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PRW NORTH AMERICAN AUTOMATION READINESS STUDYBy The International Association of Refrigerated Warehouse and HK Systems

PRW North American Automation Readiness Study 2

BACKGROUNDThis PRW Automation Readiness Study was a joint market research initiative that was conducted by the International Association of Refrigerated Warehouses (IARW) and HK Systems. For the past year, research information was collected through interviews with public refrigerated warehouse (PRW) providers, vendors and firms that service the public refrigerated warehouse PRW industry as well as media organizations that cover this industry.

Additionally, input was gathered informally during discussions and presentations at the World Food Logistics Organization (WFLO) Institute, IARW-WFLO Annual Convention & Expo, IARW North American Chapter Meetings, Global Cold Chain Alliance Assembly of Committees, and the International Association for Cold Storage Construction (IACSC) Conference & Expo.

STUDY OBJECTIVESThe purpose of the study was to clarify what benefits automation can bring to the PRW cold storage industry and summarize what the PRW industry needs to ready itself to adopt such solutions. The objectives of this study were to identify:

• Specific challenges that the PRW industry is facing today and is anticipating to face in the future.

• Benefits and appeal of automated solutions in addressing these challenges.

• Types of solutions that would be of interest and value to the PRW members.

• Profile of PRW members that could most likely benefit from such solutions.

•Technology adaptation challenges within the PRW market.

MARKET STUDY APPROACHA multi-phased process was used to conduct this market research study. Key phases and their objectives were:

• Market Segment Analysis – Focused on identifying key market segments within the PRW industry and to develop high level characteristics of each segment.

• Market Segment Profile – Key objective of identifying leading companies within each segment along with typical operating profile, industry trends, and general attitude and acceptance towards automation solutions.

• Technology Analysis – Evaluated automation options in order to identify market segments and technology solutions with the highest probability of providing a positive business value.

• Conclusions & Recommendations - Developed conclusions based on the findings and identified areas that require further analysis.


COLD CHAIN RESEARCH SCOPEBased on the 2009 data from US Department of Agriculture, the U.S. Cold Chain market is comprised of two key sectors: Private and Public with the public sector providing 76 percent of the U.S. cold storage capacity.This research study was focused on North America’s cold storage public sector. The following PRW category definitions from the 2008 IARW Benchmark Survey Report were adopted for the purposes of this market research:

• Commodity: Operations with four or fewer inventory turns per year. This grouping also includes a few warehouses with slightly more than four inventory turns, but who have identified their operating space as being used predominantly (75 percent or more) for commodity storage or production activities.

• Distribution and Import/Export: Operations with more than four inventory turns per year.

• Production: Warehouses that support product producing operations with inventory turns are greater than four times per year.

The most appropriate automated solution is generally a function of the operating profile of the facilities in each category as well as the type of facility (new vs. expansion) that it is being deployed in. Furthermore, the type of the contracts (dedicated vs. multi clients) has a major impact on how automation may be justified at each facility. This study, therefore, was focused on understanding the operating characteristics of each category.


NORTH AMERICAN PRW INDUSTRY PROFILEThis graph represents a high level view of the North American public refrigerated market and is based on the 2009 IARW membership information. It shows that there are 264 Public Refrigerated members in North America, 63 percent of which is controlled by the top 10 members. Furthermore, the top 33 providers control 80 percent of the available space in North America. The key take away here is that this is a highly consolidated market where the top 20 members dominate the market and other providers tend to be smaller regional players with far fewer facilities.

Looking at a top largest IARW members list, based on number of facilities, shows that the facility count drops dramatically to an average of 1-4 facilities after the Top 20.


GENERAL TRENDS AND AUTOMATION ATTITUDEA select group of PRW executives participated in an anonymous survey as part of this study. Their insights were extremely valuable in understanding the business potentials for automation and the adaptation challenges and attitudes that are representative of this market.

General Observations and Trends•Biggest concerns include:

– Labor regulations (i.e. Card Check)

– Health care costs

– EPA regulations (e.g. Outsourced inspections)

– Food Safety Regulations

– Cap & Trade

• Labor costs and labor availability have been relatively stable and not an issue to date. However, new regulatory factors may impact that.

• Customers continue to encourage the PRW providers to apply technology in order to become more efficient and reduce costs.

•Some customers are also looking at taking their business in-house.

• Overcapacity will continue to impact new construction in North America.

Automation Attitude• Almost all PRW members have made heavy investment in their IT

systems/infrastructure

•On average, less than 40% of business is done on contracts

• Many dedicated facilities have 5-10 year contracts, however, typical contract terms are 3 years and shorter

• ROI justification is the number one hurdle for facilities with short term contracts

• Time to market (from contract to operational facility) is a barrier to construction of large scale automated systems

• Automation is not perceived to be flexible enough to address shifting business needs (spikes in volume, pallet/layer/case mix, changing load sizes, etc.)

• Less likely to automate existing facilities; will rather invest in a new facility

•European PRWs more advanced due to high labor costs


Receptiveness to Building an Automated FacilityCost justifying automated solutions appears to be a major criteria in adopting such technologies in the PRW market. In general, PRW members appear to be conservative in their investment views and look to invest in automated solutions that have short term payback. The following are samples of responses from interviews with PRWs.

•“When justified by need and cost efficiency”

•“We recently analyzed this and still can’t justify it”

•“Would love to do it; don’t think we can justify it yet”

• “Very impressed & interested, more at pallet level”

• “Would not have any problem; need dedicated customer we can depend on”

•“Actively exploring automation solutions”

•“Very receptive”

AUTOMATION BUSINESS CASEThe interview results clearly pointed out that cost justification is one of the most critical aspects of adopting automated solutions in the PRW market. The profit & expense aspects of the PRW operations were analyzed in order to determine how automation could increase profits or decrease costs in a typical PRW operation. The graphs above are based on the data from the 2008 IARW Productivity & Benchmarking Survey Report.

The left graph outlines the key components of revenue for an average PRW operation. Storage & handling charges appear to be the main sources of revenue. The graph on the right outlines the key expense components for an average PRW operation. Labor and utility expenses followed by equipment costs appear to be the main sources of expense.

The key take away here is that an automation solution must be able to improve storage capacity/density; reduce labor costs and reduce energy costs in order to provide a viable value proposition.


AUTOMATION BUSINESS CASE AND RANKINGAn analysis of the PRW market was performed in order to identify categories that have the highest potential for a justifiable automated solution.

In general, commodity storage facilities are more “storage centric” and require less labor than a distribution facility. The top portion of the following diagram represents the relative ranking of storage & labor content of commodity, pallet distribution and case distribution operations.

The bottom portion of this figure ranks the potential improvements in storage density, labor savings and energy savings that an automated system can offer for each segment, both in an existing facility and in a newly constructed greenfield facility.

The resulting ranking (1-4) represents the probability of automation having a positive business impact in each segment. Greenfield facilities (in both commodity storage and distribution) appear to have the highest potential leading the ranking as #1 and #2. Automation potential in an existing distribution and commodity facility are ranked as #3 and #4 respectively.


GREENFIELD COMMODITY & DISTRIBUTION MARKET ANALYSIS

This section provides the summary results of the analysis for automation potentials in North American’s new construction/greenfield market segment both for distribution and commodity categories.

PRW Capacity Growth TrendsThe IARW 2008 Global Cold Storage Capacity Report suggests that the space offered by the PRW industry in North America has been steadily increasing while the corresponding number of facilities has been on a decline.

This analysis provides a number of insights: 1) The number of PRW facilities in North America appear to be flat

to declining.

2) Most of the volumetric growth in North America’s PRW industry is through expansions and renovations of existing facilities as opposed to new constructions.

3) There appears to be enough capacity in most markets.

Greenfield FacilityThere does not appear to be a good source of data for the number of new PRW constructions in North America. The 2008 IARW Productivity and Benchmarking Survey Report was used to approximate this figure.

Based on this report, 23 percent of the North American PRW space was constructed in the past 10 years. Extrapolating this across approximately 800 PRW facilities in North America, it is estimated that 18 new Public Refrigerated Warehouse facilities were built each year over the past 10 years. This estimate, combined with the fact that the number of PRW facilities appear to have reached a plateau, was used to forecast 5-10 new facilities per year over the next 10 years in North America.


Greenfield PRW Automation Outlook

The following conclusions were made as related to the North America’s PRW potentials of automated solutions in greenfield commodity and distribution operations.

• Market saturation, current economic conditions, and historical trends suggest that there will be a relatively small new greenfield construction activity in this market.

• Short term ROI continues to be the key criteria in justifying large scale capital investments.

• PRW providers are less likely to invest in large scale automated solutions without the security of a long term contract (no ROI without guaranteed revenue stream).

• PRW providers that have obtained a long term contract will not have the luxury of time to construct a high-rise type solution.

• Manufacturers and processors trend of taking the warehousing function in-house will ultimately force the PRW providers to take a long term and proactive look at automation investments.


EXISTING DISTRIBUTION FACILITIES MARKET ANALYSISThis section provides the summary results of the analysis for automation potentials in the existing distribution facilities in North America.

Automation Business Case RankingA closer look at Automation Business case within existing facilities suggests that commodity operators will be least likely to adopt automation within their existing facilities. These operations typically have a dense storage structure and require little labor due to low inventory turns. As such, automation will offer little to no value for these operators. The analysis of automation value proposition in existing facilities was therefore focused on the distribution category.

Existing Facility - Addressable Market SizeThe data from the 2008 IARW Productivity & Benchmarking Survey Report was used in order to estimate the number of existing distribution facilitates in North America . This report suggests that 1.3 Billion Cubic Feet, or 52 percent, of the industries total 2.5B cubic space is allocated to the distribution category. Extrapolating this results to the number of facilities, it is estimated that about 416 PRW facilities in North America are in the distribution category. Of the potential 416 facilities, 15-30 percent are estimated to have a justifiable ROI for some level of automation that can be implemented in an existing facility (categorized as “Automate The Conventional” for the purposes of this report).


Estimated Target Market

Viable Technology ProfilesThe following factors must be considered when selecting “automate the conventional” technologies:

• Majority of distribution facilities ship some level of mixed SKU pallets (10-50 percent Volume) and therefore the automated solution must incorporate integrated case picking options

• Automated solutions must fit within facilities with a typical clear height of 30-40’; Newer constructions favouring 45’ (38-39’ Max Product Height)

• Automated technologies should be compatible with typical existing storage media including:

– Double deep and single selective racking

– VNA racks

– Triple deep pushback & drive-in racks

– Multi-deep moles (4-7 deep)

Examples of Viable TechnologiesUnit Load Automated Storage and Retrieval System (AS/RS) and Automated Guided Vehicles (AGV) are some of the automated technologies that deal with handling full pallets of product that the PRW industry is most familiar with today. Tote/case handling AS/RS systems are also becoming more prevalent for automated case and each picking applications. Historically, these solutions have been implemented in greenfield or new construction environments. As these technologies have evolved, however, there are many variations of them that are available for implementation in an existing facility.

The following photos depict examples of solutions that can be implemented in both new and existing facilities.


Examples of Viable Technologies (continued)There are literally dozens, if not hundreds, of proven “point-solution” technologies that offer varying degrees of benefits available in the market today. The key in selecting a technology is to identify your specific business and operating requirements and use them as the basis for evaluating the technical and financial viability of each option.


Existing PRW Automation OutlookThe following conclusions were made as related to the potentials of automated solutions in existing distribution facilities:1. There appears to be a sizeable market for automated solutions that can

be retrofitted into existing facilities

2. There is an educational/awareness gap in respect to the availability of such solutions

3. Many of these solutions can be implemented with minimal impact to current operations and provide the operational flexibility that is of prime importance to the PRW community

4. Variable length leasing alternatives should be considered as an option for financing such technologies

For more information regarding HK Systems, its products and/or services, visit our website at www.hksystems.com or call Jeff Hedges at 1.800.HKSYSTEMS

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