Logistics Automation: Is Faster Better?

In part one in this series, I examined how fashion companies are leveraging automation to fulfill orders faster. In a sense, automation is to logistics what protein shakes are to the body. While you may gain muscle, you may also experience unexpected side effects.

Ultimately, to gain a competitive edge, are fashion companies compromising their financial health? As fashion companies gear up for the delivery race, at what point does becoming faster cease to be worth the investment? And beyond that point, how can fashion measure the value of its investments?

To answer these questions, we first need to understand the kind of investments companies are making to enable faster delivery.

Who is spending big on logistics?

Where technology is concerned, deep pockets fund innovative thinking, deeper ones fund innovative inventions, and the deepest pockets build and deploy them first.

According to Kevin Davis, MD at Last Mile Consulting and with previous experience as the Head of Logistics at Marks & Spencer (M&S) as well as the Head of EU Central Operations at Amazon, fashion companies expect to allocate an average of around 10-15% of revenue to logistics and fulfillment for the next 5 years. And like any average, there are companies spending significantly more.

Beyond automation, the level of investment is largely influenced by the need for greater capacity to quickly service surging online order volumes. Last year, fast-fashion pioneer Zara’s parent company Inditex (whose 2022 revenues exceeded US $30 billion) announced its plans to spend over USD 700 million on warehouses in the US. Danish fashion retailer Bestseller, with revenues over €4.5 billion, announced a €265 Million investment in a high-tech logistics facility in The Netherlands.

Instead of considering logistics purely as a sunk cost – a way to keep things moving at the speed the world expects —companies look at the investment as a way to mitigate rising costs associated with inflation, utilities or other factors.

And since smaller businesses are equally affected by those universal forces, those that do not have deep pockets have begun to partner with those that do – a win-win model with industry-wide repercussions. For example, companies such as Gap Inc. and American Eagle Outfitters offer their logistics platforms as a service to small and mid-sized businesses. India-based Reliance Retail, reportedly the world’s fastest-growing retailer, also plans to monetise warehouses by floating a separate trust. And Amazon India now offers its logistics services to smaller businesses.

Trusting a capricious mega-corporation with something as essential as your logistics network may seem risky – and it likely is – but it begins to make more sense when smaller organisations think of it as a rental home, A larger entity has invested a substantial amount of money to buy, construct and outfit the home. And while complete cost recovery may take time, renting it out ensures steady cash flow. The tenants are happy as they have a beautiful apartment at a fraction of the cost taken to build it, while the renter monetises excess capacity.

Given the breakdown of relationships between renters and landlords in the housing market this year, this represents an uneasy truce, perhaps. But it’s a truce nonetheless.

The ultimate beneficiaries though, are customers, as faster delivery becomes available to a larger number of consumers for a far wider range of products. With the knock-on effect of making it harder for smaller companies that do not tap into existing logistics mega-networks to compete – a topic too big for this article to tackle, but one The Interline intends to revisit.

Not all that glitters is gold

Though customers are set to benefit from technological advancements, the picture is not completely rosy. Large spends do not necessarily translate into large benefits from an organizational point of view.

Economic uncertainty, combined with rising costs, changing business models and technological advancements have led to large-scale employee layoffs. Earlier this year, Walmart laid off hundreds of employees across its fulfilment centres, while Amazon announced more than 18,000 lay-offs across multiple departments.

Besides the complexity and unpredictability surrounding fashion companies, it also boils down to how much extra customers are willing to pay for faster delivery. In 2021, McKinsey estimated that same day or next-day delivery can cost retailers upwards of USD 15 per package, which has likely increased since then and may not be affordable for many companies.

While some challenges are similar, others differ across countries. For instance, with Brexit, Davis shares that the biggest risk to delivery in the UK is a shortage of truck drivers, resulting in a race to raise pay and dole out huge incentives. Some countries are struggling with getting freight into the country, leading to enormous holding fees for fashion retailers, not to mention inconsistent product flow and resultant low or excess inventory levels.

Davis believes that all these issues potentially translate into longer payback periods that not all retailers are equipped to absorb. “It comes down to providing solutions for problems that were ignored earlier, which means service will certainly improve but some retailers will struggle and not survive. Though it sounds dire, it is also quite exciting as customer service will improve.”

How to avoid the environment paying the toll

When evaluating impact on organizational performance, impact on corporate sustainability goals should not be overlooked. As companies increasingly automate and build capacity, they need to do so responsibly.

To that end, companies are using tactics such as instilling solar-powered green warehouses, rainwater harvesting, and water recycling to grow capacity in an eco-friendly way.

Besides logistics, sustainable automation is also visible on the reverse logistics (returns management) front. Several top retailers – including Kerig, LVMH, Nike and Zara – partner with expert GXO Logistics for its return management system. The company’s acquisition of Clipper Logistics will allow them to pair Clipper’s Boomerang “click and collect” system with GXO’s facilities for reverse logistics. In Kerig’s case, the company worked with GXO to incorporate sustainability initiatives for their GXO-run Italy warehouse. Last year, the warehouse received Leadership in Energy and Environmental Design (LEED) Platinum certification, enabling Kerig to advance its sustainability initiative.

From a fulfillment perspective as well, retailers are adopting strategies that enable them to meet their sustainability goals. For example, retail giant Amazon invested more than $1.3 billion in a strategic alliance with electric vehicle maker Rivian in a bid to make transportation more sustainable. According to the agreement, Rivian will provide 100,000 delivery vehicles by 2030.

Similarly, H&M wants sustainability to be at the core of the business. The Sweden-based retailer recently joined hands with electric truck company Volta Trucks and electric motorcycle provider Cake to test and create a zero-emission last mile delivery system. Volta’s trucks will serve as mobile warehouses, with Cake’s motorcycles onboard. The trucks will be loaded at distribution warehouses and travel to the city centre, from where the motorcycles will complete final delivery.

Final thoughts

While expedited delivery may make companies competitive and increase customer satisfaction, only time will determine how it will impact organizational dynamics and bottom-line.

As deliveries become faster, innovation stands to win. The challenge for fashion companies will be to grow profitably, sustainability, responsibly, responsively, fairly, and compassionately.