What about warehouse automation for contract logistics companies? The extent is manageable. Yet 3PLs have good reasons to use automation technology in warehouses: Margins are often tightly calculated due to strong competition in tenders for customer projects, it is not uncommon for projects to even pay extra because of miscalculations, and labor is hard to come by at many warehouse locations. The basis for a high level of interest in automation and other supporting technologies for warehouse operations is therefore in place.

In fact, all major contract logistics companies have departments whose purpose is to explore new technologies and support the respective sites in testing and rolling them out. And yet the standard 3PL project is usually based on pallet racking, shelving and forklift trucks. In the course of working with several well-known international logistics service providers, seven dominant reasons for the comparatively low penetration of automation technology among logistics service providers have emerged, which are described below.

1. short contract term for 3PL projects - long amortization period for automation

There is a large discrepancy between the duration of logistics service providers' customer projects and the estimated payback period for expensive automation technology. The payback period depends on the type and scope of the technology used and the amount of labor costs saved. The rule of thumb in the automation industry for small to medium-sized projects is that a return on investment (ROI) can be achieved after three to five years.

As far as I know, there are no reliable evaluations of how good this rule of thumb is. When calculating the business case, there are as many different assumptions as there are users. However, the ROI tends to be expected later rather than earlier. And this is precisely the show stopper for many automation projects in contract logistics, because the regularly very short contract terms of customer projects - often only two or three years, rarely longer - do not allow the 3PL to use automation technology in an economically viable way. However, the problem starts even earlier.

2. planning and pricing of automation solutions take too long

Planning automated systems can be quite complicated. The more different sub-areas the material flow has to pass through, the more complicated it becomes. If you want to get it right, system planning first requires an analysis of the customer data. It is not uncommon for this to be incomplete, meaning that a large number of assumptions need to be made and agreed with the customer.

As the capacity limits of automation technology are usually rigid and cannot simply be expanded, determining the target capacity plays an important role: what to do if growth turns out to be greater than expected? Planning automated systems can take a while, usually several weeks, sometimes even several months, for example if different variants are planned or assumptions or budgets are updated late in the project. And then no contract has yet been negotiated between the client (the 3PL) and the contractor (the provider of the automated solution) - this process can also take several weeks or months. However, if the logistics service provider only has two to three weeks to submit an offer in response to a customer tender, it becomes clear that the inclusion of automated solutions in the process is often hopeless. If it is still possible to plan and price the automation technology during the tendering phase, the next hurdle must be dealt with.

3. the implementation of automation projects takes too long

The expectation of many customers of logistics service providers, sometimes more clearly, sometimes less clearly, is that a new project can be implemented with a few months' lead time. This expectation does not match the effort and time required to implement projects with automation technology. In most cases, an automated or semi-automated system is designed on a customer-specific basis and even many components, especially the control software, are not off-the-shelf.

IT can be a major problem in general, as the project-specific effort involved in programming and adapting a warehouse control system to manage and control the automated system should not be underestimated. Of course, the basis of these systems already exists - but thousands of working hours are regularly spent on customer-specific adaptations. At the same time, the workload in the IT departments of automation companies has been very high for years, partly due to high demand, but also precisely because of the high level of customization required, meaning that often nothing works at all in the short term. IT is not the only trade that stands in the way of rapid project implementation, but it is certainly one of the most dominant.

4. price competition among logistics service providers

Customers of logistics service providers like to see - and sometimes explicitly want - that the logistics service provider uses modern technology in its solution. However, this preference does not match the tender-induced underbidding competition in terms of tender prices. Invitations to tender are the usual method of awarding contracts and the tender price is usually the primary selection criterion, despite all the assurances from clients that they are looking at the overall package.

This forces every provider to calculate extremely tightly, as the competition is numerous and strong. It is not uncommon for this to go wrong and the winner of the tender loses money on the project. And here we are still talking about manually operated warehouses! Planning and calculation costs for automated systems are high, as is the uncertainty about the precision of the calculation, and up to the phase of detailed fine calculation before submitting a fixed price offer, the automation provider only provides a non-binding "budget price" with a tolerance of plus/minus 10 percent at best, which is of no use to logistics service providers who have to submit a binding offer to their customer in a short space of time, because this uncertainty cannot be priced in as part of a price-focused tender with strong competition.

5. the low transferability of solution concepts

The selection and design of the components of an automated storage system is highly customer-specific and takes into account, among other things, the order structure - i.e. the composition of orders, order lines and quantities -, the throughput requirements, the type and dimensions of the products and the steepness of the ABC distribution.

The more a system is designed to meet the requirements of one customer, the less likely it is that another customer will be able to use the system at the end of the - often short - contract term. In other words, a finely planned system must pay for itself within the contract period with one customer. Multi-client warehouses are also not easy to operate with automation due to the specificity of the solutions away from generic standard components.

6. ownership structure of logistics real estate

The difficulty is exacerbated by the fact that many logistics properties are only rented for the duration of a customer contract. With the exception of driverless transport systems, most automation technology is not designed to be relocated or dismantled and then reassembled elsewhere or in a different configuration, not to mention the costs involved. The use of rented real estate therefore excludes a significant proportion of automation technology.

There are now also many warehouses owned by logistics service providers. However, these are often bought and sold as required, so the situation is no different to that of rental properties. In order to be able to buy and sell quickly and smoothly, the construction of warehouses is based on quasi-standards with a hall height of 12 meters and an area of 10,000 square meters or a multiple thereof. Any deviation from the standard, which would often be necessary for sensible automation concepts, lowers the market value.

7 IT landscape and IT resources at logistics service providers

Finally, we come back to the topic of IT: the use of automated systems requires an interface to the warehouse management system (WMS) of the logistics service provider and sometimes also further adaptations to the WMS. Some logistics service providers use one WMS for all warehouses, some have a proliferation of WMS from different providers, some use self-developed WMS. It is rarely possible to fall back on existing interfaces from previous projects and IT resources are almost always required on the part of the 3PL. A modern law of nature states that IT resources are always scarce and never available at short notice. And that is a sufficient description of this aspect.

Possible solutions

There are therefore tangible reasons for the slow progress of mechanization in the warehouses of logistics service providers. It is important to note at this point that the reasons can be found in the sphere of influence of various stakeholders - and have little to do with a lack of interest or skills on the part of the 3PL.

There are many reasons for this, but the main obstacles lie (a) with the logistics service providers' customers and (b) with the providers of automated warehouse solutions.

If customers of 3PLs want lower logistics costs and to benefit from the impact of modern logistics solutions on their brand image, their primary levers are to grant longer planning phases for and longer contract periods with their 3PL. The use of tenders regularly leads to lose-lose situations; moving away from the transactional nature of the business relationship would give logistics service providers a much better basis for planning and building sophisticated solutions.

For warehouse automation solution providers who want to work with 3PLs - which probably applies to every provider, as this market is very large - there is a need to streamline the planning and quotation process. With the notable exception of Autostore, the established providers of logistics automation have processes that are of a good standard for the 1990s.

On the other hand - and this is the bigger problem - IT must also arrive in the present. Many thousands of hours are regularly calculated for automation projects to adapt existing software. For very large projects, the estimated effort can be over 100,000 IT hours. For a warehouse, mind you, not for an airport or a nuclear power plant. The major warehouse automation providers are struggling with IT in much the same way as the major automotive companies, and we can expect younger automation companies with roots in the IT world to overtake the big players in the foreseeable future. Until then, automation in 3PL warehouses will remain limited to partial solutions - an AutoStore here, a few AGVs there - and will continue to fall short of the potential of comprehensive automated solutions.

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