Amazon’s Big Bet on Kiva Systems Needs a Big Payoff

Will Amazon's $775 million purchase of Kiva Systems Inc., payoff as their fulfillment costs continue to rise?

By now everyone even remotely associated with the supply chain industry knows about Amazon’s 2012 purchase of Kiva Systems Inc. for $775 million.

According to an article by Greg Bensinger in the November 20, 2014, edition of The Wall Street Journal entitled “Amazon Robots Get Ready for Christmas,” that bet may be about to deliver an even bigger payoff.

According to Bensinger, Amazon has now deployed as many as 10,000 Kiva robots in warehouses around the country, permitting employees to “pick and scan at least 300 items an hour, compared with 100 under the old system…”

That picking rate begins to hint at the ultimate payoff. Says Bensinger, “At the heart of the robot rollout is Amazon’s relentless drive to compete with the immediacy of shopping at brick-and-mortar retailers by improving the efficiency of its logistics. If Amazon can shrink the time it takes to sort and pack goods at its roughly 80 U.S. warehouses, it can guarantee same-day or overnight delivery for more products to more customers.”

Adds Bensinger, “The robots could also help Amazon save $400 million to $900 million a year in so-called fulfillment costs by reducing the number of times a product is ‘touched,’ said Janney Capital Markets analyst Shawn Milne. He estimated the robots may pare 20% to 40% from the average $3.50-to-$3.75 cost of sorting, picking and boxing an order.”

This potential big payoff comes in the knick of time. Amazon famously posted its largest quarterly loss in 14 years in the third quarter 2014, in part because of rising fulfillment costs.

Nevertheless, a healthy dose of skepticism applies in this case. By removing Kiva from the marketplace and turning it into captive technology, Amazon has unwittingly opened up the market to a higher level of penetration for other manufacturers of “goods-to-person” technologies like automated storage and retrieval systems (AS/RS), shuttle systems and the like, which already enjoy a high adoption rate in Europe and elsewhere. Unlike Kiva, these advanced goods-to-person technologies can scale vertically when capacity is maxed out. Kiva can only scale horizontally.

And while the software and algorithms guiding the Kiva robots are certainly impressive, it may be a stretch to call what is essentially an automated guided vehicle, or AGV, a robot.

Real advancements in robotic picking are being achieved by the likes of Rethink Robotics and its Baxter robot, which is capable of performing picking and packing functions and will certainly be optimized over the coming years.

The question that remains is whether Amazon’s big bet on Kiva will end up being a bet on obsolescence or the long-awaited cure to Amazon’s ever-rising fulfillment costs. Fourth-quarter results may give us a clue to the ultimate answer.

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