Bridging the Labor Gap: Common Warehouse Automation Considerations

Johnathan McRary | 18 October 2023

The ongoing labor shortage crisis is being felt across various sectors, with warehousing being no exception, and its impact threatens efficiency and productivity. The question being asked today by most manufacturers and distributors is not “Should I automate?” but rather “When and how much should I automate?” To best answer those questions, it’s crucial to first understand common material handling and automation considerations.

Read “Bridging the Labor Gap: Warehouse Automation's Role in Addressing Labor Shortages” to understand how key types of automation are helping to bridge the labor gap.

Integration Considerations

While warehouse automation offers a promising solution to labor shortages, it's not without its challenges and considerations. However, choosing the right implementation partner ensures that the initial investment is limited to the proper level with the proper amount of customization. This partner will also work with your business to manage complexity and business transformation issues.

Before you dive in, however, it’s important to thoroughly think through these common consideration points.  

• Initial Investment: Implementing an automation system can become a significant investment. Whether you’re installing a turnkey conveyor, a sortation solution or designing a whole automation system with various equipment components, these investments require careful thought and evaluation. A material handling integration and consulting experts can help design, install and commission (ensure it runs smoothly) systems that are right for your needs and ensure a fast ROI (return on investment) justifying this initial cost.
• Integration Complexity: Integrating automation into existing warehouse operations can be complex and may require changes to workflows and processes. We call these brownfield operations or retrofits. With proper planning certain automation technologies can be implemented into an existing system without completely shutting down a client’s operations.
• Maintenance and Upkeep: Automated systems require regular maintenance to remain in optimal condition. Employing skilled technicians to maintain and repair these systems is essential for their continued operation. Whether it is reactive, preventative, predictive or reliability-centered maintenance building a maintenance strategy, will save hours of downtime, improve safety, and employee moral.
• Workforce Transition: As automation takes over certain tasks, warehouse workers may need to transition into new roles that involve operating and overseeing automation technology. Providing training and support during this transition is vital for employees to perform their roles safely and optimize the operation of your system.
• Customization: Every warehouse is unique and automation solutions should be customized to meet specific needs beyond operational goals such as such as temperature conditions, ergonomic concerns, space limitations and worker safety, to name a few. While turnkey options are more straightforward and customization can add complexity to the implementation process, tailoring automation equipment for your company’s exact needs can help achieve maximum efficiency.

Financial Considerations

The labor shortage crisis is indeed reshaping traditional calculations and considerations surrounding project ROI, NPV (net present value) and IRR (internal rate of return) in the context of warehouse automation. Here's a deeper look at how this crisis is influencing these financial metrics:

Return on Investment (ROI)

Traditionally, ROI calculations primarily focus on cost savings achieved through labor reduction. When warehouses invest in automation to replace manual labor, they expect to see significant labor cost savings over time, which contribute to a positive ROI. However, the labor shortage is altering this equation.

• Upfront Investment: Implementing automation systems often requires an investment. The status of each facility’s needs impacts that cost. Some may need more or less automation than others. Some may have existing automation systems they need to add to or update, while others may be shifting from heavy reliance on labor to automation. Operations may need to invest in robotics, conveyor systems, software, and infrastructure modifications.
• Labor - low supply, high demand, high cost: Not only is it hard to find labor, the shortage means that the cost of labor itself is rising, making the labor savings from automation even more valuable. Warehouses must compete for skilled technicians and engineers to maintain and operate automation systems. These labor costs should be factored into ROI calculations.

The labor shortage is pushing companies to rethink ROI by comparing the growing cost of labor with the shortage of labor and the strategic value of increasing fast reliable throughput by reducing dependence on human workers. While automation equipment investments are required, the potential for success with a company’s customer base, long-term savings, and efficiency gains makes warehouse automation projects increasingly attractive.

Net Present Value (NPV)

NPV calculations assess the present value of future cash flows, accounting for the time value of money. With labor shortages impacting the workforce, NPV analysis is evolving in the following ways:

• Payback Period: The labor shortage is driving companies to adopt automation solutions that are quick to install and fast to setup, requiring less infrastructure. With the increase in technological advancements more options are available. This can mean faster returns on investment. A shorter payback period reduces the risk associated with future cash flows and aligns with the need for more immediate operational improvements.
• Risk Assessment: Companies are now placing greater importance on risk assessment in their NPV calculations. The uncertainty related to workforce availability, labor costs and the potential for future labor disruptions is factored into the discount rate applied to cash flows.
• Strategic Considerations: Beyond cost savings, NPV calculations are increasingly factoring in the strategic advantages of automation. Improved customer service, reduced error rates, flexible configurations to meet market demand, and enhanced scalability are all long-term strategic considerations that can and should influence a company’s ability to remain competitive in a never changing market.

The labor shortage is making NPV analysis more dynamic, requiring decision-makers to consider not only financial returns but also the strategic value and risk mitigation that automation can provide.

Internal Rate of Return (IRR)

IRR is a metric used to evaluate the profitability of an investment by measuring the discount rate that makes the NPV equal to zero. With labor shortages influencing investment decisions, IRR analysis is undergoing a transformation:

• Balancing Costs and Benefits: IRR calculations now involve a more comprehensive assessment of the balance between the initial capital investment and the long-term benefits of labor cost savings and operational efficiencies.
• Flexibility and Adaptability: The IRR calculation considers the flexibility and adaptability of automation solutions. In a rapidly changing labor market, being able to scale up or down as needed becomes a critical factor in IRR assessments.
• Strategic Alignment: IRR analysis is increasingly focusing on how automation aligns with an organization's strategic goals. Companies are willing to invest in projects with slightly lower IRRs if they contribute to long-term competitiveness and resilience.

The labor shortage is prompting organizations to reevaluate IRR not just as a financial metric but as a reflection of their ability to adapt to changing market conditions and workforce dynamics.

The labor shortage is reshaping the traditional financial metrics used to evaluate warehouse automation projects. ROI calculations are emphasizing the value of labor cost savings and efficiency improvements, while NPV analysis is factoring in risk assessment and strategic considerations. IRR assessments are becoming more flexible, considering adaptability and alignment with long-term business strategies. As the labor shortage persists and evolves, these financial metrics will continue to adapt to reflect the changing landscape of the warehousing and logistics industry.

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Author: Johnathan McRary