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The Robot Revolution and Tax Policy

July 2016

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Federal and State R&D Tax Credits provide excellent opportunities for companies eng aging in warehouse and distribution center automation.  

As the global market increasingly evolves towards a digital economy and online shopping, it is anticipated that warehouses and distribution centers will turn towards more automation. Distribution center automation is becoming one of the greatest supply chain trends of 2017.  New Jersey is the major distribution center hub for the nation’s most populous markets. Today, companies engaging in research and development efforts to explore warehouse and distribution center automation are eligible for lucrative R&D Tax Credits.

The Research & Development Tax Credit
Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2015, President Obama signed the bill making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against $250,000 per year in payroll taxes.


Understanding Distribution Center Automation
Companies that offer their products online are challenged with recent consumer demand increases as online shopping becomes more popular. To remain competitive in the market, these companies are “hiring” robots to fulfill some of the tasks human laborers are overburdened with in warehouses and distribution centers.

In warehouses, the most time consuming activity is picking products from shelves once an order is placed. The most effort in this operation consists of the traveling required to pick up the product and bring it to the next location.  Workers walk miles a day to pick and pack items from shelf to box.  With the use of robotics, that traveling task can now be fulfilled by a robot.  Many robots in these settings transport products on the floor, saving time which would have been spent locating products to fill an order.  Now, robots complete tasks of loading and unloading, retrieving and putting away, as well as pallet stacking. On a global scale, the International Federation of Robots (IFR) anticipates a 15% annual growth rate of robot implementation in warehousing and distribution center applications.

ASRS (Automated Storage and Retrieval System) technology is now being employed on a large scale to automate the entire picking process.[ii] ASRS includes computer-controlled systems that facilitate Inbound logistics. Warehouse automation: The next generation. January 27, 2016. Available at: http://www.inboundlogistics.com/cms/article/warehouse-automation-the-next-generation/ Global Cold Chain Alliance. Warehouse Automation Trends. Available at: https://www.gccaonline.com/eweb/documents/Warehouse-Automation-Trends.pdf robots to automatically place loads from defined storage locations.  This results in more dynamic and accurate delivery to locations where pickers can retrieve from. ASRS eliminates extensive travel times required in the traditional, manual picking process.  ASRS implementation has also paved the way for the creation of multi-level racking systems in which robo-carts can be instructed to only pick products on a certain level requested by an order.

One of the most tedious warehouse jobs is unloading and stacking. Fortunately, robots are designed to accomplish such tasks with built-in 3D vision sensors. These sensors help robots determine pallet sizes so they place larger pillars on the bottom and smaller ones on the top of a stack. It is anticipated that such robotic developments will not displace workers, however will instead help workers increase their overall efficiency.

Kiva Systems, based in Boston, creates ground-based drones that deliver packages throughout warehouses and distribution centers. In most of its setups, Kiva incorporates custom shelving known as pods. These are mobile and flexible enough so robots can move them easily around a space. A Kiva installation also includes a grid of 2D QR code installed on the floor of the space, an intelligent pack station with scales, lasers, and sensors, and a software system that links these components all together. In 2012, Amazon Inc. bought Kiva for $775 million and has since deployed Kiva robots in its operations. Starting with 15,000 robots, it has since grown to 45,000 robots.  Note that not all Amazon warehouses are now utilizing Kiva robot automation, however those that are have experienced significant expense reductions of 20%, or $22 million in savings per center. This comes as a direct result of increased efficiency. Before the robots, a typical cycle in an Amazon fulfillment center would take 60 to 75 minutes. With the robots, the cycle is reduced to 15 minutes, even though the inventory space expanded by 50%.  Kiva pods have facilitated the space expansion and created more efficient use of the available space. These improvements are expected to continue as Amazon integrates more Kiva robots in its fulfillment centers.

Clear Path Robotics Image

Clearpath Robotics Inc., based in Canada, created the OTTO robot with the goal of enhancing workflow in warehouses. OTTO is intended to relieve the burden of moving materials around so that human workers can devote their time to higher value activities. OTTO is a self-guiding robot that delivers goods around a floor space. Unlike Kiva’s robot, “OTTO’s intelligence allows it to ‘learn’ the warehouse landscape without the aid of a floor-guided track system.”[i] The robot can be told a point of interest and will navigate itself to that location at a constant, safe speed. Clearpath Robotics also makes other robots for land, air, and sea applications.

An October 2016 study conducted on warehouse priorities and investments found that almost 40% of interviewed warehouses were investing in automation from 2016 to 2019.[i] Those interviewed understood that e-commerce fulfillment is labor intensive and costly, and that the optimal way to deal with it is via automation. Furthermore, in the same study it was hypothesized that 3D printing will lend a hand in promoting development and adoption of robots and drones in warehouses and distribution centers.

The International Federation of Robotics (IFR) held a panel in 2016 to discuss the future trends of industrial robot installations from 2016 to 2019. It is anticipated that during this time period, human-robot collaboration will grow and becoming more beneficial than previously anticipated. The top 5 nations with expansive robotic applications include China, Japan, United States, South Korea, and Germany.  Continued growth in expected for the US, with 5% to 10% per year growth from 2016 to 2019.



Investments in warehouse and distribution center automation provide significant R&D Tax Credit opportunities to those engaging in such activities. Depicted below is a potential R&D Tax Credit scenario created by R&D Tax Savers:

Potential Scenario: Collaborative Robot Purchasing
# of robots purchasedCost per robotOutside integration cost (50% of capital cost)Resulting internal labor costs associated (estimate)Estimate Federal R&D
Tax Credit
5$30,000$75,000$150,000$9,00 -14,000
5$50,000$125,000$250,000$15,000 – 24,000
10$30,000$150,000$300,000$18,000 – 29,000
10$50,000$250,000$500,000$30,000 – 48,000

Automation’s Impact on Future Jobs    
The IFR affirms that increased automation will have positive impacts on labor demand. In fact, the warehouse robots “take over dull, repetitive tasks, and free up people to perform more value added work.”[i] Automation creates a chain effect in which one activity leads to the next.

Automation’s Impact on Future Jobs Image

Since January 2017, warehouse worker salaries increased 6% compared to the 2.8% increase seen in all other professions during this time frame. In March 2017, 945,200 jobs were accounted for in the warehouse and storage sectors alone. This marks a 5.3% increase from 2016. Just as Amazon is increasing its robot installations, it is also increasing its number of available positions. In April 2017, Amazon announced it was creating 25,000 more jobs for part-time workers.[i] Although some workers are concerned their salaries will decrease or they will lose their jobs, many companies that automate their warehouses are finding new ways to benefit their workers. They are being given new incentives and opportunities to increase individual output and efficiency. During holiday seasons, the part-time offerings are attractive to temporary workers, such as students.

Robots developed for warehouses are intended to work alongside human laborers. Known as collaborative robots, these robots will reduce the number of steps in a process that a worker would traditionally undergo to fulfill an order.In a collaborative setting, a worker may take a product off a shelf and put it on a rack that is led by a robot. The robot would then bring the product to workers at the next station, where they will be packaged and then shipped. Such advancements benefit the workers by increasing their productivity and efficiency.

Collaborative robots are already in high demand. In 2012, Boston-based Rethink Robotics Inc. introduced Baxter, a humanoid capable of kitting, packaging, loading, unloading, machine tending, and material handling.[i] Costing $25,000, Baxter is a viable solution for some businesses seeking to improve functionality and manufacturing processes.[ii] Rethink Robotics has started a new generation of industrial robots called Sawyer. This one executes many tasks that traditional industrial robots were incapable of. Sawyer is applied to CNC machining, PCB handling and ICT, metal fabrication, molding operations, packaging, testing and inspection, and loading and unloading Sawyer works collaboratively and safely alongside human workers.



Current Warehouse Automation
Many companies currently invest in warehouse automation in order to remain competitive in the digital economy.  
 
UPS: UPS moves thousands of packages around every day.  One of the UPS warehouses is located in Trenton, New Jersey. They are concerned with end to end distribution services from local to global shipping and delivery. The company is concerned with meeting delivery time as in their hub in Kentucky, with the use of robots, the center can handle over 84 packets per second, translating to over 416,000 per hour. This helps it deliver on time and maintain customer satisfaction levels.[i] Robots have replaced ¾ of the warehouse jobs
 
IKEA: Considered one of the leading “speed” furniture companies in the world, IKEA gains this title in part from its automated warehouses. Located in Paramus New Jersey, they have automated storage and retrieval systems that capitalize on warehouse space. As a result, they can store even more products. At peak efficiency, 13 cranes that comprise one warehouse, for example, can move over 600 pallets per hour.[ii] This translates to almost one pallet per minute per crane. Storing, processing, and shipping are faster now than in the past. Orders are completed within 24 hours, when in the past, it would take over 72 hours per order.

Amazon: Amazon delivers millions of products to people all around the world and has been expanding their warehouses throughout New Jersey for example in Middlesex County and in Burlington County. Amazon’s key operations are run on automation with more than 13,000 employees. There are 14 miles of conveyor belts which consist of a mix of employees and robots providing an efficient network to efficiently order, package and ship the order. The installation of the Amazon Prime hubs has provided customers with a faster option of receiving their orders. Amazon Prime creates a lean and cost efficient network that is difficult for competitors to supersede. Amazon has made their shipping even faster and more convenient for their customers. As the image below depicts, the Amazon facility locations spread throughout New Jersey.

FedEx: FedEx services 2.4 million packages requests per day to locations all over the world. The company makes sure to deliver the goods in a timely manner and decreases transportation and warehouse costs. The faster the inventory turns then the increase in cash flow for the company.[i] FedEx has distribution hubs in New Jersey and looks to continually improve their goods to increase customer satisfaction.

Wal Mart Image

Wal-Mart: Wal-Mart has distribution centers in Vineland, New Jersey. Large warehouse facilities are used to help with their online e-commerce business as it enables companies to deliver packages more economically when shipping. The warehouse uses a number of robots to pick, pack and sort items. The use of robots has sped up the delivery time by 15%[i] over the last two years by using an algorithm to locate and sort items. Wal-Mart employees are still an important part of the process. Wal-Mart offers 5 million products online which include the iPad which is one of the top selling items. Over the past 4 years, Wal-Mart has increased its investment in e-commerce and digital initiatives from about $300 million in 2013 to $1.1 billion this year for a total of about $3 billion according to public filings and earning transcripts. E-commerce is about 3% of Wal-Mart’s overall sales.

Boxed Image

Boxed: Bulk grocery e-commerce start-up Boxed is located in Trenton, New Jersey. The warehouse introduced robots that replaced ¾ of the warehouses jobs. The “ibots” robots provide security, precision and efficiency for the company. The company retained the employees whose jobs were replaced by robots since they brought loyalty and held the company’s culture together. Boxed demonstrated that as important robots are in manufacturing people are an asset to the company. 

Conclusion

Recent developments in robotics have enabled widespread adoption of robots in warehouses and distribution centers. These robots are intended to work alongside existing warehouse workers to handle tedious, time-consuming tasks that often deter people from seeking out these types of jobs in the first place. This warehouse and distribution center automation creates new avenues for improved productivity and efficiency. 

New Jersey distribution centers handle tremendous volumes and can benefit greatly from automation which offers opportunities to remain competitive and increase efficiencies.  These automation integrations require companies to keep up with the constant revolutionizing of e-commerce.  In addition, as consumer demand constantly changes, businesses must predict the future of the digital economy to maintain a competitive edge.

Companies engaging in the development and integration of warehouse and distribution center automation are eligible for Federal and State R&D Tax Credits to help support and stimulate these efforts.

  1. Inbound logistics. Warehouse automation: The next generation. January 27, 2016. Available at: http://www.inboundlogistics.com/cms/article/warehouse-automation-the-next-generation/
  2. Global Cold Chain Alliance. Warehouse Automation Trends. Available at: https://www.gccaonline.com/eweb/documents/Warehouse-Automation-Trends.pdf
  3. Robohub. Meet the drone that already delivers your packages, Kiva robot teardown. February 1, 2016. Available at: http://robohub.org/meet-the-drone-that-already-delivers-your-packages-kiva-robot-teardown/
  4. Business Insider. Amazon’s $775 million deal for robotics company Kiva is starting to look really smart. June 15, 2016. Available at: http://www.businessinsider.com/kiva-robots-save-money-for-amazon-2016-6
  5. Inbound logistics. Warehouse automation: The next generation. January 27, 2016. Available at: http://www.inboundlogistics.com/cms/article/warehouse-automation-the-next-generation/
  6. Logistics viewpoints. Measuring the changing technology requirements in today’s warehouses. October 26, 2016. Available at: https://logisticsviewpoints.com/2016/10/26/measuring-the-changing-technology-requirements-in-todays-warehouse/
  7. International Federation of Robotics. Market overview of world robotics. September 29, 2016. Available at: https://ifr.org/img/uploads/Presentation_market_overviewWorld_Robotics_29_9_2016.pdf
  8. Charles Goulding. The R&D Tax Credit Aspects of Robotic Warehouse Automation. RDTS Publishing. December 2014. Available at: www.rdtaxsavers.com/articles/Warehouse-Automation#
  9. The Wall Street Journal. Online Retailers’ New Warehouses heat up local job markets. April 9, 2017. Available at: https://www.wsj.com/articles/online-retailers-new-warehouses-heat-up-local-job-markets-1491739203
  10. The Wall Street Journal. A robot can be a warehouse worker’s best friend. August 3, 2017. Available at: https://www.wsj.com/articles/a-robot-can-be-a-warehouse-workers-best-friend-1501752600
  11. Charles R. Goulding, Jacob Goldman and Lynn Bertrand, The R&D Tax Credit Aspects of the Baxter Robot, February 2014, RDTS Publishing. Available at: http://www.rdtaxsavers.com/articles/Baxter-Robot
  12. Charles Goulding. The R&D Tax Credit Aspects of Collaborative Robots. RDTS Publishing. September 2014. Available at: www.rdtaxsavers.com/articles/Collaborative-Robots#
  13. Rethink Robotics. High performance collaborative robot. 2017. Available at: http://www.rethinkrobotics.com/sawyer/
  14. Supply chain digital. Top 10: Automated warehouses. April 18, 2011. Available at: http://www.supplychaindigital.com/top-10/top-10-automated-warehouses
  15. MMH LLC. A peek into Ikea’s automated warehouse. July 16, 2015. Available at: http://www.murraymh.com/a-peek-into-ikeas-automated-warehouse/
  16. Spencer Kent/NJ Advance Media for NJ.com (2017, April 21). Amazon opens largest NJ facility, announces plans for 3 more in state. Available at: http://www.nj.com/middlesex/index.ssf/2017/04/amazon_opens_largest_fulfillment_center_in_nj_yet.html
  17. CKobia. (2016, May 15). Place and Distribution at FedEx. Available at:https://mpk732t12016clusterb.wordpress.com/2016/05/15/place-and-distribution -at-fedex/
  18. Peterson, H. (2013, December 13). Wal-mart has an army of robots that pick and pack your holiday gifts. Available at:http://www.businessinsider.com/wal-mart-warehouse-robots-2013-12
  19. Bose, N. (2016, October 6). Wal-mart’s next move against Amazon: More warehouses, faster shipping. Available at: https://reuters.com/article/us-wal-mart-ecommerce/wal-marts-next-move-against-amazon-more-warehouses-faster-shipping-idUSKCN12609P
  20. Yakowicz, W. (n.d.). Robots replaced 75 percent of jobs at this warehouse but not one employee was cut. Available at:https://www.inc.com/will-yakowitz/boxed-didn’t-fire-one-employee-after-robots-replaced-75-percent-warehouse-jobs.html

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