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Travel, Transport & Logistics Practice

Automation in logistics:
Big opportunity, bigger
As e-commerce volumes soar, many logistics and parcel companies
hope that automation is the answer. But as this second article in our
series on disruption explains, things are not so simple.

by Ashutosh Dekhne, Greg Hastings, John Murnane, and Florian Neuhaus

© Ian Lishman/Getty Images

April 2019
The history of logistics is also a history of Three cheers for automation
automation, from the steam engine to the forklift At first blush, more automation seems like the
to today’s robotic pickers and packers. So today’s answer to three problems facing contract
fevered interest in new machinery, after a lull logistics companies.
of several years, has plenty of precedent. Many
trends are thrusting automation toward the top Start with a shortage of workers. It’s no secret that,
of the logistics CEO’s agenda, not least these at least in the United States, labor markets have
three: a growing shortage of labor, an explosion tightened. Unemployment rates are at a 50-year
in demand from online retailers, and some low, and wages are increasing. Some of the largest
intriguing technical advances. Put it all together, e-commerce facilities currently require 2,000 to
and McKinsey Global Institute estimates that the 3,000 full-time equivalents, an order of magnitude
transportation-and-warehousing industry has more than traditional distribution centers employ,
the third-highest automation potential of any and need to add even more workers during the
sector.1 Contract logistics and parcel companies holiday peak season, when labor is most scarce.
(which, for sake of convenience, we will call simply
“logistics companies”) particularly stand to benefit. While many of the jobs that might be automated
(Automation is also on the table at other transport are currently difficult to fill, that’s not to say that
companies, such as trucking companies and port automation will have no effect on the workforce: it
operators. See sidebar “Automating freight flows: will, and companies must reckon with the significant
Changes for every sector”.) costs to their employees and communities. In 2017,
the US Bureau of Labor Statistics estimated that
Yet for all the excitement, most logistics companies nearly four million Americans work in warehouses
have not yet taken the plunge. For every force as supervisors, material handlers, or packers. That’s
pushing companies to automate, countervailing almost 3 percent of the total labor force; collectively,
factors suggest they should go slowly. We see five they earn more than $100 billion in annual wages.
reasons companies are hesitating: the unusual com- Automation won’t make all these workers redundant,
petitive dynamics of e-commerce, a lack of clarity of course, and many can be reassigned to new jobs
about which technologies will triumph, problems that involve collaborating with and maintaining the
obtaining the new gizmos, uncertainties arising from new machines. But if even a portion of these jobs
shippers’ new omnichannel-distribution schemes, are lost, it will still represent significant upheaval.
and an asymmetry between the length of contracts
with shippers and the much-longer lifetimes of E-commerce, the second trend, is remaking the
automation equipment and distribution centers. entire logistics industry. The inexorable rise of online
sales is well documented. In the United States, for
This is the second in a series of five articles on example, growth has averaged 15 percent annually
disruption in transport and logistics. In the first, we over the past decade, and the range of goods
examined the implications of autonomous trucks. has expanded dramatically. That’s been good for
Automation is no less potent a force. In this article, logistics companies. We estimate that, out of every
we will review the reasons automation is coming to $100 in e-commerce sales, these companies (or
the fore, examine the five factors that are hindering e-tailers’ in-house logistics units) are collecting
investment, and lay out strategies that can position $12 to $20, a massive increase from the $3 to $5
contract logistics companies to prepare for an spent on logistics in a typical brick-and-mortar-
uncertain future. retail operation. (It’s important to note that, in our

Michael Chui, James Manyika, and Mehdi Miremadi, “Where machines could replace humans—and where they can’t (yet),” McKinsey Quarterly,
July 2016, McKinsey.com.

2 Automation in logistics: Big opportunity, bigger uncertainty

estimate, e-tailers are saving $12 to $16 out of to adapt to B2B2C. Many large logistics companies
every $100 of sales versus their brick-and-mortar fulfill e-commerce orders by carving out a corner
competitors, which explains why their economics of warehouses designed for B2B operations. And
work so well.) some logistics companies have at times been willing
to use e-commerce as a loss leader to add business
But even as logistics companies have benefited to their transport divisions. But as volume expands,
from burgeoning volume, the business is not without all such arrangements are coming under immense
its challenges. Many B2B networks are struggling strain. Here, too, automation seems to be an answer.

Automating freight flows: Changes for every sector

Automation will affect the supply chain automation-ready capabilities rather than line a longer-term prospect, rail operators
far beyond the walls of the warehouse and simply automating old processes. And they and governments are investing in technol-
sorting center; it will change the way goods can apply better project discipline to en- ogies that lay the foundation. Positive train
flow across all modes (exhibit). In the first sure that automation investments account control (PTC) is a long-desired step toward
article in this series, we addressed the for all attributes of port operations. an automated future: its data links allow
impact of autonomous trucking, a critical for real-time automated control of sets of
automation technology, on roads, rails, Of the remaining transport modes, au- trains. Several European and US railroads
and ports. And our colleagues recently tomation in ocean and air freight is quite have PTC schemes in the works, and a few
produced a detailed look at other forms possible but will probably not move the have fully implemented them.
of port automation. They find that while productivity needle much. In rail, automa-
ports are accelerating their adoption of tion will likely begin in terminals, which offer Over time, railroads will continue to search
automation, they are not yet recouping controlled environments and repeatable for opportunities to automate the main line,
their costs. Moreover, while operating
2019 processes. Intermodal terminals will but some limits will persist for the foresee-
expenses are falling as expected (by
Automation in logistics: Big opportunity, 15 to likely seebigger
increased use of autonomous
uncertainty able future. For example, trains traveling
35 percent),
Exhibit throughput
sidebar of is falling as well (by hostlers to move containers to and from
sodebar heavily populated routes or hauling haz-
7 to 15 percent). Port operators can take trains. Autonomous cranes are also likely to ardous materials will likely continue to need
several steps to get the most out of auto- emerge in the near term. While the physics human oversight.
mation. Among other moves, they can build of trains makes automation on the main


Automation is emerging to varying degrees across the global logistics chain.

Today’s global logistics chain, illustrative
Degree of automation Low High

Shipper/ Port or hub Ocean or long- Port or hub Warehouse, contract

origin storage/loading distance transport storage/loading hub and fulfillment Customer

First-mile Customs/ Customs/ Inland Delivery

transport border border transport (B2B)

Automation in logistics: Big opportunity, bigger uncertainty 3

There’s a third reason for heightened interest: Five issues are holding the sector back. Two are
automation technology has come a long way. the flip sides of the forces (e-commerce and
Ocado Retail’s new fully automated warehouse technological advance) that are motivating the
has demonstrated the potential of several new renewed interest in automation. Also clouding the
technologies—as seen by a big YouTube audience. outlook are purchasing problems, the potential for
Other companies, such as CommonSense Robotics change in the omnichannel supply chain, and the
(CommonSense), GreyOrange, and XPO Logistics, risks associated with short-term contracts.
are rolling out intriguing new offerings.
Frenemies and ‘coopetition’
These three trends make it seem like more To capture the large e-commerce-growth
investment in automation is a layup. Indeed, many opportunity, any logistics company must meet two
are finding success with it. Some companies’ fundamental requirements: speed and variety. Think
new automated pallet-handling systems cut same-day delivery of any of a million SKUs. To deal
shipment-processing time by 50 percent. And DHL with that, more automation in picking, packing, and
International (DHL) has built almost 100 automated sorting seems like an easy investment call. But the
parcel-delivery bases across Germany to reduce unusual dynamics between logistics companies
manual handling and sorting by delivery personnel. and e-commerce customers hold many logistics
companies back. The risk manifests in a few
In fact, if you squint hard enough, an entirely new ways. One is that e-commerce companies have a
logistics paradigm is coming into view (Exhibit 1). lot of buying power; if they do not like a logistics
Many operations could be automated by 2030, as company’s offer, they can easily shift their business
artificial intelligence takes over the many repetitive to competitors. That tends to keep prices low and
activities that logistics companies perform. may keep logistics companies from making an
We expect to see fully automated high-rack adequate return on a big investment in automation.
warehouses, with autonomous vehicles navigating
the aisles. Managers with augmented-reality Another wrinkle is that most large e-commerce
goggles will be able to “see” the entire operation, companies, such as Amazon and JD.com, have built
helping them coordinate both people and robots. their own logistics capabilities. Indeed, we estimate
Warehouse-management systems will keep track that if Amazon’s logistics unit were a separate
of inventory in real time, ensuring it is matched to company, it would be the fifth-largest third-party-
the ordering system. 3-D printers will crank out logistics company in the world. To be sure, working
spare parts made to order (see sidebar “Automation with these companies can present challenges for
technologies to watch”). shippers. The online giants, with their superior
data and extraordinary scale, can readily offer
white-label products that undercut their shipping
Five reasons for hesitation customers’ offerings.2 But many thousands of
Logistics companies are intrigued by the potential of shippers find the benefits outweigh the risks. The
automation but wary of the risks. Accordingly, they online giants deploy their in-house logistics first in
are investing conservatively. McKinsey research the most lucrative niches, such as parcel delivery
estimates investment in warehouse automation will in dense urban areas, while slowly expanding into
grow the slowest in logistics, at about 3 to 5 percent other areas. As that happens, they threaten to shunt
per year to 2025. That’s about half the rate of logistics companies toward low-margin services,
logistics companies’ customers, such as retail and which may not justify an investment in automation.
automotive (6 to 8 percent) and pharmaceuticals (8 The moves by big e-commerce companies to build
to 10 percent). more warehouses in the last mile, and offer same-

Rick Braddock, “To compete with Amazon, big-name consumer brands have to become more like it,” Harvard Business Review,
June 14, 2018, hbr.org.

4 Automation in logistics: Big opportunity, bigger uncertainty

Automation in logistics: Big opportunity, bigger uncertainty
Exhibit 1 of 4

Exhibit 1

A new logistics paradigm is emerging.

10 prominent technologies that could remake warehouse operations

Multishuttle system Analytics tools Optical recognition Conveyor connection Management system
Typically used with an Algorithms that help operators Sensors that scan items (often A connection between 2 Analytic and digital systems that
automated storage and retrieval analyze performance, identify on 6 axes) to apply sortation disparate conveyor systems integrate analytics, performance
system (AS/RS) that moves trends, and make predictions and other logistics. Examples that often uses decision logic reporting, and forecasting tools,
goods (mostly on pallets) in 3 that inform operating decisions, include a conveyor’s diverts, to affect the flow of items. allowing managers to easily
dimensions to store and retrieve often using machine learning to laser-guided vehicles, and Typically, connections integrate control a full system such as a
items without human improve over time. camera-based movement different systems of flow, for warehouse.
intervention. of drones. example push and pull flows.

Smart storage 3-D printing Swarm AGV1 robots Smart glasses Picking robot
Storage solutions that use Also called additive Autonomous guided vehicles Glasses that augment and assist Systems with robotic arms that
advanced analytics and digital manufacturing, this process that operate freely or on digital reality of wearers—for example, mimic human picking motion.
tools to place and retrieve items creates parts by adding layers tracks to bring items (often from by displaying directions to Picking robots can be fixed (with
in the most efficient way, of a material (metal or plastic, a storage rack) to a picking storage locations for picking— goods brought to them) or mobile
adjusting storage media based typically) to create a desired station based on instructions reducing inefficiencies of (traveling to storage to pick
on the product, picking, and shape. from the order-flow software. searching. items).
order characteristics.

Autonomous guided vehicle.
Source: McKinsey analysis

day as well as instant delivery, are a potent step in processed 812 million orders, eight times more than
that direction, and logistics companies will have to on a typical day. If logistics companies are to fulfill
carefully monitor the pace of change. customer expectations during peaks, they will have
significant spare capacity for three-quarters of the
A particular challenge of serving e-commerce year. And if they do not build sufficient capacity for
companies is that demand is very spiky, easily peaks, e-commerce giants have further incentive to
doubling around Christmas or Singles’ Day. On build their own capabilities, as Amazon did after the
Singles’ Day 2017, Cainiao, Alibaba’s logistics arm, 2013 Christmas season.

Automation in logistics: Big opportunity, bigger uncertainty 5

Automation technologies to watch

Warehouse automation technologies can shuttles moving in three dimensions on rails to determine the appropriate action. Auton-
be broadly categorized into devices that as- attached to the structure. omous palletizers use robotic arms to build
sist the movement of goods and those that pallets from individual units and cases, of-
improve their handling. In the first group, New handling devices automate the pick- ten using advanced analytics to determine
we’ve already seen automated guided ing, sorting, and palletizing of goods. Pick- the optimal placement for each box.
vehicles (AGVs) that move cases and pallets. ing systems typically include a robotic arm
New twists are the equipment and software with sensors that can determine the shape Beyond the machines that mimic human
needed to retrofit standard forklifts and and structure of an object, then grasp it. hands and arms, other innovations will
make them autonomous. The new gear can Some devices remain fixed and have goods improve the productivity of people in ware-
be switched on whenever needed—peak brought to them (often by AGVs). Others houses. Drones are already in use in the
seasonal shifts, say—and the forklift can re- travel to the goods and retrieve and move warehouse for inventory management and
main manual when demand is slower. Other them at once. Magazino’s new TORU cube outside the four walls for yard management.
recent technologies include swarm robots is an example of the latter. We expect to see much greater adoption
(most famously, Amazon’s Kiva robots) of drones for these uses. Exoskeletons
that move shelves with goods to picking With the e-commerce boom, efficient augment human motion with mechanical
stations and advanced conveyors that can sorting has become increasingly important, power through gloves or additional support
move goods in any direction. Advanced particularly in parcel operations. Advanced for legs. The systems feature electric
automated storage/retrieval systems (AS/ conveyor systems use scanners that can motors that augment the person’s own
RSs) store goods in large racks, with robotic pick up bar codes on any side of a package strength to allow them to move more goods
(for example, heavier items) or move goods
more easily and safely.

Technology racing ahead investment at all. The cost of removing and replacing
We combed the industry and found more than equipment, much of it not fully depreciated, would
50 technologies that could further automate put unlucky investors in a deep hole.
some part of the supply chain, including many
in logistics (Exhibit 2). All are much more than a Purchasing woes
twinkle in some technologist’s eye, but none are Even if a logistics company makes a great choice
yet in widespread use. The question that confronts about the automation equipment to buy, it can run
logistics companies (and warehouse companies) is into another problem. The leading warehouse-
simple enough: Which ones will take off to yield the automation manufacturers have enjoyed strong
greatest return on investment? revenue growth of 15 to 20 percent annually since
2014. At many, order books are now full. In 2017, the
Finding answers is much more difficult, of course order book at Vanderlande Industries reached an
(see sidebar “Automation technologies to watch” for all-time high. Our conversations with many would-
our thoughts on the first few horses out of the gate). be buyers, especially at parcel companies, suggest
No one wants to buy technology that becomes that manufacturers operating at full capacity cannot
obsolete shortly after acquisition. Not only would even provide them with quotes.
that leave a company less efficient than competitors
that made better choices, it would also leave it Part of the problem is that the manufacturers are
worse off than those competitors that made no not yet at scale. Many companies, including the

6 Automation in logistics: Big opportunity, bigger uncertainty

Automation in logistics: Big opportunity, bigger uncertainty
Exhibit 2 of 4

Exhibit 2

Dozens of logistics technologies are under development.

Logistics-technology development

HIGH Technology categories

Broad Advanced robotics
use in warehousing

Analytics for transport and


Autonomous transport and

Advanced delivery
scheduling Internet of Things/smart-sen-
Adoption system sor applications
Virtual- and augmented-
Exoskeletons reality applications

Automation technologies for

other parts of the supply chain
Autonomous trucks
guided vehicles
Small parcel lockers
Vision Technological Innovation Pilot Selective Broad use
prerequisites developed use use (or failure)

Maturity, in stages

Speed of innovation adoption based on maturity.
Source: McKinsey Supply Chain 4.0 Innovation Survey

market leaders, are focused on a narrow range of order is “overspec’d,” or more expensive than it
technologies and solutions. That may change: the might have been. We have seen purchase prices for
industry is in turmoil, with significant M&A activity the same equipment vary by as much as 50 percent.
underway. Notably, large technology conglomerates
are investing in automation start-ups. For example, Rapid change in shippers’ distribution networks
in 2015, Siemens took a 50 percent stake in Brick-and-mortar retailers are reacting to the
Magazino, a start-up that builds automated picking e-commerce onslaught in part by evolving their
robots. Once the dust has settled, some larger distribution networks into omnichannel systems in
companies that are better able to meet demand may which consumers can purchase and receive items
emerge. Then again, such companies will also have through any channel. They might purchase online
stronger pricing power. and take deliveries at home, the classic e-commerce
model. Increasingly, they can order online and pick
A related issue is some confusion at logistics up in stores. Or they might purchase in-store and
companies about which advanced equipment they receive shipments at home, an option that menswear
truly need. Often the equipment on the purchase company Bonobos and other companies offer. And

Automation in logistics: Big opportunity, bigger uncertainty 7

The shipper’s perspective

Shippers—the manufacturers and part because they cannot find logistics Shippers should expect their partners to
retailers that hire logistics providers to companies that will invest enough in auto- seek contracts in line with the life cycle
move their goods—will also grapple with mation to meet their needs. of automation investments. Put another
automation in coming years. As new way, logistics companies will seek to share
technologies come online and omnichannel Beyond the level of investment, shippers some of the technology upside—and some
delivery becomes more common, most will and their logistics partners must also con- of the risk—with customers.
need to revisit their long-standing in-house tend with the complexity of omnichannel.
and outsource decisions. Shippers inter- Take one example: to operate efficiently, an Shippers cannot outsource completely
ested in automation must first determine omnichannel retailer must either open the the intricacies of automation and the best
whether they have the capital and know- full inventory system to the logistics com- practices of automated warehouses. To
how to invest effectively in automation or pany so that it can route orders between be a smart customer requires enough
whether it is more economical and easier to stores and fulfillment centers or add steps knowledge of automation to evaluate bids
outsource increasingly complex warehouse to the order-routing process to determine intelligently. Contract logistics companies
operations to a logistics company. The whether the order remains in-house or is we speak with often see automation listed
same uncertainties about omnichannel that sent to the logistics company. prominently, yet typically with sparse
hold back logistics companies’ investments detail, in requests for proposals. Shippers
in automation can also constrain shippers. Supply-chain managers should also expect frequently know they want automation but
However, our analysis indicates that ship- changes in their negotiations with logistics don’t know what kind they need. Getting
pers are investing more in automation than partners. As contract logistics players add a fair shake from logistics companies will
logistics companies are (see section “Five more fixed costs in the form of automa- require shippers to stay aware of technol-
reasons for hesitation” in article), in large tion, their strategic flexibility will decrease. ogy trends and understand well how these
might meet their needs.

of course, they can still go to the store and walk out in the past. Shippers have tried to cut costs by
with their purchases. On top of that, consumers more frequent tendering and have sought greater
demand ever faster delivery, which requires more flexibility to respond to rapid changes in customer
local storage capacity, further driving complexity. demand. The trend has exerted significant pressure
Building a supply chain to support an omnichannel on logistics companies. Because they typically
system is highly complex (Exhibit 3). develop sites with a particular customer in mind,
they need to calculate carefully the investment
With all this complexity comes a lot of uncertainty: required to add a new customer. With a significant
Where should new fulfillment centers be built? What initial investment required, logistics contracts are
share of B2C orders should they accommodate? often not profitable for two years. That leaves only
And perhaps the biggest question: How much and a year or so of profit before renegotiations begin.
what kind of automation are ideal? Shippers are Big investments in automation would push the
asking the same sorts of questions (see sidebar break-even point back further, leaving logistics
“The shipper’s perspective”). companies at even greater risk that a customer
would change providers, which would leave the
Too-short contracts facility empty and automation equipment unutilized
Most logistics contracts run for about three years, while the third-party-logistics company searches
sometimes longer. That’s much shorter than for a new customer.

8 Automation in logistics: Big opportunity, bigger uncertainty

Automation in logistics: Big opportunity, bigger uncertainty
Exhibit 3 of 4

Exhibit 3

To fulfill omnichannel orders, shippers are redesigning their supply chain.

Supply chain Strategies


E-commerce Omnichannel
fulfillment center fulfillment center Hub and Logistics Retail Omnichannel
spoke clusters infrastructure infrastructure
Network strategy Network strategy Network strategy Network strategy
— Use segmented — Locate near hubs — Rely on own — Build smaller
approach to place and competitor footprint of brick- e-commerce
inventory in larger facilities to benefit and-mortar stores fulfillment centers
(regional) and from availability close to customer close to customer
Consolidation in Dark Store with cross- smaller (local, of labor and — Train store
logistics cluster store trained workforce metro) sites collaborative associates to serve Applicability
transportation both e-commerce — For geographies
Applicability and store visits with high population
— National/regional Applicability density
— For low volumes Applicability (metropolitan areas)
— Reduced capital- — For areas around
expenditure retail footprint
investment — Reduced capital-
Customer locker expenditure
or drop box investment

Source: McKinsey analysis

In the future, contract planning might get even more Contract logistics
difficult. E-commerce requires dense networks, The big changes we’ve discussed—the simultaneous
especially in urban areas. But no single customer rise of e-commerce, omnichannel supply chains,
has the scale to support a full-scale network. and new automation technologies—present
Logistics companies must therefore build fulfillment contract logistics with a great opportunity to
centers and purchase automation technology sharpen its value proposition, which has historically
before demand is known, let alone contracted. relied on one of two factors:

—— Superior services. To meet the needs of small

Strategy under uncertainty shippers, which typically lack the capabilities or
In these murky waters, what should contract scale to set up and manage complex fulfillment,
logistics companies do? As the previous discussion contract logistics companies offer heavily
illustrates, there is no single automation strategy customized services, such as differentiated
that guarantees a company will thrive. In the packing, effective returns management, and
following sections, we offer some guidance that we high-speed fulfillment.
hope can start the thinking process.

Automation in logistics: Big opportunity, bigger uncertainty 9

—— Efficiency through scale. By serving multiple proliferating—more than 20 logistics activities
customers, contract logistics companies build could soon see mechanized help—almost every
the scale and expertise needed for warehouse logistics customer now needs guidance in picking
efficiency—for example, shift planning during the optimal equipment for its purposes, procuring it,
peak hours and seasons. For many shippers, fitting it into the warehouse layout, training workers
large and small, these capabilities were the key on it, and maintaining it. With contract logistics
reason they outsourced their warehousing. companies’ scale and experience, they can meet the
need and become true partners to their customers,
In our view, automation is not (yet) very helpful in offering expertise, better rates of procurement,
delivering value-added services, which are often and deep operating knowledge. But to get there,
quite complex. Consider what happens when a logistics companies must do two things:
worker checks whether a returned pair of sneakers
is ready to be reshipped. Reliably unpacking the —— Be at the forefront of understanding and
shipment (customers often use whatever they can deploying automation (for example, by partner-
get their hands on, such as supermarket plastic ing with automation providers to test new equip-
bags), recognizing the condition of the returned item, ment). Scale will help with this requirement,
and then selecting the correct next processing step especially in segments that use specific types
is not a job easily performed by a robot. of equipment (for example, to handle small items
or returns).
However, a lot of automation equipment is well
suited to drive efficiency, the first factor, in three —— Get sharp on the marketing strategy, including
ways. Start with the jobs of putting away and picking, a definition of the market segments they can
especially of high-velocity items. Automation can serve well, discipline in targeting clients in these
reduce the dependency on an ever-tightening labor segments, and clear communication of the value
market. Second, automation can enable higher proposition to them. With the rise of equipment
throughput in a smaller space. Given the tight comes a greater need for companies to specialize
market for warehousing real estate, especially near in activities common to a given industry, as most
city centers, the business case for automation is machinery is not as versatile as human labor. It
improving significantly. Large manufacturers and will become tougher to serve every client out of
start-ups such as CommonSense have identified the same warehouse setup. Contract logistics
this advantage of automation as a core value driver. players need to shape and communicate a clear
And of course, automation can help during peak benefit for each customer industry.
times. Business cases for automation often rely on
average throughput, or the base load. Even on those Delivering the best service at the lowest cost in a
terms, automation can succeed, but it means that given market segment will create a strong value
a lot of equipment sits idle much of the year, as it is proposition. The expertise gained by doing this
only used for one or two shifts a day. During peak well may also help to mitigate some of the contract
times, this idle capacity can easily be unlocked issues: the deep relationships formed by becoming
through a third shift without adding large numbers a true partner and adviser will likely also lead to
of part-time warehouse employees—who are harder stable contracts that can accommodate longer
to find during Christmas season, for example. From payoff periods. Some customers will still leave, of
an efficiency standpoint, automation has a lot going course, but when they do, the logistics company’s
for it right now. expertise and market-leading role should attract
replacements, lowering the risk of equipment
So how can contract logistics players make the most obsolescence. Therefore, logistics companies
of this opportunity? With specialized equipment should avoid equipment that is specific to only

10 Automation in logistics: Big opportunity, bigger uncertainty

one customer if that customer is not willing to help a flexible base capacity of large equipment
shoulder the burden. and then add smaller sorters to accommodate
e-commerce peaks.
Yet superior expertise and support may not be
enough to make all contracts profitable over their —— Which process steps should be automated?
duration. Contract logistics companies should also The most obvious candidate is sorting in the
get smart about pricing. The power of incentives, hub. The labor-cost savings, especially in the
such as adding attractive terms to extend contracts developed world, make this a relatively clear
or penalties if contracts are terminated before case. Unloading and loading in the hubs are
customized equipment is paid off, is not to more complicated. Over the past five years,
be underestimated. more equipment for these activities has been
developed. Some providers say their gear can
Parcels increase the productivity of one employee
For parcel companies, the strategic considerations to more than 3,000 items unloaded per hour,
are a little simpler. Increasing demand is a given, from the previous 700 to 1,000 items per hour.
as are rising requirements for speed and reliability. In our experience, however, this equipment
Considered that way, there can be little question often struggles with the different shapes and
that parcel companies need to automate. And in especially the packaging of today’s e-commerce
fact, many already have. DHL invested about €750 parcels. Plastic bags are the worst nightmare of
million in its German parcel network, and United many parcel-hub engineers.
Parcel Service (UPS) has announced a long-term
plan to invest even more. When it comes to automation of loading, large
parcels are the villain. Just imagine a 50-pound
But within that imperative, parcel companies face sack of dog food landing on a small, delicate box
some subtler questions: of LEGO toys. The child who receives the latter
will not be happy with its condition. For smaller
—— What kind of equipment should be installed? items, automation has been in place for years,
Parcel companies around the world have two but reviews are mixed. Parcel companies are
choices. One is to install large equipment that well advised to ask manufacturers to showcase
can handle the vast majority of parcels, say their solution with the company’s parcel mix.
those up to 120 by 60 by 60 centimeters. This
approach puts a high value on flexibility to Apart from hubs, some parcel companies, such
accommodate a wide mix of parcels. Other as DHL, have started to automate delivery bases.
companies have focused on equipment Key advantages of this model are more sorting
designed for smaller items, as e-commerce “depth”—that is, less manual sorting—and easier
fulfillment features lightweight (less than 5 same-day deliveries that are fulfilled close to
kilograms) items that are typically smaller than a a city and then just sorted to the route in the
shoebox. This kind of equipment is less flexible, delivery base. Automating in this way allows a
as it cannot handle the large items, but it is company to outcompete some low-cost services
significantly cheaper to install and often even offered by rivals.
to operate.
—— How much capacity should be installed?
To decide, companies must review two pieces E-commerce growth, and the volatility of its
of data: the historical mix of parcel sizes and the volumes, make this a vexed question. Many
growth rate of each size. If the data do not yield companies seem to have chosen not to
a definitive answer, it may make sense to create overinvest in growth. The US operations of

Automation in logistics: Big opportunity, bigger uncertainty 11

FedEx and UPS, and Japan’s Yamato Holdings, the question of installing new capacity, but
are only slowly expanding capacity. There are ultimately, all parcel companies need to find the
two reasons, which we raised previously, for right balance between yield and growth.
being cautious and not rushing to capture all the
growth: e-commerce players such as Alibaba
and Amazon are investing in their own delivery
systems, and e-commerce volumes tend to be Despite the uncertainty, logistics companies can
low margin. Instead of focusing on investing make informed decisions. We hope this article offers
in growth, many players are trying to get more clarity on a complex situation, and together with
out of their existing automation equipment—for the series of papers of which this is a part, provides
instance, by introducing new products with logistics executives with a useful perspective on
different speeds that allow for sorting through how their industry is changing—and how they can
the entire day. This will initially postpone change ahead of it.

Ashutosh Dekhne is a partner in McKinsey’s Dallas office, Greg Hastings is an associate partner in the Charlotte office, John
Murnane is a partner in the Atlanta office, and Florian Neuhaus is a partner in the Boston office.

The authors wish to thank Knut Alicke, Tom Bartman, Alan Davies, Mark Staples, Adrian Viellechner, and Markus Weidmann for
their contributions to this article.

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12 Automation in logistics: Big opportunity, bigger uncertainty