I interviewed Steve Johnson who discussed Increased Feasibility in MHE Systems, Including Robotics Involved in order Fulfillment.
Today we're speaking with Steve Johnson who is the Managing Principal and Co-founder of Johnson Stephens Consulting, which is a Supply Chain Operations consulting firm. The topic is Increased Feasibility in MHE Systems, including Robotics Involved in Order Fulfillment.
So, Steve, could you first provide a brief background of yourself?
Hi, Dustin, of course.I'm glad to talk to your audience today. I am co-founder and managing principal, as you mentioned, of Johnson Stephens Consulting. My background is in industrial engineering and supply chain operations, both as a client at one point and then also, for the last 25-plus years, as a consultant.
Our firm reaches out the United States as well as into other countries internationally to help retailers, wholesalers, third-party logistics providers with their distribution and supply chain challenges, including designing distribution centers things such as that.
Thanks. Well, my first question regarding this topic is the federal minimum wage. Can you talk about how this change is affecting companies and how are different companies approaching this?
It's an interesting phenomena. Just in the last few months, it really started, I guess, just after, probably in February or January this year, where potentially our federal minimum wage here in the US could possibly go up to $15 per hour, depending on who gets elected here in 10 days or so. That would be phased in over a period of time.
Some states have already taken steps to do this. New York in particular and California have inactivated a $15-an-hour minimum wage on a state basis, phased in over the next three or four years. New Jersey has passed it. The governor there, Chis Christie is probably going to veto it, but I think they have the votes to overturn that veto.So we'll probably see that in New Jersey. Then in the cities of Seattle, Washington, we know that that's implemented as well.
And what's happened is, retailers that consume a lot of resources to pick their orders in e-commerce fulfillment centers and in their stores as well, if they do have stores, are looking at increased ways to automate some of the processes that we might not have found in the past when we run the automation analysis and return of investment analysis, they wouldn't have penciled out.But all of sudden, people are going from $9, $10, and $11 per hour to a $15-per-hour wage rate, plus benefits.It starts to change the equation in there as far as labor.
We've also seen an increased competition for labor availability here in the US. Just about every client that we have is fighting for labor where they are, because they need, in some cases, up to 1,000 people in these fulfillment centers to fulfill customer orders. And so they find themselves using a lot of temp labor these days, which tends to be about, when you hire a temp person, it's about 50% productivity coming out of the gate, versus a regular trained, experienced person.
So they find themselves kind of with a [inaudible 00:03:41] to get quality labor. And so they've reached and said, "Are there way that we can automate some of this so we can reduce the number of folks who we have in our facilities?" I think it's an unintended consequence of potentially the law that might get passed on the federal basis, which is really to try and help people, but in this situation, it's just a hinderance to throw that on top of companies immediately and have them deal with nearly a 50% wage increases all within three years.
We're also seeing pretty much that across the US. And requests are coming in for that kind of analysis. And that can lead to things such as automated storage and retrieval systems, automated picking systems, and even some robotics that used to be really confined to the manufacturing plant. We've seen some robotic-type devices that would potentially be used in these order fulfillment centers to help pick orders and assist. You won't do away with the human element, but help that productivity rate be a lot higher. So you need less people.
Just an interesting thing, after spending a lot of time in this industry, to see this happen all of a sudden.And it's a very critical thing that's on the front of minds of all the C-level executives and the senior VPs of supply chain that we run across.
Can you talk more about some of the businesses that are affected that might be looking into automation?
Yeah. Absolutely.So I mentioned retailers, e-commerce kind of fulfillments. It goes to everybody, Amazon all the way across to name your local store — Target, Home Depot, people like that. So it's kind of your general [00:05:48] that are out there across the universe. And then also wholesales as well. But the wholesale distribution was with the wholesaler Thursday and large sporting goods equipment manufacturer that is really frightened by this whole thing. They do, also, distribution to all the main retailers out there — Dick Sporting Goods and Academy Sports and Bass Pro Shops and Cabela’s and people like that. And they're very afraid about it.
What's interesting is what's popped up as well is third-party logistics providers. So in other words, companies that outsource their distribution and logistics to these 3PL — with call them 3PL providers. We're seeing the 3PLs pop up. We've had several of them pop up and say, "Well, we typically don't look at automation for our facilities because we're tied to a contract with our client. And a lot of times that wouldn't let us spend a lot of money on a capital basis. We're faced with these increases in the labor rate, and we want to get ready for that."
So we're actually doing return on investment analysis for 3PLs for automation and for robotics, which is very unusual. I mean, typically, a 3PL, if they do rack and some conveyor and maybe a sortation system, that's about as far as you're going to see that, because they're typically working on anywhere from one to three-year agreements. But they're looking for three- to five-year's worth of commitment from their clients these days. And this is a way for them to try and mitigate this risk of needing just tons of people. They think that potentially this could be a positive return on investment.
What it's going to lead to is it's probably going to lead to situations where we're going to have less people in the buildings, which, of course, is not great for our employment picture here. But it's a reality that I think people are going to have to face up to if we inflict these kind of wage-rate increases in a short period time like this on the industry.
Thanks. And do you have any final recommendations?
I think it's important for companies, because labor availability, labor quality, the turnover rates are high. They're all faced with this. I think what we're seeing is we'll take a look at labor, space, capital, and service levels — that is to the customers — when we run what we call an after-tax internal rate of return on material, handling, equipment, technology assessment.
I think it's important to companies as they're headed into this holiday season that they reach out and, either with themselves or with a consulting partner, they try and do these analyses and run some of these with the $15 to $20-per-hour wage rates in the two, three, four, five year out-year, and just see if this is going to be something that they're going to want to look at. Because typically, that type of investment, it's at least 7-figures. In some cases, it's 8-figure US dollar investment. But if it would generate some kind of ROI after tax, then we could find ourselves in a situation where companies would benefit from this approach.
Thanks for sharing today, Steve.
Well, thank you, Dustin. I appreciate the opportunity.
About Steve Johnson
Managing Principal at Johnson Stephens Consulting