Automated warehousing systems at Amazon

Amazon is increasingly automating its warehouses. What are the impacts and what else should Amazon consider?

Automated warehousing systems at Amazon

 

Im­portance of automated warehouses

In the last decade, Amazon has grown to be the largest online retailer. A large part of Amazon’s success is its ability to build out one of the world’s most sophisticated supply chain. Specifically, it has built out a very sophisticated and increasingly automated warehousing system. [1]

A great warehousing system is crucial to Amazon’s operations, because it can ensure the right levels of inventory across SKUs and fast fulfillment at low costs. That is key to Amazon’s differentiated value proposition: large selection, low prices, fast delivery, and convenience.

On costs, Amazon has very thin margins of 1.7% net margins in 2016, and fulfillment costs are a large part of expenses at 13.4% of operating expenses. [2] Any improvements in warehousing costs can make a big difference in profits. Currently, Amazon’s warehouses still have significant human labor, but additional automation can cut down on labor costs.

Warehouse operations is also important for delivery time. The quicker an item can go from order, to picking at the warehouse, packaging, and onto delivery, the faster the customer can receive the item. Amazon has been continuing to make delivery faster, first with Amazon Prime 2-day shipping, to next-day delivery, and to a few hours with Amazon Prime Now. [3]

Lastly, an automated warehouse can also help Amazon avoid poor workings conditions for its workers. In the past, Amazon has had a poor track record in this regard, including intolerably hot or cold temperatures in the warehouses. [4]

 

Management’s short-term & medium-term plan

Amazon has been on the forefront of automated warehouses. In 2012, Amazon purchased Kiva Systems, a company that develops automated warehouse robots. These internet-connected robots replace human labor to move around the warehouse and pick customer-ordered items. After piloting and optimizing Kiva robots in Amazon’s warehouses, Amazon stopped selling these robots externally, making one of their competitive advantages. [5]

Today, Amazon uses close to 45,000 robots in 20 of its warehouses, yielding warehousing operating cost savings of 20%. [6] In the short term, it is continuing to expand the use of robotics across their fulfillment centers. It is estimated that Amazon can save $22 million in costs for every automated warehouse.

In the meantime, the robotics industry is finally catching up about 4 years after the Kiva acquisition. There are many competing companies innovating on warehouse robotics. Specifically, this new generation of robotic systems have “embedded intelligence and application software” that make the robots even smarter, more flexible, and less reliant on human help. [7] Amazon is undoubtedly trying to stay ahead, and in the longer term, likely figuring out full-automation. We see this with the Amazon Robotics Challenge, a competition with a $250,000 prize to build a robot that can actually do the human job of picking without assistance, getting them closer to automation. [8]

 

Short-term & medium-term recommendations

As Amazon increasingly automates its warehouses, I would consider two points. First, Amazon needs to not only think about automating the warehouses, but think about how an automated warehouse system connects holistically with the rest of the system. For instance, at the same time, Amazon’s delivery system is likely to be increasingly automated with autonomous vehicles, like self-driving trucks or drones. How do you connect those two? I would recommend that Amazon creates an overall Research & Development team that considers these innovations and automation across the entire company. For example, the team may work on the how the current Kiva robots can evolve to work with the next step, such as dropping off packaged products to the delivery vehicle.

Secondly, proper inventory management is going to be increasingly important. Currently, Amazon is continuing to increase the number of SKUs, from its own private label products to third-party fulfillment. How can Amazon continue to service the increase in complexity while still best utilizing all of its existing warehouse facilities designed to serve its local markets? Warehouse space may become the constraint, and inventory management will be key. Amazon will want to keep just as much inventory is needed on hand to fulfill orders before the next deliveries. In order to do such inventory management effectively, Amazon should invest in its forecasting and predictive capabilities.

 

Questions to consider

As Amazon continues to automate its warehouses, and likely other company functions, how should it consider the human displacement impact? What responsibility does a for-profit company have to deal with the impact of automation?

Big technology companies (e.g. Facebook, Google) are increasingly facing government lash back for a lack of regulation of its services. Especially with its scale, does Amazon have similar concerns and challenges about government interventions? If so, how can Amazon be ahead of it?

 

Word count: 782

References

[1]  Francis Churchill, “Amazon joins Gartner’s supply chain masters,” Chartered Institute of Procurement & Supply, May 26, 2017, https://www.cips.org/supply-management/news/2017/may/amazon-joins-garners-supply-chain-masters/, accessed November 2017.

[2] Amazon 2016 10-K annual report, SEC, https://www.sec.gov/Archives/edgar/data/1018724/000101872417000011/amzn-20161231x10k.htm, accessed November 2017.

[3] Paul Simpson, “The secrets behind Amazon’s success,” Chartered Institute of Procurement & Supply, January 21, 2016, https://www.cips.org/supply-management/analysis/2016/february/the-secrets-behind-amazons-success/, accessed November 2017.

[4] Jim Edwards, “Brutal Conditions In Amazon’s Warehouses Threaten To Ruin The Company’s Image,” Business Insider, August 5, 2013, http://www.businessinsider.com/brutal-conditions-in-amazons-warehouses-2013-8, accessed November 2017.

[5] Steve Banker, “New Robotic Solutions For The Warehouse,” Forbes, March 7, 2017, https://www.forbes.com/sites/stevebanker/2017/03/07/new-robotic-solutions-for-the-warehouse/#b84caf66506e, accessed November 2017.

[6] Jonathan Camhi, “Amazon looks to further logistics automation”, Business Insider, April 26, 2017, http://www.businessinsider.com/amazon-looks-to-further-logistics-automation-2017-4, accessed November 2017.

[7] Steve Banker, “Robots In The Warehouse: It’s Not Just Amazon,” Forbes, January 11, 2016, https://www.forbes.com/sites/stevebanker/2016/01/11/robots-in-the-warehouse-its-not-just-amazon/#383ae3f140b8, accessed November 2017.

[8] Jennifer McKevitt, “Amazon challenges inventors to design new warehouse picking robot,” Supply Chain Dive, May 12, 2017, https://www.supplychaindive.com/news/amazon-warehouse-automation-fulfillment-challenge-picking/442563/, accessed November 2017.

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5 thoughts on “Automated warehousing systems at Amazon

  1. Great post! Your question around how Amazon should consider the human displacement impact as it automates more of its warehouse functions was particularly interesting to me. In the past towns have offered Amazon significant tax incentives for setting up warehouses in their area, with the thinking that their town would benefit from increase employment. As these jobs disappear with more automation I imagine some of these towns will feel cheated by Amazon and in the future towns will be less willing to offer these types of benefits. An alternative to explore would be to design an incentive system for companies to not only bring warehouse management jobs that work in conjunction with robots but also bring jobs to design, maintain and develop the robotic systems in the same town. This will spur a new kinds of economy and bring additional investment from other parts of the value chain the robotics industry.

  2. Really interesting post Angel! Although advancements in automation and technology can have a great impact on reducing costs, as you mentioned we should consider how is the job market going to be affected. According to this Economist article (https://www.economist.com/news/special-report/21700758-will-smarter-machines-cause-mass-unemployment-automation-and-anxiety) 47% of workers in the US have jobs that are at high risk of potential automation. The solution here is clearly not imposing restrictions on automation, but to build programs to train and relocate displaced workers. As a private company, I think Amazon should help train and relocate its warehouse workers to avoid increased unemployment. In the end, as it has happened in the past, automation translated into benefits for society as the cost of products and services (and subsequentially price) are reduced and the workforce moves into jobs that are not yet automated. However, the transition period can be particularly painful for the displaced employees.

  3. Great post Angel! I really enjoyed reading it. I’m also very glad you brought up the question of human displacement as a result of Amazon’s automated technology. It is a timely question considering Amazon is in the middle of the HQ2 selection process. As part of the process, Amazon has received 200+ RFPs from different cities. Among the different negotiation points, the promise of bringing additional jobs to the HQ2 city is a key incentive for cities that have submitted RFP to provide benefits in exchange. In addition, bringing local jobs also increases the local wages and supports local economy. This, then, creates a more “livable” city which attracts more talent to the city. Amazon needs to consider not only the efficiencies but also the externalities of human displacement.

  4. Thanks for the good read Angel! I’m curious to what extent you think automating the warehouses can help improve profitability. It seems to be helping improve the operating costs, but is it enough to turn Amazon profitable? I’d like to see if the cost savings of automating both the warehouses and reducing labor can assist Amazon as it is bleeding cash.

  5. Angel – thanks for the insightful essay. I very much enjoyed reading it as a heavy user of Amazon. In addition to your questions on how an automated warehouse system would connect holistically with the rest of the system, and how the company could optimize inventory management in light of the automation process, I also wonder the impact a digitized and automated supply chain system would have on Amazon’s workforce. Most evidently, it could result in a shrinking labor force in shipping and delivery functions – how should Amazon react to labor reduction and more specifically, what measures should the company take to ensure that the well-being of its warehousing, inventory management and shipping employees is not significantly negatively impacted? What should Amazon do to ensure that its employees will be adequately equipped to adapt to the digitization & automation transformation?

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