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2020 Technology Roundtable: Meeting front-line challenges

The pandemic quickly shifted the discussion to the processes, software and technology tools that are helping to improve e-commerce fulfillment on the front lines. Our panel shares their insights on the next steps logistics and distribution operations need to take to keep their companies—and the nation—moving.

Today’s logistics managers are facing challenges that their predecessors couldn’t have imagined. Matching the speed of digital business, meeting shifting customer expectations and running the race to deliver orders of all sizes faster than ever are putting increasing pressure on logistics operations in every industry.

On the heels of the pandemic, this year our panel chose to place their focus inside the four walls as so many of our warehouse and DC operations quickly found themselves on the front lines of meeting daunting supply chain challenges. Now, more than ever, our panel suggests that logistics and operations managers need to increase their speed and transform their operations if they want to remain viable.

This year we’re joined by Dwight Klappich, vice president of supply chain research at Gartner, who will examine the booming trend of “hyper-local” fulfillment; Ian Hobkirk, founder and president of Commonwealth Supply Chain Advisors, who shares his insights on the role automation will continue to play in soothing our e-commerce challenges; and Norm Sanez, managing director at supply chain consultancy St. Onge, who offers practical advice for keeping projects and investments moving inside of operations.

Hyper-local fulfillment takes flight

Logistics Management (LM): From your unique perspective, how has e-commerce changed the general fulfillment environment and what do you see as the new fulfillment reality?

Dwight Klappich: Customers want instant gratification, so the days of distribution centers (DCs) being hundreds of miles from them are over. Consumers are now more demanding—and even more fickle. Consumers want the best price with delivery as fast as possible, increasingly the same day, and they want a simple buying experience with numerous channel options, and they want a wide assortment of goods at their fingertips.

Combined, this could be lumped under the term convenience, or more specifically “shopping on the terms the consumer wants rather than just on those terms offered by the retailer.” Where historically we saw a pendulum that swung back and forth between centralizing and decentralizing DC networks, the new world order that’s needed to serve today’s demanding consumer is permanently moving to hyper-distributed fulfillment networks.

LM: The idea of “hyper-local fulfillment” has bubbled up to the top of the list of trends these days, especially with logistics mangers becoming more involved with their organization’s warehouse/DC operations during the pandemic response. First, how do you define a “hyper-local fulfillment” operation?

Klappich: Gartner defines “hyper-local fulfillment” as an emerging concept that relies on a highly distributed network of very small, local fulfillment centers, located very close to consumers that can profitably complete same-day orders. Gartner has long had a five- level model for codifying warehouse operational conditions where Level 1 is very small and simplistic and Level 5 is highly complex and automated.

A hyper-local fulfillment center would generally be a Level 1 warehouse with some of the following characteristics. First, it would have people, but not full-time logisticians. In this case the person’s primary job is typically something else, such as sales or as a service technician. Second, it would have a primarily manual process with very low complexity.

Typically, inventory is stored in a single location in support of some other function, such as sales or customer service. And third, it would have technology, but must be simple to set up and very easy to use by non-logisticians and efficiency must be a core design principle.

LM: How does a supply chain operation need to change its mindset to prepare to meet hyper-local fulfillment needs?

Klappich: To get started, supply chain organizations need to do three things. First, companies need to develop their internal network design capabilities investing in both systems and developing internal competencies around these systems. This is needed to ensure that they develop the proper, profitable and sustainable hyper-local network.

Second, they need to start modeling and mapping out their processes to ensure they build the appropriate hyper-local fulfillment operation for their business. With that in mind, companies need to work toward answering the following questions related to their hyper-local distribution centers. Why will we need them? What activities will they support? When will orders be fulfilled? Where will they be located? Which facility best serves a customer? Who will staff them? How will these facilities be operated?

Finally, because warehouse management is a core component of hyper-local fulfillment, companies must stratify warehouse operations to develop the right warehouse management system (WMS) strategy. Each company can and likely will have a different stratification approach that fits the specific needs of their business.

Is their hyper-local network comprised of very small Level 1 DCs staffed and operated by humans, or are they looking to fulfill directly from a store? Or are they looking at leveraging materials handling automation or robotics to reduce labor costs, and would their operations be best suited to an automated micro-fulfillment center approach like those offered by providers like Fabric or Takeoff?

When we talk about stratifying the DC network we mean mapping out the network and defining the operational characteristics of each DC in the network to fully understand the environmental traits of each DC. This will help a company define the appropriate WMS and automation strategies for its individual business.

LM: We now know the new realities. How are retailers solving the “hyper-local” challenges and what role does technology play?

Klappich: Companies must approach their hyper-local fulfillment strategies with an agile and continuous improvement mindset. Few companies are going to be able to approach this as a deterministic problem where they strive for one “right” answer. Instead, many will and should experiment testing various approaches both digitally and physically to find models that best fit their specific needs.

We’ve seen the emergence of tools that allow companies to create digital twins of their warehouse operations where they can virtually model and simulate various scenarios before making sizable investments in physical assets. In fact, tools like Emulate 3D, Xce Logo, Korber/Cirrus or Logivations help companies digitally model, visualize and simulate their operations.

LM: Can you give us an example of a successful hyper-local fulfillment operation in action?

Klappich: While retail is the most obvious industry struggling with these pressures, they’re not alone, and Gartner sees similar challenges across industries. For example, Gartner was speaking with a very large food and beverage company that has 1,100 warehouses around the world and over 700 of those are Level 1, hyper-local warehouses where they serve the local community.

Additionally a large telecom company had two Level 4 warehouses and over 110 Level 1 warehouses across the U.S. supporting two-hour service-level agreements for their service business. Also, a large 3PL now rents space in high-rise office towers in high-density urban areas like Singapore, Hong Kong and other major cities in Asia.

We distinguish between hyper-local fulfillment, which is a comprehensive strategy for serving the needs of demanding customers, and micro-fulfillment centers that are often an automated approach to addressing hyper-local fulfillment. While there is a lot of market interest in micro-fulfillment centers, Gartner had predicted that by 2025, only 10% of click-and-collect orders would be furnished by micro-fulfillment centers.

This is not for lack of interest and consideration on the part of companies, but more a recognition that most retailers are currently in discovery mode, they’re evaluating their options and they haven’t yet solidified their strategies. However, adoption could be accelerated by the response to COVID-19 as retailers recognize the need to move forward more quickly.

Automation to sooth e-commerce headaches

LM: COVID-19 has changed supply chains in some drastic ways. How do you think distribution centers have most been affected?

Ian Hobkirk: COVID-19 is certainly changing the face of DCs in some lasting ways. The virus has greatly accelerated what has been a decades-long trend toward e-commerce and away from brick-and-mortar retail. Many consumers are trying out e-commerce or grocery home delivery for the first time, and really enjoying the convenience of it. This behavior likely isn’t going to change once the virus abates.

This creates problems for distributors, however. Many companies that have their retail, wholesale, and e-commerce channels siloed into separate DCs are really struggling to effectively fill orders. Their e-commerce channels may be really taking off, but they may have vital inventory stranded in retail DCs that are largely unused in the wake of store and mall closings.

Additionally, some states have had much more stringent regulations than others to force non-essential DCs to close. I’ve talked to companies who have feared that their only e-commerce DC might have to close up, and that their retail or wholesale DCs aren’t equipped to fill online orders. This lack of flexibility in distribution centers is becoming a real challenge for some companies.

I’ve also talked to other companies in essential businesses like food and beverage that are seeing record-high sales levels, but are struggling to fulfill orders due to staffing problems. Some companies that have had employees test positive for the virus have voluntarily closed their distribution center for short periods to disinfect and reassure employees that they have a safe environment.

Other companies have reported high absenteeism rates as warehouse workers fear for their health and safety, or have children at home that can’t go to school and have no child-care options. And social distancing practices, while vital, do take a toll on productivity. So even for companies that are seeing record sales, it has been a challenge to get the orders out the door.

LM: Do you think that the pandemic situation will have an impact on the adoption rate of warehouse automation in general?

Hobkirk: Certainly. More and more companies are realizing that having highly manual distribution operations puts their companies at risk if there is a disruption to the supply of labor. For years, the U.S. has lagged behind other parts of the world like Europe in adoption levels of warehouse automation.

This has been due in part to the U.S. having somewhat lower labor costs than European countries. Technologies such as automated storage and retrieval systems (AS/RS) have been harder to cost-justify here.

The return-on-investment period is longer, and many mid-sized companies have opted out of this technology in favor of more manual methods. However, now we have an added element of risk to consider—risk that the low-cost warehouse labor won’t be able to come to work in a crisis. I think that risk element will cause many companies to revisit their return-on-investment models and invest more heavily in automation of all types, but especially goods-to-picker systems with ultra-high pick rates.

LM: What are some specific areas where we can expect to see logistics and distribution operations tapping automation in the wake of the pandemic?

Hobkirk: As noted before, goods-to-picker systems in general will likely be very popular due to their extremely high pick rates, and the potential for space savings as well. However, I think the technology types companies are most likely to invest in will be those that enable efficient fulfillment of e-commerce orders, or that help adapt retail and wholesale fulfillment systems to also be able to handle online orders.

For example, many retail and wholesale DCs—for soft goods especially—utilize batch-picking processes and then sort to order using unit sorters (tilt-tray sorters, bomb-bay sorters, cross-belt sorters). This technology is very well suited to large retail orders, but quickly chokes on large volumes of small online orders.

Companies are finding that technologies like put walls and automated put systems used in conjunction with unit sorters can solve this problem. The sorter performs a primary sort and sends groups of e-commerce orders to sorter chutes. The chutes emptied, and then the put system does the final sort to order. You still get the turbo-charged efficiency of batch picking, you get high equipment utilization rates on the sorter, and a highly efficient final sort to order.

I expect we’ll also see renewed interest in semi-automated packing systems for online orders. So many DCs have small armies of workers packing orders—this is a risk point in a health crisis. Technology like case sealers, print-and-apply systems for shipping labels, in-motion scales for manifesting, and shipping sorters have been around for years, but again have had a high bar to clear in terms of return-on-investment. The math changes on some of that now, and this technology will be more attractive.

LM: Do you think that grocery distribution will change in some lasting ways?

Hobkirk: Absolutely. More and more people are experiencing the convenience of grocery home delivery for the first time and will likely continue to use it after the crisis passes. For the last decade there has been a debate in the grocery retail community as to whether it makes sense to fill online orders from a central, specialized DC or to pick them from the retail stores themselves.

The centralized model requires a high degree of geographic demand density to be cost justifiable and is most commonly seen in very highly populated areas like New York and the Northeast corridor. When many retailers have run their models, they’ve found that in other parts of the country, not enough consumers use home delivery for a centralized online grocery DC to be viable.

The thinking on this is already changing to some degree; for example, we’ve seen Kroger planning to build out a number of central DCs in the U.S. heartland. Now that more consumers are willing to use this service and pay the delivery shopping and delivery fees, I think we’ll see more and more grocery retailers revisit their network design models and perhaps find the centralized distribution center model makes sense.

These centralized DCs will likely rely on a lot of automation. In fact, Kroger has partnered with Ocado to utilize robotic order fulfillment technology. I think we’ll see technology like this, as well as AS/RS system for picking and order buffering, along with shipping sorters become popular in this style of distribution center.

LM: What will be the overall societal impact of all of these changes?

Hobkirk: The pandemic will almost certainly result in more automated and less manual DCs in the future. This will likely mean more resilient and reliable supply chains as consumers will have a greater likelihood of being able to get essential items in a crisis as DCs are less vulnerable to labor-related shutdowns in a health crisis. The downside of course is that there will be fewer jobs for warehouse workers. This is a shift that businesses and government will need to work together to address.

Technology’s impact on labor

LM: Based on your time inside a variety of facilities over the past year before the pandemic, how would you best define the environment inside warehouse and DC
fulfillment operations?

Norm Sanez: Before COVID-19 hit, labor shortages were already a primary concern for warehouse and DC fulfillment operators, and many were turning to automation. This crisis has closed many warehouse and fulfillment operations, while others are running at four times peak volumes to keep up with the demand. Many have been able to borrow or hire labor from neighboring operations that closed, yet others are struggling to find labor.

Given this market scare, many are pausing investments in planned automation, which were to counter the need for labor. For those operations running at full steam, the strategy is to hunker down and push through this challenging period. During the rebound, most will get back to their planned improvements and others may consider additional automation to prepare for a future pandemic.

LM: Is there a way to roll up the biggest challenges facing warehouse/DC operations considering this new environment?

Saenz: There are plenty of best practices and technology to design the “perfect” distribution and fulfillment center for your operations. The key moving forward is making the right decisions on improving your operations, considering any lessons learned from the pandemic and the available project capital spend.

The challenge is spending the available capital in the optimum areas that provide the biggest return on investment. The additional challenge is making sure enough time and quality data is used to develop accurate solutions. I’d go as far as saying that there is no margin for error coming out of this pandemic.

LM: From your experience over the past year, are you seeing any predominant technology trends being applied to help tackle these significant challenges?

Saenz: Having quality item master data can be as simple as buying a tape measure and scale and employing an on-going manual process. You can also require this information from your vendors during the sourcing process. If you must collect this information, then a more efficient and accurate approach is to lease a cube/scale machine. This technology integrates into most information systems, and allows data to be uploaded and utilized right away.

The importance of quality item master data is that it allows you to get the most from your warehouse systems and empowers engineers to develop accurate solutions. Maintaining this information supports the time crunch on many design projects, shorting the planning process by weeks and increasing the accuracy of the solutions.

LM: From a practical perspective, what seems to be working best in terms of meeting the common challenges? Are there any myths that you can dispel in light of the variety of technology solutions being offered?

Saenz: While robotics and other parts to person technology is growing in usage, the predominant solutions remain the variety of rack types, shelving, mezzanines, lift trucks and conveyor. Coming out of this pandemic, these proven, long-standing solutions, may provide your operations with the right level of automation and within available capital budgets.

From what we’re seeing, the traditional three-level pick module with zone-divert conveyor technology and advanced controls with an outbound sorter remains a dominant automated solution for e-commerce fulfillment. Often integrated with a pick module are put-walls, pick-to-light, RF scanning and voice technologies to enhance the productivity and accuracy of the system. These technologies are viable and support many companies, while others can justify a multi-shuttle, AGVs, AMRs and other robotics.

LM: Taking all of this innovation and automation you see being applied into consideration, are there any tried and true pieces of equipment, software or automation being overlooked as a solution?

Saenz: What is often overlooked is the basic use and configuration of storage equipment, processes and information systems supporting the operations. Many companies leap to automation and advanced software to solve their issues, only to find that methods, storage equipment and data were insufficient to realize the expected gains from the new technology.

These fundamentals, may not be flashy, but should be the starting point for any operation struggling with lowering productivity and a lack of capacity or space. Coming out of this pandemic is not the time to overlook the basics.

For example, if you have increased the number of items, and your order or inventory profiles have changed, you should be adjusting your storage equipment, processes and slotting. When an operation is experiencing growth pains, available locations become scarce, multiple SKUs end up in the same location, and locations are added making others too small to support daily volumes.

This migration to inefficiency, ends-up increasing the amount of replenishments, picker congestion, and the operation spirals out of control. Right-sizing the pick locations and adjusting product slotting are fundamental solutions that can correct these issues with minimal investment and no automation.

LM: So many logistics, warehouse and DC professionals are feeling overwhelmed these days. What practical advice do you have for operations managers who are helping their facilities undertake the digital transformation in 2020?

Saenz: The digital transformation starts with having accurate data. You need to start out collecting this information using a manual approach or with the use of available low-cost item scanning/weighing technology that I mentioned earlier.

Evaluate your requirements, and current capacity at the location and item level to uncover the fundamental changes to make immediate improvements. I’ll suggest getting your current operation running smoothly before leaping to costly automation. The jump to advanced technologies is much easier when moving from an efficient manual operation, armed with quality data and solutions.

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