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Warehouses across Europe and beyond are embracing high performance robotic based goods-to-person (GTP) automation systems. Particularly as some contemporary systems are able to handle very high throughput volumes with industry leading productivity, whilst increasing storage density and utilising the full height of many buildings without needing mezzanines. They are very flexible, easy to expand, and robots can be moved from site to site to maximise their usage.

Simon Jones, senior sales executive at Exotec

However, experience suggests that the UK’s third-party logistics companies (3PLs) haven’t yet fully embraced owning and investing in more sophisticated high performance automation. To maximise the potential of robotics, there are a number of obstacles 3PLs need to overcome, writes Simon Jones, senior sales executive at Exotec.

Open-book contracts
Open-book contracts have served both 3PLs and their customers well over the last few decades. During this period of low inflation, incremental productivity improvements were adequate for both sides, and they required relatively low investment. Gain share agreements and annual productivity improvement targets were sufficient as carrot and stick to reduce costs slowly over time, or at least mitigate the effects of low inflation.

However, with an open-book contract, the 3PL usually makes most of their revenues by adding a small management charge percentage on top of all the costs they incur running the operation, before passing the bill to their customer.

One of the biggest costs of a manual fulfilment operation is the labour force. If automation is deployed in a warehouse that reduces the labour requirement by 80%, the revenue and profit generated by the unfortunate 3PL drops by a similar amount. No one would blame them for finding this a difficult initiative to encourage, let alone expecting them to make a multi-million-pound investment in the automation required to achieve it! Of course, 3PLs are a resourceful lot, and some of them have acknowledged this challenge and formulated creative solutions for it.

Two of the reasons often given for the popularity of open-book contracts in 3PL fulfilment are the reduction of risk for the 3PL, which allows them to operate on very low margins, and the comfort the customer feels because they can see the 3PL is not making excess profits from their contract. This does not necessarily mean that they are receiving the best value, however. The customer is only getting the highest value if their 3PL’s operating costs are also as low as they can be, and without the use of effective automation, this is very unlikely to be the case in today’s environment.

Short-term contracts
In the past, contracts as short as two years have been prevalent in 3PL fulfilment, although three to five years has become more common in recent years. Even these contract lengths are too short for a 3PL to get a return on the scale of investment needed to reduce the labour required by 80%+ and minimise the warehouse space used. An 80%+ reduction in labour is the kind of productivity target that should be aimed for to meet the key twin objectives of eliminating the risk from the labour shortage and minimising the effects of past and future inflation.

Customer owned vs 3PL owned warehouses
There are a myriad of contract permutations and hybrid structures when it comes to 3PL contracts in the UK. One of the most fundamental variables is the ownership of the building where the fulfilment operation will be. If it is owned by the customer, the 3PL will only be able to offer low-impact, easily relocatable automation as part of the contract. This will make relatively little improvement to productivity and may even reduce the storage density compared to a manual operation. In a customer owned warehouse, the best way to achieve the target 80% labour reduction is for the customer to own the automation and the 3PL to operate it. If the 3PL owns the warehouse, then it can make the investment with low risk, assuming the selected automation has the flexibility to be used for a variety of clients.

Despite the challenges, progressive 3PLs are beginning to rethink and reshape how they operate in order to make automation solutions easier to adopt for the benefit of their customers and their businesses, from putting automation at the heart of their new contract proposals to creating large scale multi-tenant sites. I believe technology and commercial innovation will be markers of success for 3PLs over the next few years, and it will be fascinating to see how the sector develops over the rest of the 2020s.

Simon Jones, senior sales executive at Exotec