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Scary E-Commerce Math

By Kevin Gue | 09/15/2017 | 1:53 PM

November and December in Louisville look like the corn harvest in Iowa—all hands on deck moving packages and loading trucks. My non-scientific survey of local distribution center managers suggests that volumes increase between 2–5 times their normal levels during the peak. That got me to wondering, just how bad (good) could this get? In 10 years, how many packages will be moving, and more importantly, how will those packages get moved?

To begin, let's consider only retail sales because they account for the majority of e-commerce shipments. Let's also assume dollars as a surrogate for number of shipments. In other words, a 10 percent increase in e-commerce retail sales means a 10 percent increase in shipments that need to be handled.

 

Ecom-percent
Data source: U.S. Census Bureau

 

The figure nearby shows that e-commerce has grown as a percentage of retail sales from less than 1 percent in 2000 to more than 8 percent in 2016, an 8-fold increase in percentage terms. But percentage growth doesn't tell the whole story, because retail sales are also growing every year along with the overall economy. Accounting for retail sales growth, the second figure shows that overall e-commerce sales has been growing in excess of 15% CAGR (combined annual growth rate) during the past seven years.

Ecom-growth
Data source: U.S. Census Bureau

Fifteen percent growth per year can't go on forever, of course, so we need another way to think about the growth of e-commerce during the next 10 years. Very likely we are in a standard S-shape technology adoption curve, in which the adoption rate is low at first, then peaks as the technology gets hot, then slows again as adoption reaches steady state. No one knows what percentage will constitute “steady state” for e-commerce in retail, but even conservative estimates are pretty scary: if retail grows at 2.5% per year and e-commerce rises to just 20% of retail sales in the next 10 years (which I believe is conservative), the total e-commerce sales volume, and by proxy the total number of shipments, will rise by 3.2 times. You read that right: the number of packages handled will be approximately 3.2 times current levels. If e-commerce rises to 30 percent of total retail, e-commerce shipment volume will increase by a factor of 4.8. At 50 percent, the factor is 8. And we haven't even thought about peak volumes, which are 2–5 times steady state or more.

How does this get done?

Us-unemployment
Data source: Bureau of Labor Statistics

The traditional answer, at least in the U.S., has always been “more labor,” but the labor market is already tight and shows no signs of improving. Average U.S. unemployment is currently just above 4 percent (see figure), and the Bureau of Labor Statistics estimates that for demographic and other reasons, the labor force will grow only about 0.5% between 2014–2024.

Allow me to summarize: the labor pool projected to grow by 0.5% between 2014–2024 is supposed to support an e-commerce distribution industry projected to grow by 300%–500% in the next ten years? Really?

Something must change.

I believe that "something" is widespread adoption of material handling automation. Fortunately, recent advances in autonomous vehicles, robotic order pickers, and decentralized control algorithms make it easy to envision a future in which a very few people will work alongside a very many machines to make all this distribution possible.

What will be really exciting to watch, is how fast we can produce the machines necessary to enable this explosion in automation. If next week a company began selling a truly autonomous order picking robot for $20,000—a robot that traveled at least as fast as a human and picked individual items faster and with greater accuracy than a human—could they build them fast enough?

This day is coming.

[This post also appears on my personal website as "Doing the Math on E-Commerce Growth."]

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About Kevin Gue

Keving Gue

Kevin Gue is a professor of industrial engineering at the University of Louisville, where he holds the Duthie Chair of Engineering Logistics and serves as Director of the Logistics and Distribution Institute (LoDI). His research addresses the design and control of logistics systems, with a focus on distribution, warehousing, and material handling. He is co-inventor of the warehouse aisle designs known as the Flying-V, Fishbone, and Chevron, work for which he received multiple best paper awards and was awarded the Technical Innovation in Industrial Engineering Award from IIE in 2009. Kevin is a former president of the College-Industry Council on Material Handling Education and is Editor-in-Chief of the recently published U.S. Roadmap on Material Handling and Logistics.



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