Volatility affects the payback period of warehouse automation

Demand volatility increases the payback period (ROI) of warehouse automation and decreases the service level, according to supply chain consultancy 4flow based on its recent in-depth study of warehouse automation and volatile demand.

In their study called ‘Warehouse automation and volatile demand – a strategic fit?’, the researchers from 4flow Consulting address the core warehouse design-related questions for today’s supply chain executives: What throughputs and storage capacities are required? What are the most economically viable processes and technologies in the warehouse? And how can flexibility be ensured while also achieving the required service level?

Balancing capacity and efficiency

The trade-off between a warehouse’s free capacity and efficiency is a constant challenge in supply chain and logistics, according to 4flow. A warehouse that is too large is not cost-competitive, but opting for a more compact design can lead to significant performance issues such as stock-outs.

In addition to size, warehouse performance also depends on the degree of automation. However, the high fixed costs of technology can complicate the decision of whether or not to automate. Moreover, companies need flexibility in their operations so it is important to consider whether automation technologies can function under volatile demand environments.

“Ultimately, the business case for automation is dependent on well-informed planning and precise predictions about future demand,” says Andreas Mager, partner at 4flow Consulting. “Our study provides a data-driven approach to warehouse planning and draws attention to the key factors that need to be considered throughout this process.”

Comparison of warehouse designs

The researchers compared a manual greenfield warehouse design – operated with forklifts – against an automated warehouse solution consisting of a combination of automated guided vehicles (AGVs) and a high-bay warehouse with stacker cranes. The objective of the study was to analyse the operational and financial key performance indicators (KPIs), service level and payback period of the automation solution.

After a detailed analysis of the various KPIs, the 4flow team concluded that the volatility of demand clearly compromised the service level in the case study. Moreover, depending on the degree of demand volatility and the resulting stock-out costs, the payback period of the automated solution could increase from two and a half years to as much as six years.

Interactive model

Based on the insights from the study, 4flow has a number of recommendations for companies considering warehouse automation. The consultancy has also developed an interactive model including various parameters so that users can explore customized scenarios for themselves and assess whether it makes sense to invest in automation technology in their specific use case.