Strategic Insights 22
WILL WAREHOUSE ROBOTS HELP OR HURT YOUR BUSINESS?
Amazon’s (AMZ) efficient web
site and warehouses are chewing up traditional channel sales. Why is it buying the
warehouse-robot manufacturer, Kiva Systems, for $775MM in cash? AMZ already has
Kiva, warehouse-robot economics through buying Zappos and Diapers.com (The
robots cost $20K and deliver $2MM in lifetime equivalent human labor.) Will these
robots be in your future for better or worse? Start exploring this question by
determining the net-profitability of every item you currently stock and special
WHAT’S YOUR COST-PER-PICK IN
Most distributors are
shocked when they find out how high the cost of a line-item-pick is in their
warehouse(s). The true cost typically makes very popular, high markup, great
turn-earn, but small-dollar-per-pick items big losers. Once, this sub-group of
items is identified, however, solutions exist for transforming them into
winners without using robots (yet!).
For picking cost references:
retail/catalog warehouses (without
robots) have pick/line costs down to $1.50. This level is consistent with AMZ’s
“fulfillment by Amazon” (FBA) charge, but AMZ unbundles extra charges for
“weight” and “monthly storage”. In
the Waypoint Analytics universe of distribution clients, there is a wide range of
picking environments (over 50 different channels) from specialty-retail goods
to steel processing with a median pick cost of $11.44.
SMALL PICKS, ORDERS AND
CUSTOMERS AT THE “WILL CALL” COUNTER ARE LOSERS TOO! (?)
When an electrical
distribution chain (using Waypoint) discovered many, will-call-counter customers
were unprofitable; a branch manager did his own benchmarking trip to Home
Depot. At HD, it took him 5 minutes elapsed time to go in and out for two
electrical items which he self-scanned and paid the $7.15 charge with his
credit card. No human service needed. At his counter, customers wait (time is
money) to be helped by employees who then pick most of the requested items. “Bill
me” (with trade credit) resulted in $40 of out-of-sight, paperwork and trade
credit costs per transaction regardless of size. The counter niche and service
model needs rethinking.
SMALL, “SPECIAL ORDERS” ARE
BIG LOSERS TOO! (?)
The supply-chain cost of a
“special-ordered” item drop-shipped to an end-user and billed to the
distributor is (thanks to three-steps of trade credit and paperwork costs) a
magnitude of $200+ before freight and commission costs. Emergency shipments of
parts and pieces to end-users go faster and much cheaper with the “Fulfillment
by Amazon” (FBA) model.
AMZ will stock rarely-picked
items on consignment from manufacturers
for FBA fees. We can then order these “long tail” items along with popular heavily-discounted
items with “one-click” and “no freight” (if we are “prime”). Manufacturers are “disintermediating” traditional distributors and dealers out
of the (losing cost) odd-item buy, but popular, profitable item add-on sales
are also being nibbled at.
A “reintermediation” scenario
for channel partners would be to set up a master distribution center (utility)
to do similar fulfillment services direct to end-users. But, the buying
information and a commission would go to the distributors and/or dealers
assigned to the “direct-buying”, credit-card
using end-users. Channel intermediaries would then have an incentive to
sign up and teach end-users how to take care of their own small, special
orders. The fulfillment utility could be outsourced to a fulfillment partner like
Quietlogistics.com that runs multi-tenant warehouses at UPS and FedEx hubs
populated with Kiva robots. Traditional channel players can either seize this
opportunity or wait for alternative e-channel players to provide better, faster
service to the end-users on odd/small items and steal some best-item volume.
THE SUPER-PROFITABLE ITEMS
WILL GET ATTACKED
5% of the most profitable
items in a distributor’s warehouse will typically generate 500%+ of the net,
peak profits. These lush profits offset all losing items and leave a financial-operating-profit
remainder. Just as AMZ sells most popular books for 40%+ off, the cash-cow items
will be sold for less by the alternative e-channel players. Big cross-subsidizing
profits will be exploited by e-commerce, direct-seller strategies.
WHAT SHOULD DISTRIBUTORS DO?
Your future is already here
in other more progressive channels. Research these to discover how: Kiva System
robots; eCommerce direct companies using FBA; channel “reintermediaton”;
factory coop utilities like Colinx; and QuietLogistics as a channel- utility fulfillment
Create (or outsource to
Waypoint) the cost-to-serve models your business needs to determine the net
profit or loss on every line item (and much more!). Use line-item, net-profit
information to determine the profit/loss boundaries for different solutions for
different sub-sets of customers and items. One
standard set of channel processes for all items and customers yields big
cross-subsidies that new channels will exploit.
Because distributor costs are
mirrored by channel partners, a distributor with cost-to-serve and cost-to-buy information
can start new discussions with both sets of partners. Connect the dots. Get robots
working for you (at least indirectly) to turn losing activity into winners and insure
a brighter future.
Merrifield Consulting Group