I concluded my June 15 post stating that “The winners in the industry will be those willing to embrace innovation and having the diligence and tenacity to see it through to implementation.” I have come across various news that seem to indicate that companies are, in fact, determined to implement major projects in this area.

For example, the cover article of the May 2010 issue of ‘Food Processing’ was an outlook on capital spending plans for 2011 by 33 of the largest food and beverage producers in the US. The article reported an anticipated 20% increase in capital spending by those 33 largest producers. This increase, built upon a 19.5% increase recorded in 2010, indicates it is not just a mere rebound to pre-recession levels. Leading the way, the top three spots were held by beverage giants, Pepsi, Coca-Cola and Anheuser-Busch Inbev anticipating almost a 25% growth.

F&B Industry Engaging in Multi-Year Initiatives

Quoting the article: “Since the 2009 dip, spending attention has decidedly turned from just getting by to investing in future savings and new revenues. It’s impossible to ignore the strategic nature of multi-year initiatives to reduce waste and boost efficiency in a competitive, low-margin industry.” So for companies to show improvements in cash flow and shareholder value, one of the big mechanisms for generating increasing returns or at least stable cash flow is to extract efficiency gains through capex.”

An additional driving force of this increase in capital spending is the continued trend that while fully burdened labor costs are increasing, costs for automated equipment and control systems continue to come down. In material handling the well know question of ‘how many touches’, can be directly tied to costs. “I want to have as few people touching our products as possible,” said Dan Mishek, managing director of Vista Technologies in Vadnais Heights, Minn. “Everything should be as automated as it can be. Hiring has some hidden costs, as well as the expenses of salary and benefits,” Mr. Mishek added. “I dread the process we have to go through when we want to bring somebody on,” he said. “When we have a job posting these days, we get a flurry of résumés from people who aren’t qualified at all: people with misspellings on their résumés, who have never been in the industry and want a career move from real estate or something. It’s a huge distraction to sort through all those.” Culling the résumés takes three days. Then he must make time to interview applicants, and spend USD 150 for each drug test.

Once a worker is hired, that person must complete a federally mandated safety program, which Vista pays an outside contractor a flat fee of USD 7000 annually to handle. Finally, Vista’s best employees spend several months training the new hire, reducing their own productivity. “You don’t have to train machines,” Mr. Mishek observes.

Specifically here in the U.S., equipment and software prices have dipped 2.4 % since the recovery began, while labor costs, on the other hand, have risen 6.7 %, according to the Labor Department.

Short Payback Periods Prevent Higher Investments

With clear benefits and most, if not all the capital cost of this solution coming from inventory reductions, has the above process not become the industry standard? The 2011 Warehouse Education Research Council (WERC) annual meeting, attended by over 1000 warehouse, distribution and logistics professionals, had two sessions that touched on some of the barriers to achieving the efficiencies of this distribution process.

In the session “State of Automation in Retail Distribution” a major retailer cited the historical problem of multiple IT platforms throughout their supply chain. With various separate implementations for ERP, WMS, TMS and Point-of-Sale, data collection, flow of information from final retail outlet back to ERP remains a fragmented, slow process.

The roundtable session “Implementing Advanced Material Handling – Justification and Lessons Learned”, discussed some of the issues preventing investments in automation technology. A key topic of the discussion was estimated payback period, coupled with the short performance horizon of many large, publically traded forms. Though some private companies cited payback periods up to 8 years, consensus of the attendees was more consistent with a survey conducted by the Aberdeen Group across a large group of warehouse managers and operations executives. They found that about 1/3rd of the respondents required less than one-year payback, while the average time was just under 26 months.

Quick Returns vs. Long-Term Solutions

Required payback periods for material handling investments

It was also noted that that the recent unsettled economic climate has further reduced top management willingness to accept a longer planning horizon, and that this may actually further influence the fragmentation of IT platforms. Several journal articles since 2009 have forecasted continued penetration of small IT packages that address a specific point of process concern – resulting in a short payback for the implementation, but at the same time contributing to a long term barrier for a major overhaul of the entire supply chain process.

Will the economic outlook increase the investment horizon to enable significant change? Recent market trends in the Material Handling Industry seem to indicate this is taking place, so it may behoove every firm to re-assess their competitive positioning.

What is your view to these points? Drop us a message below and we will send you a copy of Swisslog’s 2011 WERC presentation on the ‘State of Automation’.

This post contains excerpts from a page 1 article of the June 9, 2011 edition of the New York Times: ‘Companies Spend on Equipment, Not Workers’