Warehouse ROI

Survival of the Fastest: How Customer Expectations Are Driving a New ROI Model for E-commerce Automation

Traditional ROI models based on reducing FTEs are not as relevant to e-commerce companies as other organizations. They are evaluating warehouse automation based on its ability to deliver speed, support growth and provide inventory certainty.

July 11, 2018

Warehouse automation has traditionally been justified by an ROI model that relied heavily on reducing personnel costs to “pay” for the system over multiple years. This model has become so entrenched that, at Swisslog, the material flow diagrams we create feed a complex spreadsheet that automatically generates this type of ROI calculation for every system we configure.

The thing is, the e-commerce companies we work with aren’t even interested in looking at them.  

It isn’t that they don’t trust the model; it just isn’t as relevant to them as other considerations. The keys for them are speed, flexibility, inventory certainty and a well-defined plan for growth. Those aren’t reflected in a model that was originally developed around the costs and benefits of rigid sortation systems whose ROI was almost always based on some future state that might never exist.

Regardless of the market they are in, e-commerce companies are all, to some degree, facing the same challenge: how to remain competitive and continue to grow in the face of a dominant competitor with seemingly unlimited resources.

Maintaining the status quo is simply not an option for them. If an automation system can easily scale as the organization grows while enhancing speed and flexibility, they’ll find a way to do it.

In e-commerce, speed means more than just faster pick times. It means knowing exactly what is in inventory at all times and compressing the cycle time between order and shipment. Amazon has successfully conditioned the market to expect two-day shipping and everyone else now has to meet this expectation or risk market erosion.

Being able to pick faster certainly helps. Automated picking systems may allow an e-tailer to move back the time when customers can place an order for two-day shipping, which can mean fewer missed opportunities for a sale. But, the bigger issue is shipping costs.

Regardless of how efficient an operation is, not all orders placed on a particular day will be processed that same day. In those cases, e-tailers have to absorb the costs of next-day shipping to maintain the customer relationship. Even worse, the product may not be in inventory. In that case, promised delivery times can’t be met by any means and customer dissatisfaction is the only option.

Even if the e-tailer gets the product out the day it is ordered, it may not arrive on time if they are shipping cross country. Many use zone skipping, which further adds complexity as they have to ship product in bulk to the zone where the customers for those products are located to ensure two-day delivery.

So, shipping is a huge cost that is difficult to optimize manually. Automation software provides visibility into current inventory and intelligently manages how orders are allocated down to the floor, providing an organized and efficient approach to near real-time order processing that can have a significant impact on both cycle times and shipping costs.

The hardware is important, but, in the case of shipping, it’s the software that is enabling the real savings. An ROI model that doesn’t take this into account won’t be of much interest to an e-commerce company.

In addition, these companies aren’t interested in savings three years down the road. The future is too uncertain. Instead, they want to be able to pay as they grow by making a limited investment at the front end and then adding modules as needed from their operating budget. This eliminates the lengthy processes associated with capital expenditures and allows them to adapt to conditions on the ground as they occur, neither of which is considered in the traditional ROI model.

I don’t want to give the impression that ROI isn’t important to e-commerce companies. It is. They just think about it in terms specific to mastering the complexities inherent in this segment.  

They are finding different metrics with which to measure it and are seeking solutions that can help them improve customer service and reduce shipping costs while shifting as much of their investment as possible to their operating budgets. Fortunately, modular, flexible automation systems, such as Swisslog’s CarryPick and AutoStore, allow them to do exactly that.

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