David Maloney, Editorial Director, CSCMP’s Supply Chain Quarterly 00:02
The Covid-19 pandemic showed us just how vulnerable supply chains are. Today we face many threats: shipping delays; a lack of workers; failing infrastructure; transportation rates that are out of control; cybersecurity threats; and of course, a worldwide pandemic that is still very much with us. But with each of these threats comes opportunities. Welcome to this limited podcast series from CSCMP’s Supply Chain Quarterly, the Top 10 Supply Chain Threats.
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Today, we focus on the risk of not automating. I'm David Maloney, the group editorial director for Supply Chain Quarterly, and joining me for this segment is Kevin Reader, the director of business development and marketing at Knapp.
Kevin, the pandemic has shown us a lot of the vulnerabilities. What are you seeing out there?
Kevin Reader, Director of Business Development and Marketing, Knapp 01:36
Well, I think back to Modex 2020, and our reaction as a country and the world to the shifts that were about to take place, and we we really weren't sure of what the magnitude was going to be, just that our world is going to change, and within two or three months, the supply chain took a major shift, and we saw it first with with grocery and retail and the enormous spike in e-commerce. So, that was the first harbinger of the changes and the magnitude that we'e about to take place.
David Maloney, Editorial Director, DC Velocity 02:18
Labor has been a major consideration, of course, and it's difficult to get workers today. Is that driving the the need that people have, that they have to look at automation as an alternative to some of that?
Kevin Reader, Director of Business Development and Marketing, Knapp 02:30
Yeah, that's that's an interesting discussion. Obviously, there's a huge amount of turnover in—from company to company, which raises the issue of training, of new-hire recruitment, and things like that, but in addition to that, you've got an aging workforce—those dynamics haven't changed; you've got a workforce that's basically coming back to work, and in that process, you know, a whole series of changes about the way in which they work, and so on. But there is definitely a shortage, increase in wage rates, and things like that, which is changing the need [and] drivers for automation.
David Maloney, Editorial Director, DC Velocity 03:14
A lot of companies right now are trying to consider automation. They realize they have to do something because they can't keep up with demand, but there's also a risk of automating, or maybe not automating in the right type of equipment. What do you say to balance that that risk of automating and the risk of not automating?
Kevin Reader, Director of Business Development and Marketing, Knapp 03:35
I would say, in most industries, it's almost a fait accompli. There are certain risks to any change, and change management is certainly a component of it. but automation takes many forms. In some industries, like grocery, we're seeing an automation and change in how supply chain is engineered, with the addition of microfulfillment and hub-and-spoke models and things like that. There's the opportunity for process automation, where you've got software driving those, those changes, anything from batch picking, and things like that, that I've been seeing, is pretty traditional to goods-to-person to the software solutions that are more broad in scope: control towers that act more like a GPS for the management of resources across the board in manufacturing, distribution and fulfillment, and then [word?]. So, it's it's broadened and, you know, we're seeing a major opportunity in terms of both recruiting, management—managing—and optimizing labor and performance.
David Maloney, Editorial Director, DC Velocity 04:50
Kevin, are we at a point with companies that if they don't automate, they may not be able to survive?
Kevin Reader, Director of Business Development and Marketing, Knapp 04:57
I think that's a real issue. It's certainly a challenge, and we're already seeing companies that are accelerating their compensation programs, their recruitment programs, looking at innovative ways to train and entice employees and retain them. and that's being driven by the fact that their ability to deliver is being compromised.
David Maloney, Editorial Director, DC Velocity 05:28
Yeah. And in the past, most automation products were basically evaluated on a return on investment, and if it had a certain return on investment of X number of years, it was acceptable; if it was above that, it wasn't worth doing it. But they can't just throw labor at it anymore. Right?
Kevin Reader, Director of Business Development and Marketing, Knapp 05:43
I think you got a couple of issues working here. One is the hurdle rates are being adjusted to reflect that risk. And the second issue really, is that, you know, this is becoming sort of a threshold issue. We have, like, we have to automate, and if we don't automate, we are risking business growth, and so on.
David Maloney, Editorial Director, DC Velocity 06:10
What type of acceptable return on investment are you seeing? I mean—and that may vary by country by country, too. I know in Europe, they tend to be a little more tolerant of longer ROIs than they do in the U.S.. but what's considered an acceptable range?
Kevin Reader, Director of Business Development and Marketing, Knapp 06:24
You know, I think it's still within the three- to five-year range, but again, we are seeing these threshold decisions, and the issue of labor and automation, moving into a little softer benefit category, where there's a general recognition that this situation is not going to get better in the immediate term, so that automation is being given a little bit wider berth from a CFO perspective,
David Maloney, Editorial Director, DC Velocity 06:55
In looking at doing automation, are people looking for scalable solutions, so they can, in a sense, mitigate that risk and be able to grow little by little in their automation?
07:03
Coming out of Covid, most C-levels are saying to themselves, We have to really double down on our resiliency, our flexibility, and looking at a very significant change in investments. An increase in nearshoring or reshoring, and changes in, you know, in all the things they're looking at. But one of those issues is flexibility and scalability. If things are volatile in the next few years—two years—if they increase in volatility, What are my abilities to flex and change? How do I do this? You know, you look at the reports coming out of McKinsey, for example, and a lot of them are emphasizing the various levels of risk that are seen in the—globally today, and how often, what the frequency is, in those particular levels of risk, and how they're liable to impact the planning in the C-level offices and boards of America, North America and globally, for that matter, in terms of the discussion about, you know, Are my systems, is my automation flexible? Is it scalable? Can I flex and suddenly take a 15 or 20% increase in e-commerce business, for example? Is my, is—what if my store-based business, my mall-based business, goes away? What if it's—is that significant in impact to my supply chain? And all these certainly are cascading in terms of their impact on the return-on-investment calculations, and selection of automation technologies, and the like,
David Maloney, Editorial Director, DC Velocity 09:01
You mentioned e-commerce a moment ago in your answer, and that seems to be driving a lot of the automation now, just because of the intensity of focus on labor with being able to pick e-commerce orders. Are you seeing that among a lot of your customers?
Kevin Reader, Director of Business Development and Marketing, Knapp 09:17
Well, definitely. I mean, e-commerce is top of mind, and it's it's pretty logical when you think about it, right? If you're used to shipping multiple line items in cases to a store and suddenly your e-commerce business jumps, you're gonna see a massive spike in your labor. The average lines per order or something in the order of 1.1 or 1.2 lines per order on an e-commerce order, in general, unless it's a B2B e-commerce order, and that just has a huge labor content to it. So, you know, if you consider the e-commerce impact on grocery stores that are picking e-commerce, that's a big money loser, and anyone in the business, from Walmart on down, is looking at—and Kroger and all the others—they're looking at their grocery business and saying, If I'm picking e-commerce orders at a rate of 20% or so now, and those are all single-line orders, then I'm having to pay someone to walk around the stores picking orders. That's a pretty tough value proposition to expand and justify doubling down and investing in all that. You have to automate it or it's a question of how much money you're losing as the business expands.
David Maloney, Editorial Director, DC Velocity 10:33
Right. When people think of automation, they often think of the full-blown, you know, large-scale, tens of millions of dollars of automated systems that would fill a warehouse, and be, almost be, in a sense, lights-out, where you don't have very many employees, but that's not really the case with most automation. Can you talk about how there are opportunities for people to automate and be able to afford that automation and still make significant changes in their operations?
Kevin Reader, Director of Business Development and Marketing, Knapp 11:02
That's a really good question, and I think everyone is aware that large-scale automation capacity is pretty saturated right now. The ability to contract suppliers to do large automated distribution centers is at an all-time high, and that's, that's difficult. But there are a ton of additional ways to leverage automation and derive significant improvements. You know, this could be robotic work cells. It could include, you know, more islands of automation. It could include a change in one type of packaging, or shipping in boxes to shipping in bags, where you might save $1 a package. If you're shipping thousands of packages a day, that type of impact is is massive. And it could include software solutions, like control towers, that aren't automation in the traditional sense, but they are process automation. and some of those technologies, we're seeing as high as 5 to 30% P&L reduction, in terms of costs. So, I would say there's a broad array of automation options, from soup to nuts, really, that are not just whole scale massive, million-square-foot and above facility automation projects.
David Maloney, Editorial Director, DC Velocity 12:29
Kevin, if a company is looking to automate, how do they start?
Kevin Reader, Director of Business Development and Marketing, Knapp 12:34
You know, I think that the most important thing is to do some engineering work on your flows, processes. You don't automate manual processes, typically—you've got to assess that and decide where the opportunities are—but I think the most important thing, from my perspective, is selecting a team that you can work with, that listens, as opposed to pitching their product, and then in that process, you develop a relationship of trust. And trust is really the most important factor, I think, in selecting a team and moving forward with automation.
David Maloney, Editorial Director, DC Velocity 13:15
In this segment of the Top 10 Supply Chain Threats, we've been talking about the risk of not automating, and our guest has been Kevin Reader, the director of business development and marketing for Knapp. Kevin, thanks for joining us today.
Kevin Reader, Director of Business Development and Marketing, Knapp 13:27
Thank you very much, Dave. Great to talk with you.
David Maloney, Editorial Director, CSCMP’s Supply Chain Quarterly 13:29
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