Chain of Thought

Numbers Behind Amazon/Kiva deal: Maybe Not So Crazy

The wisdom of Amazon's deep-pocket dive for $775 million to acquire Kiva Systems inspired a lot of debate last week. But as information about the e-commerce giant's strategy dribbled out, some other numbers got even more attention. This sentence came out of the Wall Street Journal's account:

“Kiva pitches its robots—which can cost between a few million dollars to as much as roughly $20 million—as simplifying and reducing costs. Though assessing the costs and benefits of robots versus human labor can be difficult, Kiva boasts that a packer working with its robots can fulfill three to four times as many orders per hour.”

Neither the deal's price tag nor the ROI strategy spelled out in the WSJ seemed to make sense. Steve Banker, director of supply chain management for the ARC Advisory Group, told me so after reading the WSJ account and my blog about the deal. What was particularly curious was how any company, let alone Amazon, could justify paying $20 million for a robot.

“That math is horrifying,” he wrote in his e-mail to me. “Let's say you could get a robot for as low as $1 million and that a fully loaded employee was $33,000. That means one robot, which can fulfill three times as much, leads to the replacement of three people at about $100,000 per year. That means, conservatively, one million dollars to get rid of $100,000 in labor in year one. That is a ten year payback period! I hope if Amazon uses them internally they get a cheaper price.”

Banker was so dubious about the higher-end price quoted in the Journal that he checked with his contacts at Kiva who explained that WSJ got it wrong. That $20 million was meant to refer to a system of robots.

That makes more sense. But even at the more ridiculous number, Joel Anderson could almost understand why more eyebrows weren't raised. Joel is president of the International Warehousing and Logistics Association (IWLA) and a member of MH&L's Editorial Advisory Board. For him and IWLA's members, the cost associated with unionized labor is a particularly loaded subject. Anderson weighed in via LinkedIn after reading my blog.

“As I read the article, my thoughts went to the labor activists who have targeted the warehouse industry,” he wrote. “The tradeoff between capital and labor includes the function of labor stability or unrest. Not surprised to see this investment in capital.”

But American laborers don't have to worry that robot workers like Kiva's will take their place. Just as the growth in logistics jobs is opening new opportunities for robots outside the plant floor, maybe U.S. labor will find plenty of work maintaining those robots, not to mention writing their code, making their parts, and picking the orders that keep them going. By being invested in both the logistics work that keeps their robots working under their own roofs and in the manufacturing that supplies robots to other logistics operations, Amazon may be demonstrating a form of perpetual employment in U.S. supply chains. We can only hope.

Related Editorial:

Zoning Out on What Makes a Good Supply Chain

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