Get a detailed view of challenges in warehouse automation

Increased consumption and expansion of the logistics industry are driving higher demand for industrial warehouse property. In the past three decades, warehouse stock has risen by over 75% if we talk about the US. Nationwide, the industrial property is now a total of 14.0 billion square feet across. Isn’t it a significant number?

However, if you think Robots for Warehouse Automation Online is done without any argument or facing challenges, you are wrong. Here we are listing two main arguments against warehouse automation; please have a look.

  1. Upfront Investment Costs 
  2. Flexibility

Upfront Investment Costs

The most common reservation retailers have against implementing Autonomous Mobile Robots Online solutions is the high initial investment costs. With already thin margins in retail (net profit margins for top 250 global retailers were ~3% in 2016), any additional expenses might quickly erode profitability. Given the additional costs incurred already in online sales development of the online platform, delivery network, and additional labour-related charges – several retailers delayed the investment in expensive fulfilment centres, preferring to opt for lower capex-intensive strategies until the market matured.

The size of the potential upfront investment in fulfilment centres will depend on a variety of factors, such as the existing infrastructure and level of Autonomous Warehousing Solutions Online required. However, a large part of the cost components needed for the construction of an automated fulfilment centre will also be required for a manual warehouse. Retrofitting an existing warehouse with automated solutions will save the additional costs of constructing the shed, but will at the same time often lead to lower output per square metre than a purpose-built solution, as discussed above, and comes with higher implementation risks as will be seen below.

For a purpose-built fulfilment centre, some of the capex savings from choosing a manual warehouse over an automated one will be offset by additional required land costs. Manual warehouses have a maximum rack height of about 12 metres versus an automatic solution of up to 40-50 metres, thereby requiring a smaller spatial footprint. Furthermore, our conversations with industry experts suggest that the main cost component of a warehouse is steel (racking, conveyors, slots, etc.), which is, to an extent, common across both solutions. Overall, steel costs are 50-70% of the total build costs of an automated warehouse, depending on the speed and throughput of pallets/hour. Given the meaningful cost overlap, the investment decision is often made on an ROI or payback basis, where the differences in operating costs and throughput are the decisive factors in determining whether to AI robotics for Order Fulfillment or not.

However, our studies find that even small-scale Automated Storage and Retrieval Systems (AS/RS) require investments in the range of £3-5m, including the integration of Warehouse Management System costs of £150,000-1,000,000. Furthermore, the equipment provider integrator estimates that there is a minimum requirement of $50m in annual sales to justify the capital expenditure, further estimating that the average payback period can be expected to be in the range of around two years. This effectively excludes smaller retailers from achieving the economics required to justify the capital investment.

Flexibility

The flexibility of an automated setup will always be lower than a manual setup as traditional shelves are inherently versatile and considering that an increase in output from a manual warehouse consists of merely increasing the number of warehouse employees and/or shelves on site. In comparison, with the lead time of 3-4 years from inception to completion of an automated distribution/fulfilment centre, making sure that the setup is sufficiently flexible to accommodate the operating reality of the business at completion is a necessity.

In the case of an automated warehouse, it is essential that the payback time of the investment is within the duration of the outsourcing contract (third-party logistics provider 3PL), or that the system implemented is flexible enough to incorporate changes in sales volumes or product characteristics. For automated systems, this would typically require a modular setup that is easily scaled up or down.

The organization of the overall logistics industry varies from country to country; for instance, the French logistics market is dominated by 3PL providers, whereas in Germany, most businesses operate their own warehouses. Any automated warehouse is custom-built to the business it supports. This would naturally leave 3PL providers at a disadvantage when it is time to renegotiate agreements. Therefore, we see a much higher proliferation of automated warehouses in countries such as Germany relative to France.

An additional area of concern with regards to warehouse automation relates to the implementation phase, and the risk that the instalment process will interrupt ongoing operations, as well as risks relating to system breakdowns, exemplified by the fact that November and December are virtually quiet periods for material handling equipment providers as no retailer risks interrupting operations through installing a new system during peak season.

There is an element of execution risk inherent in any investment. However, in the case of an automated warehouse, these will in general, be lower for a purpose-built warehouse that is used for internal operations than for the retrofitting of an existing warehouse. The same happens in the case of a warehouse owned by a third-party logistics provider (3PL). Retrofitting an automated picking system in an existing warehouse is likely to disrupt current performance levels/capacity, whilst in the case of a breakdown, seeing as most automated systems are closed, there is an existing concern that it will be challenging to perform visual inspections or revert to manual picking in the interim period before the system is restored. 

In summary, a combination of costs and operational flexibility explains a large part of why automated warehouse solutions are not yet the global industry standard.

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