Never before has the competition for warehouse and fulfillment labor been so fierce, strongly driven by sustained growth in B2C channels. In the United States, for example, employment levels across distribution centers are at all-time highs and wages have risen to well above $18 an hour, yet attracting and retaining warehouse employees remains elusive. In the short term, strategies such as bonuses, accelerated pay raises, and tuition reimbursement are helping. But the long-term implications of a high reliance on labor are clear: automation in warehousing is no longer just nice to have but an imperative for sustainable growth.
Fueled by venture capital over the past five years, the automation industry has seen increased availability of new warehouse-automation innovations, supply chain as a service (SCaaS) models, and technology that integrates multiple solutions to help retailers address some of these challenges.
For instance, the adoption of autonomous mobile robots (AMRs), technology that eliminates significant nonproductive walking time in warehouses, has progressed from early-stage pilots about four years ago to multiple at-scale deployments today. For example, DHL rolled out 1,000 Locus Robotics AMRs and will deploy up to 2,000 robots by 2022.1 These technologies aren’t just for larger companies. German toy retailer Rofu Kinderland built a new warehouse that includes 57 robots retrieving 3,500 different products from more than 28,000 bins, increasing efficiency and delivery speeds.2 Innovators are gaining momentum as well. For example, Alert Innovation developed a microfulfillment-center technology platform for Walmart to handle the demands of grocery e-commerce. The proof-of-concept pilot system is now in full operation.
Automation capabilities will play an influential role in the future size and scale of omnichannel networks. To successfully navigate the many choices for automation, retailers must have an informed perspective on where automation can create value, reduce risk, and improve reliability across an increasingly complex network of fulfillment nodes. Retailers should then use a three-step process—strategy, design, and implementation—to translate their vision into an optimal automated warehouse.
The changing face of the warehouse-automation industry
Investments from retailers in automation are poised to fuel significant industry growth: the warehouse-automation market is forecast to reach $51 billion by 2030, a CAGR of 23 percent.3 The wave of innovation in warehousing has been fueled disproportionately by venture-capital funding for new start-ups, whose solutions increasingly influence the future of the omnichannel warehouse. In addition, private equity has provided a significant tailwind for key companies. For example, SoftBank invested $2.8 billion in AutoStore, an automation provider geared to the e-commerce and grocery industries.4 Many of these technologies—for example, automated guided vehicles (AGVs) or the next level of automation AMRs as unmanned transport next to warehouse employees—have proved their effectiveness at scale in addressing the challenges of traditional e-commerce warehouses, such as labor shortages, SKU-complexity growth, and increasing service expectations.
Increased M&A and investment
Marketplaces and platform players have long recognized the importance of automation and have been rapidly acquiring robotics companies. Several at-scale investments have grabbed headlines. In 2019, the online marketplace Shopify spent $450 million to acquire automation provider 6 River Systems, with the goal of extending its AI-enabled fulfillment network.5 Amazon is developing proprietary automation solutions via Amazon Robotics to improve warehouse productivity and lessen the labor burden. Zalando has partnered with multiple automation partners to accelerate consumer-delivery times and improve operating efficiencies.
Several retailers have publicly committed significant capital toward their automation strategies. For instance, Walmart plans to allocate nearly $14 billion for warehouse automation and other business areas,6 and ASOS announced $100 million in spending to expand the capacity and productivity of its warehouses.7 These moves are indicative of an industry-wide focus on automation, now even further accelerated as a response to changing market conditions brought about by the COVID-19 pandemic.8
Larger players in the warehouse-automation industry have sought to create distinctive and integrated capabilities through acquisition. For instance, Toyota Material Handling has acquired integrators including Vanderlande and Bastian Solutions, Kion Group has acquired Dematic and software company Digital Applications International, and Honeywell has acquired Intelligrated and Transnorm. Acquirers are seeking to develop more end-to-end solution sets rather than point technologies as they seek to unlock greater value through integrated solutions. The automation market remains concentrated, with the top five automation and material-handling players still accounting for more than 50 percent of current market share.9 Beyond the top ten in each region, players mostly are specialty and niche automation providers.
Automation in action
Leading retailers are aiming to make warehouses responsive, resilient, and reliable to accommodate the ever-growing e-commerce market and incorporate lessons from the global pandemic. Along with improving existing warehouse capabilities and enabling new nodes of fulfillment (such as urban fulfillment centers), they view warehouse automation as an important part of the solution. In a recent McKinsey survey of 50 retailers across apparel, grocery, and other key sectors, more than 80 percent of respondents indicated they intend to increase automation investments over the next two to three years.10
And it’s worth it: some retailers have cracked the code and have begun rolling out ambitious upgrades. As part of a €500 million initiative, Edeka invested €93 million to expand its existing warehouse in Berbersdorf, increasing the total number of SKUs from 2,900 to 12,700 while adding a 300,000-square-foot, partially automated picking-and-storage area.11
Leading retailers are aiming to make warehouses responsive, resilient, and reliable to accommodate the ever-growing e-commerce market.
Navigating automation choices
Multiple technological advancements have pushed the boundaries of what is possible in warehouse automation. As part of an overarching automation strategy, retailers that develop an end-to-end vision for the warehouse of the future have to identify the specific use cases and unlock value (Exhibit 1). Navigating the choices has become more complex, with new providers entering the market and larger conglomerates and venture-capital funds pursuing consolidation in an effort to build an integrated portfolio of solutions for clients. Acquisitions within the automation-provider landscape will continue, significantly increasing the pressure on automation companies to offer warehouses end-to-end solutions.
We envision three warehouse archetypes that will inform the design of automation systems: dedicated, shared, and integrated omnichannel (Exhibit 2). These archetypes can help retailers narrow down the set of use cases and solution sets and better understand the complex choices among automation providers, integrators, and start-ups.
This archetype consists of warehouses specifically designed for a given channel (such as e-commerce), product flow (for example, consolidation), or product type (apparel versus hard goods). Generally, dedicated warehouses solve for scale and cost efficiency in the network. Distribution formats can range from large-scale facilities that cover national distribution needs (more than one million square feet) to smaller, urban-based fulfillment centers (less than 20,000 square feet) that balance same-day and next-day speed with cost efficiency.
Given the specific focus of these distribution formats, integrated and specialized end-to-end automation concepts generally work best. These warehouses benefit from improved space efficiency, greater labor productivity, faster four-wall cycle time,12 and downstream efficiencies (such as store-friendly pallets). Examples of dedicated warehouses include retail fulfillment (Amazon Go stores), national e-commerce fulfillment (Zara), store replenishment (such as Albertsons and Carrefour), delivery centers for small parcels (Post), and category-specific facilities (such as Reckitt Benckiser and Zalando).
Warehouses serving multiple channels or product segments, which may include wholesale and direct-to-consumer (DTC) channels or ambient and perishable-product segments, make up this archetype. While these warehouses exist under the same roof, the operations and inventories are independently managed by channel. This archetype offers greater flexibility than a dedicated warehouse in that multiple channels and categories may be served under one roof or in a campus setting. The multipurpose structure has several benefits: more efficient use of distribution space, cost savings from consolidated labor and overhead, and external advantages such as inbound consolidation. The systems technology and automation may need to support specific flows, handling requirements, and order profiles of each channel. As a result, individual warehouses still operate mostly independently. Automation solutions can still be integrated, but they may combine various fit-for-purpose technologies to address unique channel needs—for example, a retail-store warehouse could be on the side of the building (with automated pallet and case storage where store replenishment orders are prepared), while the e-commerce warehouse could be on mezzanines where individual units are picked with a multishuttle or autostore.
Integrated omnichannel warehouses
Omnichannel warehouses seamlessly serve all channels in the network and generally have the technology and systems to handle inventory across a mostly common stock pool (for example, the same picking locations or an automated storage system). These facilities offer the greatest flexibility in the network and reduce systemwide inventory-carrying costs, but retailers may have to make trade-offs on cycle time, dedicated capacity, and productivity. The set of automation solutions, which may be a hybrid of the capability or shared archetypes, could allow convergence in upstream warehouse processes such as inbound and storage. Distribution operations may have different requirements for fulfillment-execution processes to meet the needs of individual order profiles and channels. For example, online consumers might order small quantities and request a lead time of less than 24 hours, while stores might accept 48-hour or longer lead times with larger volumes being picked and shipped. Hence, the requirements in warehouse operations need to be matched along the steps across channels, balancing the trade-offs of solution benefits.
This archetype, which is best suited for stores that order in eaches13 (an approach many apparel and electronics retailers take), can support a shared picking location between stores and online. It provides two benefits: First, it allows inventory pooling and the more efficient use of space. Second, it enables increased scale for automation and the better use of system capacity, with the ability to handle stores and online channels with different seasonality and peaks.
Because each type has its own advantages, identifying and implementing the optimal solution requires an informed decision-making process.
Selecting the right automation solutions
In response to a rapidly changing marketplace, many retailers are moving away from a single solution or turnkey provider and building a portfolio of solutions to fit their network. Traditionally, partnering with a turnkey provider offered advantages, such as integration across multiple solutions and pricing transparency. While this still holds true, the pace of innovation in solutions continues to accelerate, and innovations in technology and operating models provide compelling reasons to explore a multipartner strategy.
For instance, along with technological innovation, many new robotics and automation providers have innovated as-a-service models (XaaS), such as robotics as a service (RaaS) and fulfillment as a service (FaaS). These solutions alleviate the traditional hurdles of up-front capital risk (RaaS helps retailers overcome ROI hurdles such as a payback of two to three years) and offer retailers a variable cost structure better aligned to testing and learning across new technologies and concepts. Because of lower investment levels, retailers are now able to test and learn with selected partners, building up their automation capabilities. Companies can excel in innovation by replacing their tried-and-true approaches to warehouse automation with in-house capabilities to explore earlier-stage implementation. For example, companies can conduct a pilot with AMRs that assist picking operations alongside employees on site. The benefits of this experimentation can be significant—for example, progressing from proof of concept to large-scale implementations.
The range of design and implementation choices varies considerably depending on strategy. An AMR project may require six to eight weeks to pilot, whereas case multishuttles can take 12 months or more to accommodate infrastructure procurement and build-out. In our experience, a three-step process can help retailers determine the right approach to warehouse automation.
Traditionally, retailers might take a site-by-site view of their automation strategy. This exercise includes both establishing criteria for prioritizing automation opportunities and defining business cases to evaluate fit-for-purpose use cases and potential partners for a new or existing operation. We find the more innovative retailers are taking an end-to-end view of their network, developing scenarios for both productivity and short- and longer-term labor risks. A balanced approach to use cases may open up a variety of solutions, while the site-to-site approach focuses solely on payback for individual locations.
In this step—segmented into preconceptual, conceptual, and detailed design—retailers conduct a financial evaluation, create optimized warehouse designs, and select providers by stress testing simulations. The design workshops include retailers, joined by their chosen automation suppliers; beyond them, an objective, informed, third-party perspective—for example, via consultancy—is essential to reach the optimal design. The design process goes beyond the selection of automation to encompass warehouse analytics, strategic network effects, and much more.
Where necessary, retailers can identify and select a warehouse-automation system integrator or can orchestrate across a set of partners to build the case-specific automated warehouse. Some companies may also select a logistics service provider to operate the new warehouses and orchestrate the warehouse launch, based on a case-by-case evaluation.
This process has repeatedly captured substantial value because even small decisions (for example, initial product-segment growth assumptions that, in the end, significantly influence automation-picking capacities) have a major impact on projects of this scale. By following this holistic approach, retailers can create a compelling business case for automation and gain buy-in for investments.
The rise of e-commerce in omnichannel has elevated the demand for warehouse automation across industries. Retailers that innovate in this space can keep pace with high consumer expectations for service and personalization. A structured approach helps to pinpoint their current status, identify available and suitable options, and implement warehouse automation and utilization—including harnessing analytics enabled by warehouse automation. With these insights, companies can select the optimal automation for their warehouses.