Adopting automation in Australian warehousing

By: Ricky French


How supply chain firm TM Insight is helping clients explore the latest warehousing advancements

Adopting automation in Australian warehousing
TM Insight directors Milan Andjelkovic and Travis Erridge

 

TM Insight has carved out a niche in the last few years providing consulting services for businesses wishing to invest in – or update – their warehousing space. Increasingly, this has centred round working out the best way to take advantage of automation, and how best to navigate the complicated interaction being property and automation.

Australia has been relatively slow on the uptake of automated distribution centres, compared with the US and Europe, but has put on a sudden burst of speed in the last two years, with some of the country’s biggest names in both retail and transport making huge investments in automated warehouse space.

Earlier this year, Toll opened a new fashion distribution centre in Western Sydney, which, although relatively modestly sized at 32,000 square metres, can process more than 375,000 orders a day, aided by around $50 million worth of automation equipment.

Woolworths is set to unveil a $215 million warehouse with automation that exceeded the building cost, in Melbourne’s east next year, while outdoors clothing retail giant Kathmandu is a shining example of the current appetite to combine sustainability with automation in warehousing, with its 25,000sqm distribution centre in Laverton North. Dexus Property Group owns the site but Kathmandu installed its own automation.

How to finance automation technology, which can often cost in excess of $100 million, is becoming a hot topic, and one that consultants such as TM Insight is increasingly being called on to advise upon, according to director Travis Erridge.

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OPERATING COST FOCUS

"There wouldn’t be too many big clients who don’t think about what their total cost of operating is, and automation is now often a major part of that," Erridge says.

"The typical rule of thumb is automation, for a fully automated DC, will cost around three times the cost of the building. So, for someone to go forward with an automated DC, there’s got to be a payback to make it worth it."

Erridge says you only have to look at the number of DCs being automated to see that the payback is – in many cases – there.

"The property component of an operating cost is less than 30 per cent. Automation targets that other 70 per cent of operational costs, so operators are asking themselves: ‘How do I get a more efficient operation? How do I get speed of product in and out, 24 hours a day?’"

The benefits of automation need to therefore be weighed up against its cost, which can be substantial. Operators need to look at the total cost of operating, not just the cost of property.

So what should operators look at when crunching the numbers? It depends what model will work for the business. Whereas the US and Europe have a lot of owner-occupiers – operators who buy the land and build their warehouse – Australian businesses have traditionally preferred long-term leases with an institutional or private developer.

"It’s because property isn’t usually a core business," Erridge says. "Under a leasing arrangement, there’s the concept of an OPEX cost, or a leasing cost, where you don’t need to finance to build. So there would be no offset to the $20 million you might put into automation.

"You had to physically go and get $20 million of your own capital and put it into the building."

It was that hefty initial capital expenditure that limited Australia’s uptake of large-scale DC automation, according to Erridge. But it’s beginning to change.

"What we’re starting to see, hence the uptake in automation, is people looking at different financing models, which developers are now starting to offer as part of a package."

The idea is that developers will finance the automation, and $20 million can now be OPEXed over the lease cost, making things simpler – in principle. But Erridge warns that this model leaves operators, particularly 3PLs, vulnerable to a type of boom-and-bust scenario.

"Developers are integrating fitouts into their buildings in order to attract large tenants.

"However, this requires the support of a very capable supply chain team, or third-party consultancy group, as developers can’t design the automation solution, they just provide the building around it."

Erridge expects the recent trend towards purpose-built warehouses specific to the transport and logistical needs of a tenant to boom over the coming years, but he cautions tenants to be wary, especially those attracted to a particular deal by incentives.

"In certain states, like Victoria, there have been big incentives given to clients [by developers] – fitout incentives or rent incentives," he says.

"We’re seeing these reduce as land supply goes down across the Eastern seaboard.

"These incentives are not sustainable. With land values increasing at exorbitant rates, these financial incentives will reduce dramatically as the market moves toward a cycle where developers may be more favoured than occupiers by market fundamentals."

Erridge believes incentives reducing could be the first step before rents start to skyrocket, putting critical pressure on businesses to control operating costs. All of this highlights the need to have a strong supply chain team.

"You might happily take a slightly increased rental cost if you’re going to significantly save money on operations by the type of facility you take," he says. Again, it’s about full end-to-end cost, not just the property cost.

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THE CHALLENGE WITH TECHNOLOGY

Keeping pace with the advancement of automation is only one part of the challenge, the other part is the practicalities of implementing the new technology into your warehouse, and hoping it won’t be obsolete by the time it’s installed.

"We’re seeing a very long uptake to get to the technology," Erridge says.

"From inception to the point where you go live can be anything from three-four years.

"So the technology you’re looking at now in 2018 won’t be implemented until 2021, for example. And the technology is changing so rapidly that some of the challenges are trying to stay ahead of that change."

Whether you’re looking at fixed or mobile automation, one thing is certain: the market is complex and rapidly changing, and there are no hard and fast rules.

"We always talk about the fact that you’ve got to look at the cost lifecycle [of your equipment] and look at the benefit, rather than always be waiting for newer technology," Erridge says.

"If there’s something now that suits your business and shows a dramatic payback in terms of your operating costs, you should look into it."

RELATIONSHIP WITH 3PLS

When asked what financial and technological challenges 3PL warehousing businesses are facing with its clients, Erridge nominates the nature of contracts as being one of the most significant.

"In Australia, there’s a mindset of short-term contracts with 3PLs," he says.

"Unfortunately, it doesn’t always align with their long-term property and automation requirements."

This is because a 3PL will typically have a 10-20 year exposure on its property lease, whereas most contracts with their clients wouldn’t go past five years.

Add to that the fact that automated DCs are typically complex buildings that need a longer lease term for the developer to develop them.

"This is the dilemma 3PLs are facing at the moment," he says. "In the past, they could get a generic building, rack it out manual and have client ‘A’ in there from years one to five, and then bring in client ‘B’ from years five to 10 if client A leaves.

"But when they’re automated for a specific market or type of client, the automation won’t necessarily suit client B."

According to Erridge, this has led to a growing reluctance for businesses to give their whole property and distribution solution to a 3PL, instead opting to outsource only certain parts of their operation to a 3PL and to have greater control of their own lease terms.

But Erridge doesn’t expect 3PLs to miss the boat entirely.

"They are not going to sit idly and watch this go past," he says.

"They will be actively looking at ways in which they can get multi-user, multi-use facilities, where they can buy a piece of infrastructure and have multiple clients get the benefits of that infrastructure. That’s what we’re seeing overseas."

Erridge cites the example of Toll’s new DC in Sydney.

"They’ve got multiple users all using the same bespoke equipment, and multiple people are getting the benefit. So there are smart people out there doing smart things.

"To take a long-term view is sometimes hard for operators, so that’s where 3PLs do provide an essential benefit."

ADAPT OR DIE

The days where a warehouse would see a pallet come in, be put on a shelf, then pulled out and shipped to a retail store may not be gone completely, but they are looking increasingly antiquated.

With customers expecting faster delivery times, and the huge increase in online shopping, the core nature of distribution has fundamentally changed.

Increasingly, products are going out as an online sale at an item level, which means more touch points at the DC end, rather than the shop front end.

This requires DCs to be extraordinary efficient in how they store and move product. Automation allows for solutions to these changes, including the ability of machines to work through the night.

"The key thing to stress is automation doesn’t suit every client or every customer," Erridge says. "We never go and push an automated solution on a client without first understanding what it is they need to do. We look at the total breadth of an operation and use risk and cost to determine that, rather than just giving everyone an automated solution.

"Not everyone is ready because they’re trying to understand what their business is going to look like in three-four years’ time."

One thing appears certain, though: the days of real estate companies calling the shots and shunting people into buildings is over.

"Eighty per cent of new enquiries that came to market this year were determined by either an internal supply chain team or a supply chain consultant," Erridge says.

"People realise how critical it is to understand what their operation is, and then choose a property solution to suit."

 

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