Put strategy first when pondering automation for your distribution center

  • April 19, 2022
Chess board

The unsurprising eagerness of venture capital (VC) fund investments is manifesting in an automation tech glut in the distribution center (DC) space. Motivated by trends like labor and land shortages, DCs are amid an automation transformation. Never has defining an automation strategy been more important.

There’s no shortage of VC cash available to logistics tech startups

With a brightly shining spotlight centered on supply chains for the past two years, it’s no surprise that total funding in logistics startups has seen a dramatic increase. It’s growing at over 70% compound annual growth rate (CAGR). Logistics technology startups raked in over $25 billion in the first three quarters of 2021 and the incentives for continued investment persist.

The rise of the of the “micro” DC

“Micro” is a relative term. The size of a micro-fulfillment center (MFC) can range from 5,000 to 50,000 square feet. Those reduced square footages allow for locations in dense urban areas, typically within 40 miles of most intended customers. Smaller footprints also lead to reduced rents compared to a standard customer fulfillment center (CFC). The proximity to consumers lowers final-mile delivery costs, too. It’s no wonder that MFCs accounted for more than half of logistics real estate leasing activity in the third quarter of 2021. The “urban logistics” trend is fueling demand for these highly automated, smaller locations.

Vertical logistics integration grows more “fashionable” among retailers

Acquisitions and partnerships in this space are an “in” thing right now, and they won’t be going out of fashion anytime soon. For example, clothing retailer American Eagle took in AirTerra and its parcel optimization technology, along with third-party logistics (3PL) provider Quiet Logistics.

Target started early. The retailer bought Grand Junction, a software platform that helps retailers determine the best delivery method and track carrier performance, in 2017. Its 2020 acquisition of Deliv brought with it same-day delivery routing technology. Target now applies that tech to its 2021 purchase of on-demand delivery service Shipt. Target uses Deliv’s technology to generate more efficient routes for Shipt.

Grocery chain Kroger partnered with U.K. e-grocery specialist Ocado Group to build automated CFCs across the U.S. and expand their retail footprint. The first CFC opened in spring 2021 in Ohio. The second opened in Florida later in 2021. Kroger plans to open 20 CFCs over the next three years.

Coping with shortages in warehouse space and labor availability

In the third quarter of 2021, U.S. demand for industrial real estate exceeded supply by 41 million square feet. This pushed the national vacancy rate in the fourth quarter down to a record 3.7% in the Cushman & Wakefield U.S. National Industrial MarketBeat report for Q4 2021.

On the labor side, the December 2021 U.S. unemployment rate was 3.9%. This was higher than in December 2019 (3.6%) yet reflected a tighter labor market. The December 2021 labor force participation rates stood at 61.9%, nearly 2% below February 2020 levels, due to the continuing effects of the pandemic. The rising wages and signing bonuses of the past year offer silent testimony to the ongoing constraints in today’s labor market.

Both trends will remain with us for the near- and mid-term, making an automation strategy a necessary part of your DC operations as you attempt to mitigate the effects of both. Additionally, warehouse labor shortages are most pronounced in markets with high distribution center densities — Greater Memphis, Southern California's Inland Empire and Allentown, Pennsylvania, for example.

Building the capability to rapidly open DCs at scale

No other factor drives home the need for a coherent DC automation strategy like this one. Let’s explore it with an example. We’ll call this “a tale of two companies.” One jumped on the automation bandwagon without hesitation — not a bad thing — but applied no strategic groundwork. The other is, well, ecommerce powerhouse Amazon.

Company one responded to increasing demand by creating DCs in its usual, strategically located fashion. However, with automation, the lack of a logical strategy led to adopting “the best that money could buy.” These DCs work fine on their own (most of the time). Each employs unique implementations from a variety of vendors. There’s little to no overlap of methods, capabilities and management procedures between DCs. It’s functional, but a needlessly complicated hodgepodge.

On the other hand, Amazon looks like it has a standardized automation strategy. One that can easily adapt to exploit the individual physical specifications of any space. This capability makes it simple to arrive and equip a DC with a standard package of automation solutions. That’s probably how Amazon blanketed the U.S. with over 400 new DCs in the last two years alone. The company wastes no time or money on repeating unnecessary decisions along the way.

Now, we can’t all have the resources of Amazon. However, the rise of on-demand warehousing companies like Stord and Flexe allows organizations to dramatically decrease the cycle time of standing up additional fulfillment capability.

Developing an automation strategy will feel familiar. It begins with benchmarking order profiling, current performance drivers, earnings before interest and taxes (EBIT) targets and theoretical evaluations of newer technology options. Your strategy will lead to the creation of a decision framework for DC automation. The goal here is aligning leadership on which critical capabilities to focus on, including:

  • Rapid fulfillment
  • Labor shortage
  • Capacity constraints
  • Safety challenges
  • Sustainability

Organizations that commit to this process will start slowly but finish with a strategy that underpins thousands of decisions and supports sustained rapid growth.

If, in the end, you decide that automation isn’t right for your operation, that’s a perfectly valid strategy. So long as you have a method to evaluate your options and base your decision on cost-service-sustainability trade-offs, the right strategy for your organization may be no automation at all.

There’s no point in chasing shiny robotic objects if automation makes little sense‌.

The rise of automation and the multitude of technologies to choose from require the development of a strategic decision framework. Contact us and see how NTT DATA can guide you in developing this critical part of your foundation for growth.

— By Vikas Argod

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