Is Warehouse Automation Worth It?

Spending millions of dollars on a single technology application would give any chief executive officer pause, especially CEOs running margin-challenged grocery operations. But should food retailers take a closer look at what warehouse automation — one of the most massive technology investments out there — can do for their business?

Thirty or forty years ago, when automation in distribution centers first emerged, the answer would probably have been no. But these days a confluence of factors is creating a better business case for warehouse automation, changing the way retailers are judging the technology.

“It’s time to take an open-minded look at automation,” said Raj Veeramani, professor, Center for Retailing Excellence, University of Wisconsin-Madison, during a presentation on automation in January at the Supply Chain Conference, sponsored jointly by the Food Marketing Institute and the Grocery Manufacturers Association.

“There’s only so much faster that you can drive a forklift truck in the DC, only so fast that you can load cases onto a pallet,” said Veeramani, who helped conduct a recent study of the business case for warehouse automation. “At some point, you want to take a quantum leap in the way you run your operations.” But first he advised conducting a careful and comprehensive analysis of whether there can be a reasonable return on an investment that starts in the millions for basic automation and can exceed $100 million for a comprehensive system in a large warehouse.

(Photos: The AutoStore system being implemented by Wal-Mart’s Asda banner in the U.K. uses robots (right) to retrieve items stored in bins and bring them to pickers at ground level.)

Besides being costly, warehouse automation is less flexible than labor and less amenable to change with evolving business conditions than a traditional format. It’s like “putting all of your eggs in one basket,” said Craig McPhee, director of warehousing, WinCo Foods, during a second session at the Supply Chain Conference.

Warehouse automation has been implemented to a much greater extent by retailers in Europe than by those in the U.S. However, a number of regional U.S. grocers and wholesalers as well as national chains have begun installing automation in their DCs in recent years, including Kroger, Target, Wal-Mart, Hy-Vee, H.E. Butt Grocery, Publix, Supervalu, Stop & Shop, Associated Food Stores and C&S Wholesale. In Canada, Sobeys has made a major investment in automation at its Vaughn, Ontario, warehouse and a new DC under construction.

Perhaps the biggest factor affecting the automation calculation here and abroad is the aging market for warehouse labor. “You must be in complete denial if you think the aging DC workforce is not real,” said Veeramani, who noted that 25% of the U.S. population is 55 and older, a segment that will grow to 30% in 2020. Moreover, the hard, physical nature of the work causes both high turnover and difficulty in attracting young replacement workers.

Looking ahead, retailers should be asking themselves whether in 15 years they will be able to hire the people they will need to operate their DCs, said Ananth Krishnamurthy, a colleague of Veeramani at the University of Wisconsin-Madison, who spoke with him at the Supply Chain Conference session. Automation, of course, would be one solution to any impending labor shortages while at the same time reducing labor costs.

One retailer taking Krishnamurthy’s advice is Hy-Vee, West Des Moines, Iowa. “Recently our leaders have been open to looking at automation because they see cost savings and labor issues we may face in the next several years,” said Tod Hockenson, vice president, distribution for Hy-Vee, during the second automation session at the conference.

“It’s harder and harder to get people to work in our industry picking boxes,” said Robert Doyle, vice president, operations, for Price Chopper Supermarkets, Schenectady, N.Y., who also spoke at the second session.

There are other factors driving interest in automation. One is the proliferation of new items that make it more challenging for retailers and wholesalers to stock and efficiently distribute goods to stores. Another is the high cost of fuel, which puts a premium on limiting the number of store deliveries even as demand grows for better service levels.

Accounting for labor pressures and other considerations, as well as the degree of automation implemented, Krishnamurthy puts the ROI for warehouse automation at between three and 10 years, while Veeramani made it a more optimistic two to five years.

The Full Monty

Over the past several years, “a new generation of systems” has emerged to address retailers’ warehousing challenges, said Veeramani. As a result, food retailers and wholesalers are experimenting with a range of automation options, from partial to full-blown, and for fast-moving grocery products to slow-moving HBC/GM merchandise.

Some large retailers, like Kroger, Supervalu, Target and Sobeys, have opted to try comprehensive automation in their DCs. Sobeys, for example, opened a fully automated warehouse in Vaughn, Ontario, in late 2009, that supplies dry grocery products to the majority of its stores in Ontario; the system was supplied by German automation provider Witron.

The 500,000-square-foot Vaughn DC, which is 65 feet high, automates everything from the moment a product enters the building, through the picking process and onto delivery trucks headed to stores, explained a YouTube video called “Sobeys-Delivering the Future-Vaughn RSC (Retail Support Center).” “This is a leap forward in grocery DCs,” it said.

(Photos: Large retailers like Kroger and Safeway use complete systems from Witron that automate the warehousing process from receiving to store delivery.)

According to the video, the Vaughn facility receives 320,000 cases daily, compared with 100,000 cases at other Sobeys facilities. As pallets are received, they are sent via conveyors to high-bay storage that maintains a two-week turnover of inventory. The pallets are then moved to a de-palletization area where they are automatically dismantled; cases are separated and placed on trays for storage in a selection area, each tray holding a single case. The trays are ready to be picked and assembled for store orders.

When an order is placed by a store, the system picks and transfers cases onto pallets, ensuring “near-perfect order accuracy,” the video said. The cases are stacked in sequence for optimal stocking at the store. The system can ship 1.4 million cases per week, allowing for volume growth, greater assortment, more frequent deliveries and fewer DSD deliveries from manufacturers. “One of the biggest advantages is [fewer] DSD deliveries, [fewer] trucks at the store dock door, and more time spent serving customers,” said the video.

Sobeys is now constructing a 415,000-square-foot DC in Terrebonne, Quebec, that will use the same automation technology employed at the Vaughn DC. The new DC, scheduled to open in early 2013, will consolidate all of Sobeys’ dry grocery distribution in Quebec.

Witron’s order-picking machinery using AS/RS is also deployed at four Kroger DCs and two Supervalu DCs, said Brian Sherman, vice president of sales and project realization, Witron Integrated Logistics, Arlington Heights, Ill., Witron’s U.S division. Unlike the new Sobeys DCs, the automation at Kroger and Supervalu was retrofitted into existing facilities. The automation “eliminates the need to build a bigger warehouse” to accommodate the proliferation of SKUs, he said, adding that it reduces labor count by “over half.”

In the Witron system, there are only two manual “touches” outside the scope of the automation — when products are dropped at the receiving area and when they are picked up in fully wrapped, 7-foot-tall pallets at the shipping dock.

With the automation, the system removes 95% of items from “pick-front locations” where selectors manually select cases. “For some items — loose unstable items like bagged cat food — it’s not possible to be automated,” said Sherman.

Sherman declined to cite the cost of the full automation except to put it in the “millions,” though he said the system lasts for more than 20 years and has an ROI ranging between three and five years. The ROI is based on reductions in labor and transportation costs, the latter stemming from better-built pallets that fit on trucks in greater quantities with less damage to products.

Hybrid Solution

Rather than investing in a full-scale system, it’s possible to adopt a “hybrid solution,” which is more affordable and available to companies with less than $1 billion in sales, said John McGlasson, vice president of logistics, Food Tech, Rockland, Mass., who also spoke at the second automation session at the Supply Chain Conference. “It’s what you can do without investing tens of millions of dollars,” he said.

A hybrid solution can be easily expanded and purchased as a commodity. Moreover, it allows companies to keep conventional applications like voice selection so that there is no “massive retraining and redeployment of employees,” said McGlasson.

An example of a hybrid solution is what Associated Food Stores, Salt Lake City, did in 2007 when it added 56,012 square feet to its perishables distribution center, including an additional 732 pick slots and 4,200 storage locations, and installed four, 60-foot-high AS/RS (automated storage and retrieval system) mechanisms, each with rotating fork cranes.

The cranes are designed to put away pallets on the concrete mezzanine level in either storage or a pick slot. Products consist of high-volume, mixed-commodity perishables such as yogurt, eggs and lunchmeat, as well as dry cross-docked items, accounting for 22% of total facility volume, according to Food Tech, which built the expansion. The system also moves completed manually picked pallets down to the shipping area without an elevator.

“The cranes have worked out well for AFS,” said Bryan Goins, senior vice president of distribution and transportation for AFS. “We feel we need to have our arms around technology including some automation. When we added the expansion, we felt this would be a good time to make the investment.”

AFS projected that the AS/RS would save $340,000 annually in put-away and replenishment labor costs, while improving selection productivity by 10% to 12%, or $145,000, according to Goins. “The outcome was similar to the original projections,” he said. “The savings in our automated area [are] on track to make the projected ROI.”

Goins noted two issues with the automation. One is that delivered pallets need to meet quality standards such as those provided by CHEP. In addition, the automation needs to be configured to meet certain communication requirements. “For example, when we are about to mark out a hot item, we want that particular pallet to go directly to the pick slot rather than follow the original process,” he said.

Also, the automation savings were accompanied by “a slight drop in production in the old perishables area,” added Goins. But AFS made some modifications to inventory allocation between the original perishables warehouse area and the automated area, and now “we feel confident in the investment [in the expanded warehouse],” he said.

The automation at AFS also includes a special-order mini-load system, which is used to cross-dock as well as temporarily warehouse one and two cases of special ordered product. “Our retailers cover different geographic zones and have special products that separate them from their competitors,” said Goins. “This mini-load system is one way to keep the products together and another tool to help our stores.”

The AFS perishables warehouse was originally slated to be 110,000 square feet, but the automation allowed it to be reduced to 56,000, said Food Tech’s McGlasson. “In essence, the automation was free,” he said. “We paid for the [AS/RS cranes] with the reduction in square footage.”

Picking Pieces

Some retailers have focused their automation efforts on piece-picking of slow-moving HBC/GM items or other products that aren’t necessarily supplied by manufacturers on pallets. “You’re already seeing manufacturers thinking about getting away from shipping pallets to retailers,” said the University of Wisconsin’s Veeramani. “With these systems, you can handle material in smaller quantities.”

For example, Kroger and CVS have each installed a tote-based dynamic picking system (DPS) from Witron for piece-picking of slow-moving items.

Hy-Vee followed a similar path at its 1,200-SKU pharmacy distribution center last year, installing an A-Frame autopicker from Knapp AG, an Austrian warehouse systems provider. The A-Frame holds the top 600 pharmacy items, which account for 85% of pharmacy volume.

Hy-Vee’s Hockenson described the system as “a great big vending machine,” adding, “It’s a little labor intensive loading it, but when you see it pick the order it’s pretty slick.”

Hy-Vee previously employed a labor-intensive cart-based picking procedure for pharmaceuticals, capable of picking about 180 units per hour or 100 totes per hour with 20 employees. By contrast, the autopicker can pick 172 pieces per minute or 800 totes per hour with five employees. “It was an eye opener,” Hockenson said “You can see why we automated pharmacy.” On the other hand, he acknowledged there is a learning curve for the system. “We didn’t bounce right off the bat to 172 units per minute.” Refrigerated items like insulin are still handled manually.

In addition to productivity, other factors cited by Hockenson for selecting the automation were order accuracy, limited space, low margins and the increase in sales, units and SKUs.

Over the past year, Hy-Vee has also automated the bagging and palletizing part of its ice-making operation (the production part was already automated). Ice production is a highly profitable enterprise — an 8-lb. bag costs 40 cents to make and sells for $1.99 or more, said Hockenson — that justified the $1 million investment in automation.

With the additional automation, Hy-Vee went from producing 4,000 pounds of ice per man-hour to 16,000 pounds per man-hour, and eliminated labor-intensive tasks that employees hated, Hockenson said. The productivity boost translated into an ROI of about three years, he said, adding that an increase in production could cut that to two years.

The automation consists of “hammer baggers” that produce 8- and 20-lb. bags, at the rate of 60 pounds and 45 pounds per minute, respectively. The bags of ice are then palletized by two robots (Curley and Moe) and wrapped by another robot (Joe). “We don’t touch a bag of ice,” said Hockenson, “which helps with sanitation and HACCP [hazard analysis and critical control points].” The bags, he added, are perfectly stacked on pallets, without any overhang.

For Hockenson, who called himself “an old distribution guy” accustomed to racking, forklifts and pallet jacks, automation has been a switch. “I didn’t know I was going to do robotics and computer controls, but those have been a lot of fun.” Hy-Vee’s senior officers have also been sold on the virtues of automation, and “in the next five to 10 years you’re going to see a lot more in our warehouses,” he said.

Another system, recently introduced by Swisslog, a Swiss automation provider with U.S. offices in Newport News, Va., also handles pieces or split cases of mostly HBC/GM items. These categories “have grown and people are struggling with handling them,” said Bill Leber, in business development, warehouse and distribution solutions for Swisslog.

(Photos: Swisslog’s AutoStore is an example of a piece-picking system that accommodates slow-moving
HBC/GM items not necessarily delivered to warehouses on pallets.)

The system, called AutoStore, stocks products in 2.5-cubic-foot bins linked together in an expandable cube; the system is at minimum 16 feet high (22 overall) and takes up 2,000 square feet of floor space. Robots positioned at the top of the cube retrieve the right bins and bring them to a person at floor level, who puts pieces into an order tote. The cost of most installations ranges between $3 million and $8 million. The system was originally developed by a computer firm for its own use; Swisslog is one of the companies marketing it.

In April, Swisslog said that U.K. grocer Asda, a subsidiary of Wal-Mart, will use AutoStore in one of its DCs to handle several thousand “small-case” items “in a more space efficient and productive way than its current operation.” The system, incorporating more than 70,000 storage bins and 160 robots as well as a dozen picking ports, will be integrated into Asda’s existing operations.

According to Leber, AutoStore reduces labor, increases order accuracy and product security, and enables retailers to store and process more goods in a given space, requiring half the footprint of a tight rack system.

Lesson Learned

Because of their cost and complexity, automated warehousing systems require all the stars to be aligned to be successfully implemented — as Price Chopper recently discovered.

Last year the chain conducted an in-depth review of its supply-chain facilities and concluded it needed to expand to support sales and SKU growth. One of the strategies selected was to create “hyperfast aisles” for mostly promotional and seasonal goods, supported by AS/RS cranes, said Price Chopper’s Doyle. In addition to labor savings, the automation would have cleared space in the fast-moving selection aisles by removing lift trucks that replenish products while also speeding up replenishment.

However, that automation plan was scuttled when it became apparent that the chain’s warehouse management system (WMS) would be unable to automatically support switching products to a new location — a “floating slot” — in the system when those products went on sale or became part of seasonal demand. Moreover, the alternative manual intervention was deemed too cumbersome.

The lesson, he said, was that “as you go down the road for automation, don’t forget all of those other areas in your organization that impact whether automation is going to work for you. With 20-20 hindsight, I wish we had looked into the actual capabilities of our WMS before we made a commitment to go forward.”

However, Price Chopper has by no means ruled out automation. “We believe it’s going to have a role for us in the future,” Doyle said. In fact, the chain is in the process of replacing its existing WMS with a system that can support automation and floating slots. 

Sidebar: Automatic Shelf Stocking

While automation is becoming increasingly deployed in grocery warehouses, can the technology be used in supermarkets to replace labor-intensive activities like stocking shelves?

Such a futuristic concept is being tested by Hamburg-based Edeka, Germany’s largest food retailer, which has installed a “shelf replenishment system” (SRS) made by Witron in a few aisles of a store near Witron’s headquarters in Parkstein, Germany. “We are footing the bill” for the test, said Brian Sherman, vice president of sales and project realization, at Witron’s U.S. office in Arlington Heights, Ill.

The purpose of the system, which is linked to the POS, is to reduce labor costs and out-of-stocks and optimize shelf stock, said a Witron press release. The system provides for “the symmetric alignment of products in each rack” as well as clearing aisles of replenishment pallets. “The trend in retail is towards larger stores and wider assortments, and that makes a fully automated shelf replenishment system especially beneficial,” said Witron’s chief executive officer, Helmut Prieschenk, in a statement.

The SRS “shuttle” brings products from the back room to the shelves via slat conveyors, belt conveyors and push-off devices — similar to Witron’s warehousing system. The shuttle travels through the roof of the store and is integrated above shelving, remaining invisible to the customer. Shelf stock is automatically registered by a scanner located on the shuttle, allowing the system to directly determine the optimum replenishment volume.

“For us, this is the vision of expanding a mechanized supply chain through to the racks of a shop,” said Ulrich Schlosser, a Witron sales manager.