The history of logistics is also a history of automation, from the steam engine to the forklift to today’s robotic pickers and packers. So today’s fevered interest in new machinery, after a lull of several years, has plenty of precedent. Many trends are thrusting automation toward the top of the logistics CEO’s agenda, not least these three: a growing shortage of labor, an explosion in demand from online retailers, and some intriguing technical advances. Put it all together, and McKinsey Global Institute estimates that the transportation-and-warehousing industry has the third-highest automation potential of any sector¹ . Contract logistics and parcel companies (which, for sake of convenience, we will call simply “logistics companies”) particularly stand to benefit. (Automation is also on the table at other transport companies, such as trucking companies and port operators. See sidebar “Automating freight flows: Changes for every sector”.)

Yet for all the excitement, most logistics companies have not yet taken the plunge. For every force pushing companies to automate, countervailing factors suggest they should go slowly. We see five reasons companies are hesitating: the unusual competitive dynamics of e-commerce, a lack of clarity about which technologies will triumph, problems obtaining the new gizmos, uncertainties arising from shippers’ new omnichannel-distribution schemes, and an asymmetry between the length of contracts with shippers and the much-longer lifetimes of automation equipment and distribution centers.

This is the second in a series of five articles on disruption in transport and logistics. In the first, we examined the implications of autonomous trucks. Automation is no less potent a force. In this article, we will review the reasons automation is coming to the fore, examine the five factors that are hindering investment, and lay out strategies that can position contract logistics companies to prepare for an uncertain future.

At first blush, more automation seems like the answer to three problems facing contract logistics companies.

Start with a shortage of workers. It’s no secret that, at least in the United States, labor markets have tightened. Unemployment rates are at a 50-year low, and wages are increasing. Some of the largest e-commerce facilities currently require 2,000 to 3,000 full-time equivalents, an order of magnitude more than traditional distribution centers employ, and need to add even more workers during the holiday peak season, when labor is most scarce.

While many of the jobs that might be automated are currently difficult to fill, that’s not to say that automation will have no effect on the workforce: it will, and companies must reckon with the significant costs to their employees and communities. In 2017, the US Bureau of Labor Statistics estimated that nearly four million Americans work in warehouses as supervisors, material handlers, or packers. That’s almost 3 percent of the total labor force; collectively, they earn more than $100 billion in annual wages. Automation won’t make all these workers redundant, of course, and many can be reassigned to new jobs that involve collaborating with and maintaining the new machines. But if even a portion of these jobs are lost, it will still represent significant upheaval.

E-commerce, the second trend, is remaking the entire logistics industry. The inexorable rise of online sales is well documented. In the United States, for example, growth has averaged 15 percent annually over the past decade, and the range of goods has expanded dramatically. That’s been good for logistics companies. We estimate that, out of every $100 in e-commerce sales, these companies (or e-tailers’ in-house logistics units) are collecting $12 to $20, a massive increase from the $3 to $5 spent on logistics in a typical brick-and-mortar-retail operation. (It’s important to note that, in our estimate, e-tailers are saving $12 to $16 out of every $100 of sales versus their brick-and-mortar competitors, which explains why their economics work so well.)

But even as logistics companies have benefited from burgeoning volume, the business is not without its challenges. Many B2B networks are struggling to adapt to B2B2C. Many large logistics companies fulfill e-commerce orders by carving out a corner of warehouses designed for B2B operations. And some logistics companies have at times been willing to use e-commerce as a loss leader to add business to their transport divisions. But as volume expands, all such arrangements are coming under immense strain. Here, too, automation seems to be an answer.

There’s a third reason for heightened interest: automation technology has come a long way. Ocado Retail’s new fully automated warehouse has demonstrated the potential of several new technologies—as seen by a big YouTube audience. Other companies, such as CommonSense Robotics (CommonSense), GreyOrange, and XPO Logistics, are rolling out intriguing new offerings.

These three trends make it seem like more investment in automation is a layup. Indeed, many are finding success with it. Some companies’ new automated pallet-handling systems cut shipment-processing time by 50 percent. And DHL International (DHL) has built almost 100 automated parcel-delivery bases across Germany to reduce manual handling and sorting by delivery personnel.