Supply Chain Digest Blog Entry: January 29, 2014 (here).
I spent the first two decades of my career working as a consultant to companies in North America. In my third decade, I spent much more time overseas in Europe, the Middle East and beyond. This exposure has been healthy because it has expanded my understanding of the fundamental differences between the markets and the mindsets of corporate executives on both sides of the pond.
In the book Things That Matter, Charles Krauthammer makes the point that America is a country that has been built upon the concept of dynamic individualism, as compared to the more equitable but static model of European social democracy. “While there's much to be said for the decency and relative equity of social democracy, it comes at a cost: diminished social mobility, higher unemployment, less innovation, less dynamism and creative destruction, and less overall economic growth.”
If you accept the point of view that social democracy stifles innovation and dynamic individualism then it may come as a surprise that the adoption rate of automation technology in Europe far surpasses that of North America – not by a small margin, but by leaps and bounds. The dominant suppliers of material handling automation are primarily from Europe. The overall level of technological sophistication being deployed in European logistics centers is far more advanced than in their North American counterparts. These are well-documented facts which contradict the theory that social democracy breeds “creative destruction”. Why is this?
European companies have become leaders in material handling automation for a very simple reason – they are responding to local market demand. European countries have very expensive social programs to take care of their people. The high cost of these programs results in higher rates of taxation funded by both individuals and companies. Social democracy drives up the cost of labor – plain and simple. In Denmark, it is not unusual for the fully loaded compensation rate for a forklift driver to be in the range of $65,000 - $70,000 per annum. The moral of the story is that countries that take good care of their people end up with high-cost labor resources. In response, companies that operate in these countries spend inordinate amounts of money to reduce their dependence on labor – through investments in innovative automation technologies. The irony is that these investments ultimately reduce the very middle class incomes needed to pay for the high cost of “the nanny state”.
In Europe, companies invest hundreds of millions of dollars into distribution center automation. This is particularly true in the Fast Moving consumer Goods (FMCG) industries where hundreds of thousands of pallets of food, beverage and consumables products are presently being produced and distributed by handfuls of people. It is unbelievable how few people are need to distribute pallets of consumable merchandise. I visited one food production facility in Italy with a fleet of over 50 laser guided forklift vehicles moving pallets from the production lines, into high density rack storage, and on through to the loading of the trucks. It was a 24 x 7 lights-out operation without a human in sight. The machines work around the clock to feed the humans.
Should US companies think more like the Europeans when it comes to automation? The prevailing voice from North American supply chain professionals is that Europe is “well…, it is different.” We simply can't cost justify their investments into automation in the U.S. Their land and labor resources are more constrained and more expensive. If we can't pay for it in three years then we won't get approval for the project. And so on.
In truth, these points of view are not wrong. The American landscape is very different than the European landscape. America has a plentiful supply of cheap dirt and cheap labor. The math for automation is often challenging at best. The return on investment for material handling automation is not three years, or even five years, but for many companies it is closer to ten years or more. Publicly traded companies generally don't consider automation investments with 10-year time horizons. A few privately-held companies have the intestinal fortitude to make automation investments with the longer term outlook in mind. Overall, America's automated material handling adaptation rate is minuscule as compared to their counterparts in Europe. In Europe, companies look for any and all solutions to minimize labor as a first priority. In America, companies look to maximize profits in the short term. Two very different schools of thought.
Now having said all of the above, one simple question needs to be answered. Why then are we currently witnessing explosive growth in material handling automation investments in North America? Why are North American companies increasingly choosing automation technologies over conventional operating systems? My viewpoint is that the prevailing rationale is no longer solely predicated on economics, rather companies are turning to automation as a fundamental means to increase competitive advantage. The more automated facilities that I visit the more that I realize that the driver is not the business case. The driver is the recognition that speed, accuracy, throughput, certainty, reliability, quality, growth and success are not achieved by throwing more people at the problem. To build a better business and to capture more market share, companies need to aspire to provide something greater than their competitors can offer. This is especially the case in the logistics industry where differentiation is challenging at best. It is easy to build a conventional distribution center but nothing great ever came out of easy.
Marc Wulfraat is the President of MWPVL International Inc. He can be reached by clicking here. MWPVL International provides supply chain / logistics network strategy consulting services. Our services include: supply chain network strategy; distribution center design; material handling and automation design; supply chain technology consulting; product sourcing; 3PL Outsourcing; and purchasing; transportation consulting; and operational assessments.