Tax credits, automation and human capital

I started writing a column this morning based on a conversation I had yesterday with Sean O’Farrell, business development manager for Witron Integrated Logistics. O’Farrell and I discussed a new picking solution Witron has implemented in Europe and is about to introduce in the U.S. It’s sort of a middle ground between a light-, RF- or voice-directed manual case picking solution and an automated storage and retrieval system.

But I’m going to digress a moment because I just listened to a discussion on tax credits on CNBC in advance of this morning’s presidential press conference that I think has a direct correlation on materials handling automation, including solutions like the one above.

This week, President Obama unveiled a business investment package that, among other things, would let businesses write off 100 percent of their investments in equipment and plants through 2011. The discussion between Larry Kudlow and his colleagues was two-fold:

First, was this a good idea for business and would it spur the economy? The consensus on CNBC was that it was a terrific idea and would spur the economy. In fact, while I don’t intend this as a political column, Kudlow argued that it’s a smart political idea. The kind that once it’s on the table will be hard for either party to take off the table; even if it gets reduced from a 100% immediate write-off to a 50% write off, he thought it was a positive for business. I think it’s a positive for materials handling, since we are a capital intensive industry that could benefit from the plan.

Second, would it spur jobs? The answer, which I think is correct, is that it is unlikely to spur jobs at the companies making the investment in equipment and plants. In fact, it might have the perverse effect of cutting jobs. The reason …. and here’s why it’s relevant to OEMs in our industry that develop automated solutions …. is that increasingly we are making investments in automation that reduce head counts. “A company buys a new computer and gets rid of an accountant,” is the example used on CNBC. Another pointed out that the investments companies are making in people today are “human capital” investments. They want to hire individuals who can advance a company’s agenda, not just get boxes out the door.

I think the CNBC commentators are dead on, and I think that kind of business thinking is good for materials handling. Let’s face it, in a three shift operation, an investment in two AGVs may eliminate three lift trucks per shift. More importantly, materials handling is all about efficiency: you may not eliminate labor today, but a tactical investment in automation allows a distribution center to grow its business without adding to head count in the future.

Our end users don’t make those kinds of investments because they have anything against laborers. Manufacturers may fret about the high cost of skilled labor, but when I talk to distribution center personnel, what I hear instead is their inability to retain a sufficiently-sized workforce to get the orders out the door. “People don’t want to work in a warehouse anymore,” is the way one supply chain VP for a national retailer put it to me the other day.

Which brings us back to Sean O’Farrell from Witron. The solution he was showing me is something Witron calls ETP, which stands for ergonomic tray picking. It is currently being used by three European grocers that pick a lot of cases to pallets – Migros, Sainsbury’s and Spar – and was designed as a compromise between a manual pick-to-pallet operation and a fully-automated case palletizing operation.

It looks like an automated storage and retrieval system, and, indeed, AS/RS cranes can be used to automate putaway and replenishment. A trolley on the picking side of the aisle, however, transports an order selector horizontally from one end of an aisle to the other while two platforms move vertically from the bottom to the top of the zone.

An order selector stands inside one of the platforms; the other platform maintains the pallet or roll cage at the right ergonomic height for picking. The order selector doesn’t have to physically lift a carton, only slide it from a storage location onto the pallet. The system includes software that can build a mixed SKU pallet that is aligned for a specific aisle in a grocery store and a pick-to-light system that tells the order selector where on the pallet to place the carton he is picking. Users are getting pick rates of 500 cases per hour per employee using the system.

According to O’Farrell, the solution was developed in response to requirements in Europe that limit the amount of weight an employee is allowed to pick during a shift. “We have been in operations where order selectors were picking ten and even fifteen tons per shift,” he told me. “But one European country has already passed legislation that limits the amount a worker can lift to 6,500 pounds per shift, and other countries are considering similar restrictions,” he said. But he also noted the problems many end users have just finding enough employees to keep their operations running. “Down the road, workers are going to have a choice between picking a case or working in front of a monitor,” O’Farrell said.

Increasingly, I see our industry developing solutions like the one above that replace labor that gets the job done with human capital that advances the business. If we see new business-friendly investment policies, we have an opportunity to get more of those into the marketplace.