Amazon ponders ninth generation fulfillment center design

Discussion
Mar 11, 2015

Through a special arrangement, presented here for discussion is a summary of a current article from Supply Chain Digest.

You know a company is a little different when it talks about what generation it is on for its distribution center design, like a Boeing aircraft or something.

But that is just what Amazon.com is doing in conjunction with opening up a relatively new DC — or fulfillment center (FC), as Amazon likes to call them — in the Tacoma, WA area not too far from the company’s headquarters in Seattle. Amazon opened the FC for a tour by reporters and other dignitaries a few weeks ago.

The one million square-foot Dupont, WA FC is one of about 10 the company considers "eighth generation" designs, among the 109 or so FCs it currently operates worldwide. What most characterizes the eighth generation FCs is the use of the famous orange Kiva System robots.

The Kiva robots are a form of automated guided vehicle (AGV) that can be said to have ushered in the "goods to picker" movement that is currently very hot in the distribution and materials handling industries.

A thousand or more Kiva robots carrying inventory move across a grid-like path inside the 10 Amazon DCs, arriving at one of dozens of work centers staffed with Amazon associates. The associates work with a "pick-to-light" type display, which informs each picker as to which SKUs that robot is carrying. The associate completes the picks and the robot whisks away to another associate. All this eliminates travel time for the associates, who traditionally of course would have walked the DC floor, going location to location to make the picks.

[Image: Amazon Fulfillment Center]

Thus far, Amazon has declined to make the Kiva System — surprisingly acquired for $775 million in early 2012 — available to others, though there were several companies such as office products retailer Staples that had deployed the technology before the acquisition. Amazon has said Kiva manufacturing and deployment resources are simply consumed with rolling out the robots within Amazon’s own network, and that is probably true.

These new generation of FCs also use a heavy-duty robot capable of lifting pallets up to 3000 pounds from the floor to an overhead conveyor system, likely to move inventory from reserve storage to the area where the Kiva robots are replenished.

Because of the way the Kiva robots store inventory, the Dupont DC can now carry about 50 percent more inventory than a similar DC would have had the capacity for in earlier FC design iterations, Amazon says.

Amazon’s Mike Roth, vice president for North American operations, says that Amazon is now working on its ninth generation FC design, which will somehow use even more robotics and more sophisticated optimization software.

How much of a competitive advantage does Amazon have over other retailers with its aggressive investments in warehouse technologies? Can retailers with lower volumes than Amazon afford to invest in this kind of automation?

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12 Comments on "Amazon ponders ninth generation fulfillment center design"

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Ron Margulis
BrainTrust

You might as well ask how Walmart became the largest retailer in the world. Pricing, at least the perception of value pricing, was critical, but the ability to get product to the consumer at a lower cost than anyone else is what made Walmart huge. Amazon is just stealing a page from their playbook and adding a few new chapters.

Ken Lonyai
BrainTrust

Clearly this is a major advantage for Amazon. Consumers experience peer reviews, recommendations and pricing, but how products get to them quickly or when expected is unknown to them. Most competitors are probably three to four generations behind Amazon’s fulfillment center technology and logistics and they know it. Also not many competitors have the capability of financing and executing leapfrogging their fulfillment centers up to cutting edge standards.

Amazon may have lost some pricing advantages, fumbled with its phone and may not make shareholders happy, but it has no worries about competitors taking its fulfillment dominance away anytime soon. The best avenue for brick-and-mortar retailers to look for a competitive advantage is to up their game in physical stores where Amazon has no real footing and has to play catch up.

Dan Raftery
BrainTrust

Simplification is one thing (of many) that Amazon has done right as it manages accelerated growth. Easy to see from the consumer perspective, but harder to understand from the supply chain side. Maybe even a bit counter-intuitive. So this is an example of how they have simplified the DC/FC challenge.

To the posted question, Kiva robotics clearly appear to work well in dry environments but may not be ready for the special challenges of the perishables supply chain. Plus don’t forget the human factor here, represented by long-standing union contracts and by corporate commitments to their employees.

Many food/beverage companies work hard to stay connected to their marketplace through their philosophies and actions. Not so with Amazon, starting from scratch, building a new supply chain. Does anyone else see a similarity to supply chain of Soylent Industries, the fictional company in the classic movie “Soylent Green” (set in 2022, by the way)?

Bill Davis
Guest

Significant advantage—Amazon. And if not investing in automation, retailers will need to focus on raising the efficiency of their fulfillment centers/warehouses.

Karen S. Herman
BrainTrust

Robotics are giving Amazon a competitive advantage in many ways, namely reduced costs, greater inventory management and less worker error or injury. I would like to think Amazon is using delivery drones, too, in their gargantuan fulfillment centers, and perfecting this delivery system.

Smaller retailers can invest in less expensive robotics, namely drones tracking warehouse inventory through barcodes and RFID tags, and should explore these options.

W. Frank Dell II
BrainTrust

The rules for warehouse technology investment have not changed since before the days of Web Van. If the investment does not pay back in seven years or less from labor savings it is a bad investment. Note with this new system Amazon is implementing, the warehouse is larger and the inventory has increased 50 percent. These additional cost must be paid for with additional labor savings over the savings for the equipment investment.

Warehouse labor cost is created by product touches. In this system, there is the receiving touch, put away touch, replenishment touch and picking touch. A flow through the warehouse has the receiving touch and truck loading touch. This is the minimum possible except for store drop ship. Amazon’s new system works well for small light items. The average dry grocery case weighs 28 pounds and a paper case is five cubic feet. Heavy and large cases will not work with this system. Furthermore, the high volume items are likely to incur additional cost by delays at the picker station. Therefore the advantage or disadvantage depends on the industry.

Ralph Jacobson
BrainTrust

Focus on your core business (fulfillment) makes your business your core strength. That drives success, obviously, and is an example most others should leverage in most any industry.

Marc Millstein
Guest
Marc Millstein
2 years 3 months ago
Quite a bit—and probably not. Amazon’s main strategy is to invest, advance, revolutionize, and otherwise stay well ahead in the inventory management and fulfillment (among many many others). So much about winning in omnichannel is about flawless fulfillment—allowing customers to buy, pick-up or have delivered, and return products without a hitch and barely a thought. Amazon owns that in retail. And this will likely only increase their competitive edge. I am one who believes Amazon could turn on the long berated and so-called underperforming profit switch any second they so desire. Instead, they invest, invest, invest and invent to stay ahead of everyone else, and one day they hope they’ll dominate in a way we have not yet seen. Whatever version 9 of their fulfillment centers is will be part of that strategy—and likely more advanced than we imagined. But even with current investments and centers, they have a major advantage. As for lower volume retailers, I do not see them competing in this area. Instead, they will more and more have to choose the best supplies they can to provide the greatest services. Or perhaps served by Amazon (though not likely on terms they will want.) They will, as always,… Read more »
John OBrien
Guest
John OBrien
2 years 3 months ago

Amazon is the expert in this methodology, which keeps their cost of fulfillment a key competitive advantage. However, the exposure to counterfeiters inserting product into the channel is a higher risk than many realize.

If retailers with lower volumes don’t adopt a similar approach to fulfillment, they may be forced to compete on the price/margin side—never a great long-term solution.

Vahe Katros
BrainTrust

When I read this question, I imagined another time when someone might have walked down to the warehouse to tell Fred, the head of the warehouse, to wear his tie for some East Coast investment people.

But this is now and Fred’s PhD thesis was entitled “Dynamic Vehicle Routing for Robotic Networks” because as much as AMZN is a retailer, its profits, when they finally make some, will be due to their logistics expertise.

Just as Walmart succeeded with EDLP, AMZN right now needs to focus on two letters, P/E—and that’s what those East Coast investment people came to justify. Good luck Fred.

Christina Ellwood
Guest
Christina Ellwood
2 years 3 months ago

Amazon has deftly leveraged technology to lead in fulfillment but continues to be blithely unconcerned about profitability. Other retailers in test to improve profitability so need a faster and higher ROI. So AMZN cannot really afford their model. That said, the cost of robots including drones will cone down as volumes rise and new innovations come to market, and more retailers will use them over time

Shep Hyken
BrainTrust

Amazon is looking for efficiency and cost savings while delivering exemplary service to their customers. And what company doesn’t want that? Their inventory system is upgraded to deliver on those goals. They recognize that the investment doesn’t cost, it pays. I think you’ll see them continue to upgrade to future generations of automation, delivery, etc.

Few retailers can afford to build out a system like Amazon has done. They will and should continue to upgrades and make changes to keep up with the goals of efficiency, savings and service.

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