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November 1, 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Readers Respond – Two Paths for DC Automation?

So, are there two paths for DC automation, as I posited a few weeks ago?

Gilmore Says:

"My quick take: I still stand by my prediction that the two ends of the spectrum will tend to grow, and the middle will shrink. Not dramatically, but some. We’ll be watching closely."


What do you say?


Send us your comments here

At the time (see The Two Paths for DC Automation) I suggested that two somewhat opposing forces (high and growing labor costs and challenges, need for greater flexibility), are gradually driving companies towards two extremes in distribution center automation: either highly automated facilities, to drive out labor costs and headaches, or those with little automation, to maximize flexibility. Moderate levels of automation would be squeezed – not eliminated, of course, but companies would tend to drift to one of the extremes.

Was I crazed? We’ll let SCDigest readers help sort it out. Between letters sent directly to SCDigest and to our content distribution partner RetailWire, we received over 30 responses, most of them excellent. In one of my favorite types of columns, this week I get to put my brain mostly on the shelf and share some of the best of those reader comments.

Jim Barnes, president of EnVista, in general agreed with my perspective.

“I see my many companies (Grocery and Auto) pulling automation out of their DCs. We are pushing and we are seeing traction in the area of LEAN Distribution. Given that in the above mentioned industries we are ripping out automation because we can use a WMS with manual processes (cart, pallet picking) and touch the product one time,” he said. “We took one client (Grocery) that had pick to belt, routing sorter and pallet building from 35 cases per hour (total man-hours) to 96 cases (total man-hours) because we went from touching the product 5 times to 1 touch.”

But, he added, “We are using automation in high volume throughput facilities (Retail Apparel and Shoes). Obviously you are not going to pick 100,000 pair shoes in one shift without a Tilt Tray sorter. In summary, I agree with, the extremes: highly automated facilities versus manual facilities.”

Larry Shemesh of Operations Design opined that I was not completely off with my thesis, but that “the application of automation or lack thereof might not be as polarized” as I suggested.

But he adds a point that I think is supportive of one end of my bi-polar view: “Forecast is a huge wildcard in the automation equation.Tight and accurate the business forecasts through the design year (typically five years forward) provide a greater opportunity to effectively apply automation,” Shemesh wrote. “This is partially due to the inverse relationship between automation and flexibility. Often, this is the last nail in the coffin for automation projects. When executive management’s crystal ball is foggy, it is virtually impossible to develop meaningful return on investment calculations” for automation.

Shemesh added his own prediction: “I expect that there will be remain a relatively small percentage (10-15%) of highly automated supply chain operations here in the United States over the next decade and that 20-25% of operations will remain largely manual. The balance will apply pockets of automation in the areas that are most labor intensive and/or time and capacity critical.” In other words, he does expect the middle to remain strong.

Marc Wulfraat of TranSystems/ESYCN agrees that we can expect to see growth in the percentage of highly automated DC systems, driven as I suggested by growing labor concerns.

“There is little debate that these [highly automated] projects involve risk and are expensive (in that the ROI tends to be longer term) but the companies that are investing in these systems are doing so primarily as a labor strategy,” Wulfraat wrote. The bottom line is that we in North America will eventually be facing a much more serious warehouse labor shortage. The risk of increasing wage rates, labor shortages and labor disruption will drive more and more firms towards automation solutions.I think we are now just seeing the tip of the iceberg.”

He says he is seeing a lot of interest by companies in the grocery industry, for example.

“In recent years we have seen a number of firms in this industry (Kroger, Supervalu, Sobeys, Stop & Shop, Wegmans, H.E. Butt to name a few) implement or announce major automation projects and I am aware of more companies that are secretly exploring moving in this direction,” Wulfraat added.

Dean Starovasnik of Peach State Integrated Technologies notes that for any individual company, how they look at this equation depends significantly on their own approach to finance.

“The level of automation which is justifiable is at the mercy of the ROI/IRR [internal rate of return] hurdle the client has set,” Starovasnik wrote. “Privately held companies are often more willing to take a more extended ROI perspective than those publicly traded. The forces at work in this are well understood “on the street” and can drive payback periods half the length or less than those accepted by a privately held company.”

Mark Lilien of the Retail Technology Group added this interesting perspective: “Physical distribution executives have been debating increased automation paybacks for decades. Many distribution centers haven't tried sustained significant productivity incentives for their work forces, however. When productivity incentive programs are done skillfully, the paybacks often beat the risk and expense of major automation. Another alternative: sooner or later, more physical distribution will be done from Mexico, cutting labor costs considerably.”

So there you have it. I may do this again next week, as we only scratched the surface of the comments we received, including many more excellent and thoughtful responses.

My quick take: I still stand by my prediction that the two ends of the spectrum will tend to grow, and the middle will shrink. Not dramatically, but some. We’ll be watching closely.

All the letters mentioned above are included in full in this week’s Feedback section below – you will enjoy them. The rest soon, but we’d still like your perspective.

What is your reaction to our reader comments on this issue? Do you agree that the two extremes – highly automated and manual – will expand, and the middle will shrink? Or will we see the status quo? Why? Let us know your thoughts at the Feedback button below.

Let us know your thoughts.

Want a printable version? Go to:

www.scdigest.com/assets/FirstThoughts/07-11-01.php

 

Dan Gilmore

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NEWS BITES

This Week’s Supply Chain News Bites – Only from SCDigest

November 1, 2007
Supply Chain Graphic of the Week - Understanding World Import and Export Flows

October 30, 2007
Supply Chain by the Numbers: October 30, 2007

News from Section Sponsor: Optiant

Optiant Announces Multi-Echelon Inventory Optimization Enterprise Agreement with P&G

SCM STOCK REPORT

By the end of last week, Wall Street’s major indexes (for the most part) recovered from the previous week’s slide.

The stocks in our Supply Chain and Logistics index similarly muddled through the week mending the previous week’s damage.  In the software group, JDA improved (and then some) with an increase of 13.4%.  In the hardware group, both Zebra and Intermec were up (7.8% and 4.2%, respectively).  In the transportation and logistics group, Yellow Roadway gained 6.4%, followed by Union Pacific (up 4.3%).         

See stock report.

NEW ON-TARGET e-MAGAZINE


Weekly On-Target Newsletter
October 30, 2007
Edition


EXPERT INSIGHT:
The Executive View

by: Gene Tyndall

Another Excellent Presentation at CSCMP - "Are you the Weakest Link in your Supply Chain?"

Time for CEOs to do a Self-Assessment?

SUPPLY CHAIN TRIVIA

Q. What is the generally accepted length of the "red zone" regarding in-transit truck cargo security - meaning the travel distance beyond which thieves are unlikely to keep following a truck moving cargo after it leaves the origin?

A. Click to find the answer below

YOUR SUPPLY CHAIN QUESTIONS ANSWERED!

Reader Question: Can Bucket Brigades Work with Mechanized Order Picking?

Reader Question: Is there a True Global RFID Standard?

See our expert answers at the links above. Share your knowledge or perspective.

Or, ask your question

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YOUR FEEDBACK

Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're really behind again - bear with us. But keep the letters coming! In the next few weeks, we'll start adding feedback right on specific story pages, so you can see what others are saying.

As noted above in First Thoughts, we received several dozen letters on our Two Paths for DC Automation column of a few weeks ago. We publish several of them here this week, and more next week. That includes our Feedback of the Week from Jim Barnes of Envista, and all the other letters referenced in First Thoughts. Each of them is worth the read.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – On Two Paths for DC Automation

I see my many companies (Grocery and Auto) pulling automation out of their DCs. We are pushing and we are seeing traction in the area of LEAN Distribution.

Given that in the above mentioned industries we are ripping out automation because we can use a WMS with manual processes (cart, pallet picking) and touch the product one time. We took one client (Grocery) that had pick to belt, routing sorter and pallet building from 35 cases per hour (total man-hours) to 96 cases (total man-hours) because we went from touching the product 5 times to 1 touch. We are using theory of constraints, meaning yes, you can pick 300 cases per hour (pick to belt), but you are going to build a pallet at 60 cases hours at a pallet build line (hence, total throughput) is only 60 cases per hour for the facility.

We are using Automation in high volume through put facilities (Retail Apparel and Shoes), but again dependent upon volume. Obviously you are not going to pick 100,000 pair shoes in one shift without a Tilt Tray sorter.

In summary, I agree with, the extremes: highly automated facilities versus manual facilities. My point is that automated facilities need to evaluate the value of WMS and that manually operated facilities need to really leverage the WMS to gain efficiencies. Warehouse Control Systems (WCS) solutions are closing the gap in automated highly automated facilities. You know it also depends upon DC flexibility. I like the fact that if your business model is changing or growing (or major spikes in season) throw people at the problem with WMS efficiency.

The Europeans have been automating facilities because labor is extremely expensive and land costs are outrageous (High Bay Storage, ASRS, etc.) Note, my experience with Western Europe is centric to France, Netherlands, and Germany. The unions in these areas are difficult to work with, so the Europeans are designing solutions to minimize the headache of dealing with Unions. I have a client in France (outside of Paris) where they spent over $200EU to automate carton erecting and case taping in order to replace two people. It could not be justified with ROI, but they justified by not having to deal with the French labor union.

Jim Barnes
President
EnVista

More on DC Automation

As usual, good stuff on the DC automation subject. My take, as a designer and integrator of DC material handling systems is firmly in the camp of “it depends.” I have developed business case analyses for designs that have led to both ends of the automation spectrum as well dead in the middle. The costs you mentioned must be understood but also the product value, associated margins and customer service issues come into play.

Once these factors are included in the analysis, there remains one critical element to consider. The level of automation which is justifiable is at the mercy of the ROI/IRR hurdle the client has set. Privately held companies are often more willing to take a more extended ROI perspective than those publicly traded. The forces at work in this are well understood “on the street” and can drive payback periods half the length or less than those accepted by a privately held company. While this can frustrate the designer with the “right” solution, it represents the reality that all stakeholders’ needs, including shareholders, must be considered. Anyone else see this differently?

Dean Starovasnik
Director, Solution Development
Peach
State Integrated Technologies

I have heard more lately from eCommerce distribution execs, so my perspective here is skewed: they tell a story of building distribution capacity as fast as they possibly could by throwing as many people at it as they possibly could, during the big rush to eCommerce. But now they're at capacity in their existing facilities, or are missing fill rates because they don't have real-time visibility into their inventory position, and they're faced with either investing in automation to increase efficiency and raise the bar on capacity in their existing sites, or run out and buy/build a new DC. Automation is winning out in the short term.

But it's fascinating to me that the messages these guys key in on are the basic value propositions for basic automation. There may be some threshold where your volumes are too small to justify automation at any level, but for the most part, it's surprising to me that this is news--fancy laser-guided robots aside, the business case for more automation in a DC is pretty much a slam dunk. The only question is whether you implement it with enough discipline to actually capture all of that business case.

Nikki Baird
Managing Partner
RSR Research

I just returned this week from the HK Systems Material Handling and Logistics Conference, which is an excellent annual event for anyone interested in exploring automation within the North American context.

Several sessions dealt with the subject of U.S. population demographics, which in my mind will serve as the single largest driver towards automation applications for North American distribution centers. The projected growth in the U.S. economy combined with the well-documented forthcoming decline in the number of young able-bodied people available to work in physically demanding warehousing environments will create a significant shift towards automation by the year 2015 in my opinion. Even today, fewer people are willing to work evenings, nights and weekends, which is when many distribution centers need to operate to service customers. In many areas of the country, warehouse labor turnover rates exceeding 30% have become the norm.

Take a look at the U.S. grocery industry, which happens to be one of the most labor-intensive industries for distribution operations and which typically runs on net margins of 2% or less. In Europe, automation has been widely implemented for years, whereas most North American wholesale and retail grocery companies have historically operated conventional distribution centers (…the last big wave of automation died out in the early 80’s when the last of the Ordermatics were ripped out).

In recent years we have seen a number of firms in this industry (Kroger, Supervalu, Sobeys, Stop & Shop, Wegmans, H.E. Butt to name a few) implement or announce major automation projects and I am aware of more companies that are secretly exploring moving in this direction. Automating pallet moves with ASRS equipment has been around for a long time, but now European companies like Witron and Nedcon (DLS) are making some serious headway in successfully automating full case order selection.

There is little debate that these projects involve risk and are expensive (in that the ROI tends to be longer term) but the companies that are investing in these systems are doing so primarily as a labor strategy. The bottom line is that we in North America will eventually be facing a much more serious warehouse labor shortage. The risk of increasing wage rates, labor shortages and labor disruption will drive more and more firms towards automation solutions. I think we are now just seeing the tip of the iceberg.

Marc Wulfraat,
Director
TranSystems|ESYNC

Physical distribution executives have been debating increased automation paybacks for decades. Many distribution centers haven't tried sustained significant productivity incentives for their work forces, however. When productivity incentive programs are done skillfully, the paybacks often beat the risk and expense of major automation. Another alternative: sooner or later, more physical distribution will be done from Mexico, cutting labor costs considerably.

Mark Lilien
Retail Technology Group

SUPPLY CHAIN TRIVIA

Q. What is the generally accepted length of the "red zone" regarding in-transit truck cargo security - meaning the travel distance beyond which thieves are unlikely to keep following a truck moving cargo after it leaves the origin?

A. 200 miles, according to security pros. This means drivers should avoid any stops within 200 miles of the origin point.

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