The Big Picture: Business as Unusual
Big Data, Industry 4.0, the Internet of Things, the Amazon Effect—no matter what your business is up against, it’s probably safe to say your warehousing and distribution operations do not look like they did five years ago.
Start-ups have shaken up the solutions landscape with innovative software, hardware and go-to-market strategies. Established systems suppliers have made meaningful shifts in how they provide solutions and services. In the process, the warehousing and distribution playing field has leveled somewhat. Thanks to consumer demands, massive automated facilities and mom-and-pop shops are expected to deliver similar service. And, thanks to faster and cheaper technology, many solutions exist to bring the capabilities of small, medium and large businesses closer together. In the wake of the Great Recession and the ongoing e-commerce revolution, the companies left standing can choose from a rich variety of solutions.
“There are still casualties out there, but it’s getting to the point where the market has shifted from panic to asking, ‘What are the right ways forward?’” says Corwin Carson, chief revenue officer for InVia Robotics. “The solutions are available today, and innovative technologies are transitioning from the hopeful betas and pilots to real deployments and real throughput.”
InVia and IAM Robotics, suppliers of autonomous mobile robots (AMR) and new players in the materials handling space, are two examples of companies that have structured their business models around the unique conditions facing the industry. By offering robotics as a service (RaaS), they enable customers big and small to begin or gradually advance their use of automation. RaaS allows those companies struggling to attract or retain talent to address non-value-added materials handling tasks without large up-front capital expense or long-term commitments.
At the other end of the spectrum, global integrator Witron (ranked 14th on Modern’s 2017 list of top systems suppliers) has also adapted to help its large, highly automated customers keep pace with the rate of change and the sparse labor pool. First, the company embraced a kind of apprenticeship program that formalized a path for its technicians to transition to being a customer employee, effectively turning attrition from a liability into a benefit. In 2015, it took the concept even further and began operating entire automated facilities on behalf of its customers, managing automated and manual activities.
“When the world is talking about IoT and Industry 4.0, we would like to support customers so they can focus on their competencies,” says Christian Dietl, CEO of Witron Service. “Our core competency as an integrator is designing systems with guaranteed throughput. When, as a service provider, we then operate the warehouse, these objectives are matched with the customer’s objectives: ship on time and accurately at the lowest operational cost.”
Cross-training between maintenance and equipment operation has proved an effective means of optimizing the workforce.
On the supply chain side, Jim Tompkins, chairman and CEO of supply chain consulting and implementation firm Tompkins International, saw an opportunity and founded MonarchFX Alliance. Designed to connect world-class supply chain and logistics companies with world-class sellers of products to “form a reinvented logistics ecosystem,” the alliance is intended to enable companies to pivot in a rapidly changing marketplace. For example, a retailer working from one central North American distribution center will be challenged to open comparable facilities on each coast, especially when the art of planning for the future is murky at best. Tompkins hopes to change that.
“Having talked to a couple hundred brands and retailers, the real issue is not competing with Amazon, it’s profitability,” Tompkins says. “A recent PwC study indicates 90% of companies doing e-commerce are losing money on it. What we do is different because we’re not betting on any one client, we’re betting on e-commerce.”
What each of these companies has in common is a niche that might have seemed impractical or inconceivable just a few years ago. Recognizing that fact, they are also positioning themselves, their customers and their partners for the equally mysterious conditions of a few years from today. These are just a few examples, but they reflect the way the industry has embraced an innovative philosophy where no options are off the table.
According to Tom Galluzzo, founder and CEO of IAM Robotics, the capital model has governed warehouse assets for decades, and it’s characterized by large up-front payments, ongoing depreciation and long-term return on investment (ROI). Automation has traditionally worked best for big players, he adds. Capital expense is a manageable component at that level, but it prevents small and medium-sized businesses (SMBs) from getting into the automation game.
Galluzzo and his team set out to find ways to reduce a customer’s risk when betting on an investment that may or may not stand the test of time. IAM now sells its AMRs through the traditional model but also developed an RaaS model to reduce barriers to entry.
Robotics as a service (RaaS) enables small- and medium-sized businesses to automate without big upfront costs.
“There’s a lot of creativity happening now around business models, and we’re not the only ones exploring RaaS,” Galluzzo says. “There are a lot of interesting things about it that make sense for us as suppliers and for our customers. In the traditional model, there’s a big outlay out front, followed by service and support costs that could go forever. With RaaS, the maintenance costs are spread across the life of the automation. Best of all, the customer doesn’t have to wait for a return on investment. If you have the right business case you can start using robots and saving money from day one.”
InVia’s Carson says this dynamic can help automation newcomers as well as those who have already invested in large-scale automation.
“For SMBs, it’s a huge opportunity to compete with anyone in the world,” he says. “But there are a number of customers who have invested large amounts of capital just to see markets change and the ROI on that capital does not come to fruition as planned. If they were working on a five- to 12-year ROI, a lot can happen. Even a decision as seemingly simple as a warehouse split, from a single central facility to one on each coast, it’s not always easy or possible to spread automation and assets across both facilities. With RaaS, it is.”
Customers want to leverage existing infrastructure, Carson says, and many of the newest companies supplying AMRs can work with nearly all of what already exists in a warehouse. The ability to work with standard components and still create a highly automated system is essential to control the costs associated with automation.
In turn, capital can be redirected to areas that help further grow the business. For example, Carson notes the importance to e-commerce businesses of adding SKUs. Data shows it’s a key way to increase value per customer, whose decision to buy one extra item helps reduce shipping costs.
“Customers recognize that all options are on the table now. It’s back to the drawing board,” Carson says. “There are all sorts of mobile robot companies, all of which provide very strong, adaptable, low cost-of-entry solutions to the market. It’s a whole new world.”
Large and highly automated warehouse systems have made great strides providing the flexibility that traditional automation has not always offered. The modern dynamism of order and SKU profiles continues to challenge such systems, but the greatest struggle in recent years has centered around uptime.
The maintenance of automated systems is complex work, and aggressive service levels leave no room for downtime. Coupled with a dwindling talent pool for skilled technicians, many system suppliers and end-users have struggled to find sufficient help to ensure peak performance.
For Witron, a global provider of intralogistics systems, the issue first arose about 20 years ago. Dietl recalls a number of customers, particularly in food retail, who recognized the value of large automated DCs but who frankly admitted they lacked the competence to maintain them.
Automation must be flexible, such as this track-less, robotic tilt-tray sortation system capable of handling both units and parcels.
In addition to standard after-sales services like spare parts, maintenance, training and help desk, Witron began offering specialized technical on-site services focused on the mechanics and maintenance of the electronics, controls, PLCs, electrical engineering, as well as super-user IT engineers. The first such facility, for a customer in Europe in 1996, began with an on-site staff of six Witron employees. That was the start for Witron as a technology provider that also provides resident staff at the site to support the technology, Dietl says.
Then, in the mid-2000s, Witron worked with a customer in Phoenix, Ariz., to provide technician services locally as well as a staff to operate the equipment. From that point, Dietl says Witron’s involvement in the customer facility increased from a small service team of 10 to 15 people to 60 to 100 people performing maintenance and operation.
“For 10 years until 2015, that model became successful,” Dietl says. “In 2005, we provided such services to seven customers with 300 of our employees, and by 2015 we were in 35 sites with about 1,000 local resident employees.”
Dietl says the journey has helped Witron develop competencies for the organizational and workforce management elements of its new program. For example, since volume varies in retail environments, Witron found a way to cross-utilize workers so machine operators do some maintenance tasks and vice versa. During peak volumes, no maintenance activities are scheduled and those people instead support operations. This helps avoid the need to supplement the workforce with temporary workers, Dietl says, which can be a problem in an automated system that requires more skill and training.
Two years ago, Witron began to operate its first warehouse completely, including the manual tasks before and after the automation—from receiving to forklift operators to picking and shipping. Dietl says the model differs from a traditional 3PL in several important ways. Whereas a 3PL might make some profit selling spare parts, Witron is not interested in making profits on after-sales.
“We act as a full provider, and so the after-sales services are focused on the best possible operational value,” Dietl says. “Where a 3PL workforce is typically flexible, ideally operating with cheapest possible headcount, we are building up a stable of cross-skilled people. Our strategy is to either offer full service, or build up the service operations personnel for the customer and then hand them over if they want that responsibility.”
The cross-training seems to be having a positive impact on job satisfaction, since the average turnover rate in all of its sites in North America is 3% and less than 1% in Germany.
Resident technicians might continue to be employed by the system supplier, or can transition smoothly to becoming the customer’s employees.
“More and more automation in DCs and warehouses is changing to resemble a production line rather than a DC, like in the automotive industry which is driven toward demand chain rather than supply chain,” Dietl adds. “From controls to labor utilization to order processing, we’re implementing interfaces in our warehouse and DC systems in a horizontal way. We have transparency and can plan and connect these elements horizontally to transportation, procurement, even stores, so the customer can proactively plan store activities. We’re looking out a few years strategically, and this model of operating warehouses is a strategic decision.”
Coast to coast, shore to shore
When it comes to building out distribution networks to improve responsiveness and delivery times, strategic decision-making calculations have been upended in recent years. Tompkins, from his position as an industry consultant, first saw the writing on the wall around 2012, when he drew up some projections of what the e-commerce market might look like in five years.
“When I put together some analytics, they were unbelievable—not that you wouldn’t believe them, but I didn’t believe them,” he says. “I saw Amazon getting into private label, being one of the largest if not the largest 3PL in the country with fulfillment centers everywhere, and it didn’t seem like a plausible projection. Many were saying dot-coms won’t make it or be profitable, and at 2% of retail it was just the tail wagging the dog. As a consultant, I thought I can’t take this out and preach it because people will think I’m crazy.”
Fast forward five years, and Tompkins says his seemingly wild projections have turned out to be modest. Along the way, he recognized an opportunity and founded MonarchFX Alliance based on his understanding of the business model developed by Alibaba, a Chinese e-commerce company that facilitates consumer-to-consumer, business-to-consumer and business-to-business sales. The model hinges on IT infrastructure that leverages existing independent delivery and warehousing firms to perform the physical storing, picking, packing and delivering.
“The rationale was that no two or three companies could do this on their own, and now Alibaba connects 3,000 firms to provide e-commerce fulfillment,” Tompkins says. “The model makes a lot of sense, especially when Amazon is doing it so well. Today 52% of Amazon product sold is done by a 3PL that is not Amazon. So Amazon is twice as big as Amazon, if you think of it that way.”
Like Alibaba and Amazon, MonarchFX Alliance is a 4PL, a concept trademarked by Accenture in 1996 as “a supply chain integrator that assembles and manages the resources, capabilities and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.”
The goal, Tompkins says, is to help e-commerce companies break free from the need to build multiple fulfillment centers to ensure their distribution networks can provide the kind of e-commerce service levels consumers expect.
Robotics as a service (RaaS) enables small- and medium-sized businesses to automate without big upfront costs.
“Especially for companies with one fulfillment center serving the entire country, five- to six-day shipping is not competitive, and express delivery and logistics can cost more than the product margin,” Tompkins says. “Many think they can either do e-commerce or make money, but not both. No one company has the economies of scale to make it profitable, so they need a local, multi-tenant 4PL that can make it work.”
Tompkins describes the alliance’s services as additive to its partners’ distribution capabilities. He offers the example of a prospective partner with a two-year-old facility in Atlanta. To consolidate all of its e-commerce fulfillment there, the company designed the facility five years ago, when five-day delivery was a marked improvement.
“They will continue to operate on the East Coast, with the majority of their inventory there,” Tompkins says. “In our West Coast facility—don’t think of it as warehouse, but more as a forward pick location—we will only have the inventory we need, replenished weekly from the main facility. This way, their investment in the Atlanta facility doesn’t have to be thrown away.”
Tompkins partnered with JDA to build out the IT resources to connect alliance partners and developed a robotic, track-less variation of a tilt-tray sorter capable of handling unit and parcel sortation on the same system. As of the holiday season of 2018, the first two facilities will go live in Burlington, N.C., and Rialto, Calif. Tompkins says the first two buildings will provide two-day delivery to 81% of the country, and by 2020 as many as two dozen facilities will provide 100% two-day delivery and 84% next-day.
“If you want a fulfillment presence on the West Coast, great. If next year you decide you want to be in Chicago, great,” Tompkins says. “Delivery pressure is only going to continue, and nobody can keep up by themselves. How else could that Atlanta company put up a new facility every year?”
Companies mentioned in this article: