job efficiently, while also adhering to high quality standards. The management team has to listen to them and learn what those needs are and make sure they are creating an environment where the employee can thrive and be the most productive. To drive the highest level of value, it is critical that warehouse associates are encouraged to identify and own the elimination of waste and inefficiencies. Doing so not only reduces costs, but increases employee engagement because they are being empowered to make their jobs easier. Through the act of Lean “Kaizen events,” or small focused efforts aimed at identifying areas of inefficiency and creating solutions to resolve them, employees take ownership of the problem-solving process. It is the job of the leadership team to make carving that waste out possible.

Getting employees to a place where they feel comfortable pointing out problem areas within their workplace isn’t a simple process. Those organizations with the best chance of success have implemented Lean over time and have done so by keeping their employees informed and by building trust. It’s critical that the communication lines remain open with employees from the start. Management has to explain what brought them to adopt a Lean philosophy and what their expectations are moving forward. Why are we doing this? What is the organization’s vision? What is its strategy? Why should the employee help advance the cause? It has to be easy for people to understand and it requires an investment of time and training on behalf of the company. Once employees understand an organization’s core values and areas of focus — and that an efficient operation leads to profitability and thus job security for them — change can be generated from the warehouse floor. This, of course, means teaching employees how to utilize tools and Lean processes such as value stream mapping and visual management, or how to conduct a Kaizen event. It’s an evolutionary process.

Helping employees realize that they’re responsible for the collective success of the team in the warehouse is absolutely crucial. Visually displaying progress in real-time using Lean tools like at-a-glance boards is an effective way to do this. However, they are just that — tools. It’s what the employee does with the tools that really makes the impact. In the warehouse, a picker, for example, should know how many picks he needs to complete during a standardized work increment. How is the quality? Is he under capacity or over capacity? It’s difficult to pinpoint areas for improvement without knowing where one stands. Insight and knowledge engages the employee to champion change.

New warehouse management systems and other physical equipment can help companies gain incremental savings. But real savings occurs when you unlock the true power of Lean, empowering the employee to make the changes that they know need to be made on the warehouse floor. The employees drive the long-term, sustainable results. So, when you teach your employees how to identify problems, and you give them permission to solve those problems — and your leadership team supports those actions — then it becomes self-perpetuating. This isn’t a top-down approach. It takes on a life of its own, and that’s what really carries organizations to the next level in terms of operational performance and efficiency.

Carl Fowler is Senior Director, AIG Business Development at Menlo Worldwide Logistics. During his eight-year tenure with Menlo, he has worked in transportation, warehouse operations, account management and business development, and has earned a senior leadership role responsible for the company’s 4PL product offering. With an extensive background in manufacturing and warehousing distribution, Fowler has been immersed in the logistics and supply chain industry for more than 17 years. During that time, he has had the unique opportunity to work at all levels of the automotive logistics industry, from large tier-one suppliers to one of the early lead logistics providers at General Motors.

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