I interviewed Robert Munro who discussed The Merits from Warehouse Investment in MHE vs. IT.
It’s good to speak with you today. I’m looking forward to hearing your views on the merits from the warehouse investment in MHE versus IT. My first question is: Can you provide a brief background of yourself?
Yes, I’m an engineer by education; my degree is in mathematics engineering. The first ten years was in heavy engineering production management and also managed chemical plants and furniture production, et cetera. Then I became a consultant with a company called AT Kearney, and at that time, most of Kearney’s work was in what’s called logistics, so I became a logistics consultant, which then went into supply chain. That was in the U.K. I did a lot of consulting work in the U.K. and Europe.
Then coming to the States, they wanted me to focus on warehousing. Since coming to America in 1986, for the past 30 years, I’ve focused on warehouse consulting. In addition, for the past five years, I also do supply chain recruiting. I’ve got two hats; I’m an executive supply chain recruiter, as well as supply chain IT, and I still do supply chain consulting, mainly in warehousing. I estimate I’ve been in about 700 warehouses in North America alone, and I still do work overseas as well.
What are the merits in terms of warehouse investment in MHE versus IT? Can you define what MHE and IT are?
Well, mechanical handling equipment covers everything from fork trucks to highly sophisticated ASAR systems, which is Automatic Storage and Retrieval Systems, and even in East Asia into robots, companies like Amazon getting well involved with robots. On the MHE side, almost every warehouse needs some form of MHE, usually fault trucks, pallet jacks, and, depending on the storage, they might need high-rise cranes that are called cherry pickers or order pickers. There’s always some degree of MHE required; there’s a question of degree.
There are so many warehouses getting involved with highly sophisticated and expensive sortation systems, massive amounts of conveyor, et cetera, et cetera. That all comes under the heading of MHE. The question is justifying the extensive use of MHE because conveyors are expensive. I’ve been in warehouses where they’ve got 14 miles of conveyor, and I know immediately there’s no way they can cover the costs of the equipment.
The problem I often find is that many people invest in MHE because they think automation automatically pays. Well, it doesn’t automatically pay; it depends on the extent to which you use it. For example, companies like FedEx, there’s no way FedEx can do what they do with heavy investment in mechanical handling equipment to do all the sortation of the packages, to handle the millions of packages they have to sort in a very short period of time. They have to, but, of course, their cheapest rate for a letter is something like $10.76 for a letter, whereas Uncle Sam can do it for 49 cents, and it doesn’t need the same level of investment. On MHE, it’s just a question of speed against cost and if you need that equipment in order to meet your throughput demands.
On the other hand, IT means the system that drives the warehouse. Here’s the point: Every warehouse needs a system. There is no way you can run a warehouse without a system. In the old days, it was an order-picking and a pay-per-picking system, but in the past 20 years or even longer, it’s now moved to an RF, radio frequency, where you scan barcodes. That all comes under the heading of an IT system.
Every warehouse needs a system; therefore, you may as well have the appropriate system. The trick is to look at the system first before you look at MHE, work out what system you need, do your cost comparisons on systems, do your ROI on system, and then put the appropriate system in. in warehouses, these go under the heading of WMS—warehouse-management systems—and the best WMSs integrate with a TMS, a transportation-management system, and they link within an ERP, such as an SAP or a nautical.
In these days, and in the past ten years, the starting point has to be your IT side, how it drives the whole system through the business. MHE is only then looked at to what extent you can get additional benefit from using the mechanical handling equipment, and that’s when it becomes almost very, very difficult to justify the additional benefit from the MHE, whereas the problem I often find going into warehouses, people have not gone through that logic. They haven’t optimized their IT, and they’re going straight to the MHE without looking at their IT first. That was a problem about 15 years ago, before the IT really got as sophisticated as it is today. That wasn’t a bad approach looking at MHE first, but these days you have to look at your IT first. I hope that answers your question.
Yes. Can you explain some of the reasons why? We were talking about the merits of warehouse investment, MHE versus IT.
Okay. The only cost that has come down, that reduces is the unit cost of handling data. Note: I’m not saying the total IT cost, but the unit cost of handling data. You can handle more data more cheaply with IT than you used to be able to. And it’s much easier and cheaper to manage all your sorting and your management and your planning on a computer than it is to try and manage it by sorting cases on expensive conveyors in the warehouse. It’s basically a cheaper way of planning and organizing your warehouse to use the IT. Of course, IT is much quicker.
Another benefit of going the IT route first is that the timeframe that’s open to the warehouse to get product out from receiving and shipping it out is constantly being cut back, cut back, cut back. E-commerce is driving what I call the dwell time in the warehouse down. Before, it was okay to get an order in in the morning and maybe have it shipped out in the afternoon or in the evening. A 24-hour turnaround 10 years ago was quite acceptable for a warehouse, but nowadays, retail warehouses—which are some of the most demanding e-commerce warehouses—they’re demanding something like two-hour turnaround times. The order cutoff, they want it to be as late as possible in the day—say, three o’clock, four o’clock—and you often find to get an overnight delivery, your outbound transportation wants to start leaving by five o’clock in the evening, so you often have two hours to respond.
If you look at the time from some of the MHE systems I’ve seen—I did one about six months ago where the time in the warehouse was 24 hours. It took them 24 hours to handle their product through their highly sophisticated, mechanized equipment. That, these days, is just not acceptable for an e-commerce business; they’re going to have to change whether they like it or not.
Do you have any final recommendations?
Yes, my final recommendations are: Always start with senior management who really do understand the business. One of the problems I often find is that senior management assume that warehousing is simple. What could be more simple? You bill it in, you receive it, you put it away, and you pick it and ship it. What could be more simple than that? Then they wonder why the warehouse is not performing as cost-effectively, providing the level of service that they require.
That’s because almost every order is different. It’s not like manufacturing, where you’re doing the same task over and over again. With most jobs in the warehouse, every order is different: a different SKU in the order, a different quantity by SKU, et cetera, et cetera. It’s a totally different animal that has to be managed. If you look at some of the WMSs which are out there and some of what I call tier-one WMSs, they are some of the most extremely well thought-through systems with extremely high algorithms in order to constantly and quickly take the order profile and manage it through the warehouse in the most cost-effective way.
You’ve got to start with senior management who really do understand what business they’re in, they can translate that business into a supply chain philosophy, and that supply chain philosophy breaks down into a transportation and warehouse philosophy. The whole thing has got to be integral. In this day and age, your supply chains are totally integrated from vendor through to the end user, and that requires extremely complex systems and that requires a high level of senior-management skill to understand that.
What often happens is that management don’t quite understand what’s going on, and they think the answer is to subcontract it out to third-party providers on the assumption that they’re the experts. This is not always was the case. Often they are putting out to a third party an expertise they should maintain in-house to provide a better level of service compared with their competitors. It starts with senior management who really understand the business, senior management who know how to use IT, and senior management who know how to translate the IT into the appropriate operations. It is only once you’ve done that that you look at your operation and decide what additional benefit you can get from MHE, and, often, at that stage, you just cannot justify it.
Thanks, Bob, for sharing today.
Okay, thank you very much indeed.
About Robert Munro
Management Consulting - Supply Chain, IT, International