In recent years we have seen several large-scale mechanization initiatives in the retail industry, and things are not expected to slow down any time soon. A growing pool of proven concepts – and low interest rates – have put the topic of mechanization high on the agenda of many retail executives.
However, initiating such a multi-year journey comes with a wide range of challenges. This two-part blog series will lead you through the key success factors, starting today with the things you need to know before giving the green light.
1. Understand the why One of the fatal errors in decision-making is retailers taking the short cut and choosing to mechanize because “everyone else does”. Not only is this a non-factual argument, it will also proof a weak foundation for the long journey ahead. Understanding the true motives is a crucial first step to success.
In short, there are either tactical or strategic motives to mechanize your operation. Companies often focus on the first one, where they talk about cost reductions and warehouse footprint minimization. The real value however comes from the more strategic motives, though they are often harder to quantify: reducing the dependency on manual labor and being able to offer same-day delivery. Especially for retailers operating in the online domain ‘mechanization done right’ will offer a key competitive advantage.
2. Involve the entire board from the start Large-scale mechanization projects are challenging, high-risk and multidisciplinary. The impact of these projects goes beyond logistics and therefore it is important to involve the entire board right from the start, preferably as a steering committee.
Success will only be achieved when every major decision is made in a robust way and consequences are thoroughly understood by the entire board. Dedicate sufficient resources to prepare important decisions and set up the required documentation for it.
3. Look far beyond the now, think 5-10 years ahead Mechanizing an entire operation does not come cheap. Typically you need a longer period to earn back the investments compared to let’s say the more conventional manual racking and picking solutions. Knowing where your business will go meanwhile is therefore a tough nut to crack, but absolutely necessary to make the call.
So before you sit down with any system supplier, you need to make an estimation of your future volume flows, predict how peak patterns and promotions will develop and in what way the assortment will change. Move away from the logistics sphere and collect input from the Commercial Director and CEO. Build a spreadsheet that incorporates all of the above and share this with your short list of system suppliers to get a common understanding and talk the same language.
4. Challenge the system suppliers on their proposed solution design For many executives initiating a large-scale mechanization project is often a once in a lifetime decision. It is therefore no surprise that system suppliers will have far more experience than you have. Nevertheless it is paramount to bring enough expertise and preparation from your side of the table when you start the selection workshops.
Even though any supplier most likely has all the best intentions, they are not an expert on the specific way you conduct your business. One particular example involves how to deal with peak demand. Since reducing or shifting peak demand may result in significantly lower investments in robots and steel, you should pay particular attention if and how the system suppliers aim to do so. Challenge them on their approach and verify if it is feasible from an operational and commercial perspective. Also evaluate the IT solution and see how the integration will work with the non-mechanized flows in your supply chain. Do not forget to get a clear understanding of the productivity levels and workforce requirements (for business case purposes) and allow for enough flexibility in the design (e.g. extension possibilities, manual workarounds) to handle volumes beyond the design year.
5. Build a solid case for change With the input from the workshops the next step is to build a business case to see if the numbers add up. These calculations will be fundamental for the upcoming decision and the main reference during the implementation phase. Six lessons here:
Pay special attention to the manpower as it is the main benefit driver
Have a detailed look at the service and maintenance costs. Technical staff have higher wages and will make up a significant part of the total workforce
Evaluate a pessimistic growth scenario to see if mechanization is the right decision. This might not always be the case!
Focus on the business case for mechanization and leave any real estate decisions out. By including real estate in the business case you will not be able to evaluate the true payback time of mechanization
Get a true sense of the transition costs, including the cost of any possible lay-offs and double rent periods. Depending on the situation these costs can be significant, even a show-stopper when the case for mechanization is weak to begin with
Add 10% of unforeseen costs on top of all investments and one-off costs. Experience shows you will need it.
6. Leverage your project with an outside-in view With increasingly more proven concepts in the industry, on many occasions there is no need to re-invent the wheel. Whether it is food retailing or fashion, most learnings about mechanization are similar regardless of the industry. Learn about best practices by visiting other sites and connecting with people who have been through the same process before.
If you follow all these key success factors, you are ready to take on the next challenge: implementation. In the next blog I will address the most important lessons to make sure you can bring your strategy towards execution.
About IG&H IG&H has proven to be a key strategic partner in several large-scale mechanization initiatives in the retail industry, from online fashion to food and household.
With a proven track-record in driving the early stages of setting direction, through decision-making into the implementation phase, IG&H is the key partner for moving your business into the new digital reality of retailing.