Survival of the Retro-Fittest

“Traction by contraction” might be an appropriate way to describe how businesses today look to accommodate greater shipment volumes in their warehouses, manage labor more effectively, and increase stamina for growth, while at the same time maximize capacity utilization and streamline costs.

Even as capital spending rebounds to the tune of 10 percent annually according to the Material Handling Industry of America (MHIA), the threat of even a benign hiccup in the economy has the industry wary of making significant investments outside the “four walls” without looking inside first.

Businesses today must take stock of future growth goals and be proactive in making enhancements, however small, that could prove invaluable over the next few years. Even now, building a new DC may be fiscally irresponsible, unless there is a quantifiable demand for one.

Improving processes and upgrading material handling systems as a way to efficiently scale capacity and growth internally is a solid recovery strategy, and good business.

As IT developers steward industry toward wireless supply chains, material handling equipment manufacturers and integrators are building a foundation for continued automation and innovation, buttressed by an increasing capacity to customize unique solutions to specific customer needs.

During the past 25 years, significant changes have occurred in warehouse and DC evolution and development, writes James A. Tompkins, a Raleigh, N.C.-based supply chain consultant, in a recent article, Enhancing the Warehouse Role Through Customization.

“A paradigm shift must occur,” he says. “Warehouse functions must expand past the point of storing finished goods until the customer wants them. Warehousing can no longer be in reactive mode; it must adopt a proactive approach.”

In the 1980s, companies began recognizing the value of large centralized warehouses; in the 1990s, technology took warehouse automation to new heights—literally and strategically. Now, companies turn to warehouse customization as a core capital enhancement.

The evolution of material handling systems and the ability of equipment providers to tailor solutions to meet specific needs is one important component of this shift, suggests Tompkins.

“New and different equipment will be required for customized warehousing as a result of changing storage requirements and adding some manufacturing functions to the warehouse. Depending on the customization to be provided by the warehouse, equipment with considerable flexibility will be necessary,” he notes.

A greater awareness of asset utilization, and flexibility that allows distribution facilities to bend with changing business and economic conditions, is what Tompkins alludes to. It is the same awareness that drives lean logistics and reduced inventory models.

Material handling equipment manufacturers, for their part, are primed for the task. In 2004 alone, new orders and shipments grew at 15 percent and 12.5 percent respectively, according to the MHIA.

Similar growth is expected in 2005, with 10 percent estimated growth in bookings and shipments. Material handling and logistics consumption continues to track back toward 2000’s record levels, and capacity utilization has stabilized near 80 percent—both optimistic signs for the industry as a whole.

Bookings for Automated Guided Vehicle Systems and Automated Storage/Retrieval Systems (AS/RS), for example, skyrocketed in the past three years alone, and experts expect growth to continue climbing. Less sophisticated material handling applications such as plastic pallets have also expanded, helping shippers and transporters safely move product through the global supply chain.

“Perhaps more than past recoveries, users are placing a premium on solutions supporting cost containment and continuous improvement objectives—a clear legacy of the strong reliance on productivity,” writes John B. Nofsinger, CEO of MHIA, in the Material Handling Equipment Distributors Association’s 2005 Industry Forecast.

A Strategic Vision

Having a warehouse equipped with the systems and technology necessary to drive greater efficiencies is only part of the equation. Industry now looks toward automated material handling systems with a strategic eye rather than a tactical one—an attitude that contrasts with past trends and reflects the growing importance of long-term planning in capital expenditures.

“The issue of risk ultimately drives the day,” says Len DeWeerdt, vice president of business development, Retrotech Inc., a systems integrator based in Fishers, N.Y.

“In the 1980s and 1990s companies bought equipment not based on short-and long-term business requirements, but because an ‘out of the can’ solution looked attractive. Those systems didn’t address future flexibility, room for growth, or business changes.

“Today, the industry encourages businesses to look at their own unique interests and goals before ‘spec-ing out’ material handling systems. This way they get a solution that serves them near and long term,” he adds.

This consultative approach has gained traction not only because businesses are wary of going it alone and manufacturers are more flexible in offering customized solutions, but also because material handling automation offers tangible value.

“In the current manufacturing and distribution environment, it makes sense to consolidate distribution on one campus, retract existing outside warehouses, and accommodate business needs in a tightly controlled environment—especially if you are simply filling existing buildings,” says DeWeerdt.

Supply chain consolidation is a major piece of what businesses such as Retrotech are doing with customers’ capital projects because their systems provide a tool to cost-effectively merge multiple warehouses into one.

“Potential AS/AR buyers ask questions such as: ‘What does our current asset base provide, and have we squeezed as much productivity as we can out of it? Can we come up with more efficient solutions?'” says DeWeerdt.

As a result, businesses that might not ordinarily consider automated material handling systems are crossing the risk boundary because it has become strategic. This awareness, however, isn’t always feasible.

“Other buyers, under intense pressure from management teams, say, ‘Build a warehouse and figure out what goes in it afterwards.’ In those situations, it’s difficult to determine the most effective material handling and logistics solution. In many cases buyers get locked into convention,” he adds.

Ultimately, pressures from outside markets—be it China or Wal-Mart—drive questions, force answers, and lay the groundwork for equipment manufacturers and integrators to customize solutions for enterprising businesses.

“Corporations large and small are trying to determine where they can invest capital to improve productivity,” says DeWeerdt.

The Blair Automation Project

Productivity gaps were a primary concern when Blair Corporation, a Warren, Pa.-based direct market retailer, began revamping its main DC. Moving $500 million a year in men’s and women’s apparel and home furnishings direct to consumers, Blair’s shipment volume had outgrown its existing automated distribution system.

The company expanded its mail-order distribution channel 10 years ago to include catalog orders, and more recently, e-commerce. Its existing automated distribution system, installed in 1972, accommodated nearly 30,000 products a day.

With increasing orders resulting from its multi-channel approach, the retailer was stocking more products with less inventory and therefore needed a more effective system to account for dips in efficiency.

“Our inability to efficiently handle multi-piece orders was the main reason for retooling our operation,” says Tim Harlan, fulfillment operations director, Blair.

“Cataloging increased the number of multi-piece orders we received, and at the same time caused additional SKU growth. We used belt conveyor units with sweep arm sorters to facilitate this process but it was labor intensive and time consuming,” says Harlan.

Blair enlisted Sedlak, a supply chain consultancy based in Richfield, Ohio, to help sort through the project details. Blair looked at mail-order companies in both the United States and Europe to gauge how they used packing sorters and other technologies.

The European market proved to be an appropriate benchmark for Blair’s planning phase, given the region’s space constraints, labor issues, and propensity for highly automated multi-tiered facilities.

“We compared our operations with European companies’ to see where we could improve,” says Harlan. “It forced us to look at things differently.”

Prior to the redesign, Blair used a homegrown legacy-based WMS customized to its mail-order business. Sedlak was brought in to help implement and integrate a pre-packaged WMS. As the design process unfolded, however, the scope of the project was adjusted and Blair opted instead to modify its existing legacy-based system to support the new material handling equipment.

Throughout this process, and even during the mid 1990s when it transitioned to cataloging, Blair considered the possibility of locating a new facility elsewhere in the United States to accommodate growth.

But ultimately the company decided to consolidate its packing and shipping operations in an existing 310,000-square-foot structure on site. The location became available after Blair transitioned to cataloging.

Blair contracted with Siemens Logistics and Assembly Systems, based in Munich, Germany, to engineer and install a packing and shipping order solution, modify some of the existing conveyor systems in its main 560,000-square-foot DC (newly dedicated to receiving, warehousing, and product picking), and tie the two facilities together.

With Sedlak’s assistance, Blair also adapted its legacy WMS to handle the new technology. The aim was to capture 80 percent of the new automation equipment’s capacity and functionality.

In addition to installing the Siemens system, Blair looked to improve labor yield within the new facility.

“In the project’s second phase, we introduced engineered labor standards and a labor management software system to monitor labor and enhance our incentive-based pay program. We are also upgrading our WMS,” says Harlan.

Blair’s goal from the outset was to improve capacity, speed, and throughput in its DC. “The ability to pool orders is the biggest benefit we’ve created with our existing system,” says Harlan.

“Under the old system, if we received 100,000 orders, we released 100,000 orders regardless of our processing capacity. If we only had staff to support 70,000 orders, we kept track manually of all the pick tickets produced,” explains Harlan. “With the new system we create an order pool and release orders based on our requirements.

“This lets us control how many orders we receive and what types of orders we process daily, which means we can accurately monitor order age to release the oldest orders first. As a result, we’ve dramatically increased throughput.”

Blair’s new system considerably improved labor productivity. Prior to implementing the Siemens system, the retailer averaged 22 units shipped per labor hour.

“Once we modified the system, we averaged 24 units per labor hour. Now, with our engineered labor standards, labor management program, and incentive-based pay program in place, we peak in the low 30s,” says Harlan.

Though Blair gained productivity and throughput improvements partly as a result of applying labor management software and engineered labor metrics to its new operation, “the infrastructure was in place as a result of the Siemens project,” notes Harlan.

Smart Growth

A decade ago when businesses such as Blair looked to expand, their first inclination was to find or build a bigger facility. Budgets were flush, and as long as demand dictated expansion, risk was nominal. Now, the trend toward contraction and consolidation, as well as maximizing existing space and labor, is the focal go-to-market strategy.

Not all businesses have the foresight or resources necessary to totally retrofit their facilities. But just as plant managers are looking to more effectively scale growth and capacity in their own facilities, enterprising businesses can similarly manage the degree to which they invest capital—and the efficiencies can be equally tangible.

“The fact that smaller companies are equally aware of material handling innovation’s importance is remarkable,” says DeWeerdt.

“Recognizing pain points in the supply chain, and asking, ‘What can we do differently?’ is what binds together companies—both large and small. They look at these solutions, which they initially think are radical, but come to understand they can handle them.”

Smart growth ultimately requires a collaborative and dedicated approach to performing due diligence. Without a strategic vision and/or third-party guidance, expendable capital can be a liability.

Harlan recalls touring a newly built European DC with all the latest material handling equipment during the company’s pre-planning phase. “The European firm had a brand new facility in a rural area and there wasn’t a bell or whistle it didn’t have,” he says.

“Interestingly, during the benchmarking process, we realized the facility wasn’t producing any more for any less than what we were already doing—before our redesign.”

As material handling automation continues to drive strategic decision-making, the trend toward consolidation will grow, ultimately placing a higher premium on finding optimum warehouse space.

“Tenant demand for quality, institutional-caliber warehouse space looks positive both on a current and long-term basis due to changing tenant requirements, reports a briefing by Kensington Realty Advisors, an investment management and advisory services company. “Functional obsolescence, business consolidation, and technological change are creating demand for good warehouse space.”

In some cases, businesses will need to invest in modern facilities that can structurally accommodate new material handling systems. Rather than building a warehouse, then fitting technology and material handling systems to meet whatever needs arise, however, businesses will consider the strategic value of investing inside out—retrofitting and consolidating existing facilities—before looking at outward expansion.