BUSINESS CASE: Kiva Systems’ Robots versus Humans: The Challenge of Holiday Order Fulfillment

For those who like to procrastinate when it comes to holiday shopping, the rise of e-commerce has been a welcome phenomenon. Amazon.com boasts that in 2012, customers living in 11 cities in the United States could receive same-day delivery for orders placed on the day before Christmas.

E-commerce retailers like Amazon.com and CrateandBarrel.com can see their sales quadruple for the holidays. With advances in order fulfillment technology that get customers’ orders to them quickly, e-commerce sellers have been able to capture an ever-greater share of sales from brick-and-mortar retailers. Holiday sales at e-commerce sites grew by over 13% from 2011 to 2012.

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Behind these technological advances, however, lies an intense debate: people versus robots. Amazon has relied on a large staff of temporary workers to get it through the previous holiday seasons, often quadrupling its staff and operating 24 hours a day. In contrast, Crate and Barrel only doubled its workforce, thanks to a cadre of orange robots that allows each worker to do the work of six people.

But, Amazon is set to increase its robotic work force in the future. In May of 2012, Amazon bought Kiva Systems, the leader in order fulfillment robotics, for $775 million, with the hope of tailoring Kiva’s systems to best fit Amazon’s warehouse and fulfillment needs.

Although many retailers—Staples, Gap, Saks Fifth Avenue, and Walgreens, for example—also use Kiva equipment, installation of a robotic system can be expensive, with some installations costing as much as $20 million. Yet hiring workers has a cost, too: during the 2010 holiday season, before it had installed an extensive robotic system, Amazon hired some 12,500 temporary workers at its 20 distribution centers around the United States.

As one industry analyst noted, an obstacle to the purchase of a robotic system for many e-commerce retailers is that it often doesn’t make economic sense: it’s too expensive to buy sufficient robots for the busiest time of the year because they would be idle at other times. Before Amazon’s purchase, Kiva was testing a program to rent out its robots seasonally so that retailers could “hire” enough robots to handle their holiday orders just like Amazon used to hire more humans.