In the wake of the supply chain crisis, warehouses across the globe are being squeezed by demand to store more goods than there is space, and to ship out products faster than their people can keep up.
The pandemic had a ripple effect on the supply chain: Demand for packaged goods soared while supply was constrained by factory shutdowns, shipping costs quadrupled, hundreds of thousands of containers were stranded and in warehouses, vacancy rates dipped below 4% while rents rose.
The challenge shipping and distribution companies are facing is that “they need to be able to respond to the disruption, whatever the disruption is,” said Darcy MacClaren, head of SAP’s digital supply chain team for North America. “And what they're all struggling with is how do they enable their organization to be more resilient and able to respond to these disruptions, how do they be more agile and how do they be more intelligent.”
Coming off all that change, companies are using software warehouse management systems and emerging technologies like robotics, the Internet of Things and artificial intelligence to make sense of the new normal.
But to solve their most pressing problems, from lack of space and labor shortages to market gaps and outdated software, enterprises will need to drastically change the way they view and operate their warehouses.
Room to grow
Supply chain leaders have long been pressed to adapt a traditionally inflexible, infrastructure-laden industry to a new digital reality, and that shift was only accelerated by the COVID-19 crisis. With new challenges at play, warehouses are trying to use software to cope.
“Space is a huge issue now, especially if you’re on the coast,” said Gary Mirsky, vice president of warehouse outsourcing company ShipHero. “You couldn’t find [space] in New York state if you wanted to. If you want to be in Jersey, if you want to be in California, it’s really tough to find warehouse space for anybody.”
Labor shortages are another pressing challenge. “Companies used to treat what we call frontline workers or operational workers kind of as fungible assets,” but now, if you get rid of labor, you might not get them back, said Dwight Klappich, VP analyst at Gartner.
Although warehouse management systems were designed to help enterprises manage these types of operational challenges, there are still limitations: Low adoption in certain markets and geographies means there’s a learning curve before they start to reap the benefits, and cloud infrastructure challenges and integration issues come along with any major IT project.
Still, warehouse management systems aren’t new, which is why Klappich estimates market penetration is north of 80% in established regions like Europe, North America and parts of Asia. The problem is that there are still gaps.
“As you move down to smaller and to midsize enterprises, even in those established economies, you’ll still see [warehouse systems], it’s just fairly lightweight systems or it's a system that came with their ERP,” said Klappich.
Driven primarily by the increasing complexity in supply chains due to the crisis, there’s a large swath of small to medium-sized enterprises entering the market for more complex warehouse management products that weren’t traditionally in the market for this kind of software. At Blue Yonder, product management director Rizwan Butt said the company is now seeing a need to move downmarket because “70% of new facilities that are coming up are going to be in that micro-fulfillment category.”
Even in markets and geographies where warehouse managers have adopted new software, certain special requirements demand they manage that software themselves, and that’s not their core area of expertise.
“In some cases, even though there's interest, there's considerations and constraints that prevent a customer — whether it's legal, regulatory or others, from going and migrating to cloud,” said Butt. Some of those constraints are legal restrictions on data being housed off premises, lagging infrastructure capabilities or reliance on legacy systems that are difficult to modernize.
The biggest hurdle for potential customers is regulatory or legal constraints around moving data, but another is the ability to maintain operations in the event of power outages or disruptions in internet service.
For example, some of Blue Yonder’s customers are “mission-critical companies whose operations cannot be disrupted even for a short amount of time,” said Butt. But “some of the systems that we’re dependent on for the cloud infrastructure don't even have those abilities yet,” he said.
Generalists versus specialists
The perennial question in SaaS is whether to go with a large full-suite vendor that can provide a number of adjacent services or to go with a company that lives and breathes the problem, and warehouse management systems are no different.
On the lower end of the market, it's common for enterprises to just select a service that fits with their already existing ERP system. “What we would normally say is that if you have a commitment to a suite — Microsoft, Oracle, SAP S/4HANA — there's a good reason for you to at least short list your suite vendor’s [service] if they have one,” said Klappich.
That’s because “the integration between a warehouse system and an ERP system, there's about 75-plus integration points” that need to be addressed, said SAP’s MacClaren. “So if you don't have a warehouse system, you probably want to get one that matches your ERP system.”
But the benefits of integration, like a common technical environment across services, still need to be weighed against functionality. While integration is important, “I don't think it's as big a factor as the suite vendors want to make it,” said Klappich. That’s especially true given that most of those smaller vendors integrate with the major ERP providers anyways.
The downside of relying on a vendor with a broad suite of services is that while it may have enough functionality for most customers, that’s not enough for companies with more complex warehouses, Klappich said.
That’s where supply-chain-specific vendors like Blue Yonder come into play. “They’re very open to listening to their clients, and they have some of the biggest, most complex, most sophisticated customers telling them what they need,” said Klappich. “That's why they tend to have deeper functionality: That's what they do — they live and breathe this 24 by seven.”
For small to medium-sized enterprises, vendor selection requires a different calculus. Industry leading solutions like SAP and Blue Yonder are simply too cost prohibitive for smaller companies, meaning the availability of cheaper enterprise-grade solutions is much more limited. That gap has left room for companies like ShipHero, which works primarily with small to medium-sized enterprises looking to outsource the complexities of their warehouse operations. “For our customers, we’re not seeing a lot of SAP,” Mirsky noted.
For larger companies though, the answer to the best-in-breed versus suite vendor question is that sometimes you need both. Multinational corporations, for instance, often mix and match vendors to suit the needs of their different warehouses.
As an example, a global food and beverage company that Klappich works with has more than 1,000 warehouses across the world and uses a three-tiered vendor strategy.
“They have Blue Yonder for their biggest, most complex sophisticated warehouses, [but] they're a big SAP shop, so they use SAP for their plants and others, and then they have 700 little warehouses” where they use a mobile solution, said Klappich.
Although it’s easier to use the same warehouse management system across an organization, MacClaren doesn't think it’s necessary.
“Because warehouse management systems are a little bit more specific to the design of a warehouse, it's not as important that globally, everybody has to be on the same warehouse system,” said MacClaren. And it won’t affect a company’s ability to have visibility across its warehouses as long as there’s tight integration between its warehouse software and the ERP, she said.
The new warehouse
Regardless of which direction customers take, the real challenge is using that technology to tackle the unsolved problems of storage and labor in warehouses.
To address storage issues, companies can look to AI and machine learning to move inventory out faster so it doesn’t take up extra space. “If you were to take a beer manufacturer, they have to get stuff out,” said MacClaren. “If I make the beer, I ship it out. They don’t have a lot of space to hold any extra inventory.”
SAP uses data to speed up the flow of inventory by moving high-volume production to locations that are easier to pick, for example. “There are algorithms that will help make sure that you're placing it in the most optimal place based on the way your orders come in,” explained MacClaren.
ShipHero’s Mirsky has also seen companies mine warehouse data to better use their existing space. Walking patterns, for example, are being analyzed and updated to guide workers on the most efficient routes to take in a warehouse. And systems are gathering data to see “if certain products are selling at a higher rate, taking that information and then providing it to whoever that user is and then rearranging their warehouse,” said Mirsky.
Blue Yonder uses similar technology to coordinate workflows between humans and machines so that “you have a system that is very smooth in terms of the flow and allows you to maximize the use of the space that you have,” said Butt.
Robotics and automation are also key components of operating warehouses effectively when fewer workers are available than needed. “In warehousing, the hottest topic right now is robotics, and that's driven by labor constraints,” said Klappich.
“We’ve got to automate because there's a people shortage, whether it's driving a truck or working a warehouse or driving a forklift,” said MacClaren. “Most logisticians will tell you they've never paid more for materials for their forklift drivers and there’s no drivers. So the answer to that, medium to long term, is automation.”
Although automation technology has been used in warehouses before, it’s expensive.
“You had to have deep pockets and [be able to] absorb a five-to-seven-year payback for some of these large scale automation investments,” said Klappich. But a new wave of startups like Locus Robotics, inVia Robotics and RightHand Robotics, which recently raised $100 million from investors, are seeking to lower the cost for warehouses to acquire robotics.
The large ERP players are responding by expanding their ability to integrate with external systems. “This applies also to automation and robotics but equally to the ERP and host systems as well,” said Butt.
Other technologies that could make warehouses faster and more resilient, such as the Internet of Things and computer vision, may be further off but still hold promise.
Blue Yonder, for one, has been eyeing use cases for IoT in areas such as yard management, to tell a worker exactly what products are on a forklift or truck as it drives by, for example. Panasonic’s acquisition of Blue Yonder last September gives the company a competitive advantage in this area. “Our parent company is Panasonic, and that's what they do — they specialize in the type of equipment to do that type of imaging,” said Butt.
SAP, on the other hand, has been exploring the application of machine learning to asset management, and computer vision to product inspection.
For example, a company “may have thought that this piece of equipment in the warehouse needed to be maintained every four weeks, but what you're learning is in actuality that's a bad strategy,” said MacClaren. By looking at the data, that company might discover it gets better throughput if it maintains it every three weeks instead. And with computer vision, a worker could know everything from whether a product is damaged to if it’s packaged correctly.
SAP and Blue Yonder are confident that emerging technologies can solve warehouses’ challenges. The supply chain crisis is far from over, so warehouses that don’t adopt sophisticated management technologies might find themselves falling behind.
This story was updated to correct the spelling of Klappich's first name.