7TH MANUFACTURING ACCOUNTING RESEARCH CONFERENCE

TAMPERE, FINLAND, MAY 30 - JUNE 1, 2005.

Effects of Automation on Cost Accounting:

A Case Study in Warehouse Logistics

Mikko Varila
Cost Management Center
Institute of Industrial Management
Tampere University of Technology
P.O. Box 541, FI-33101 Tampere, Finland
mikko.varila@tut.fi

Marko Seppnen
Center for Innovation and Technology Research
Institute of Industrial Management
Tampere University of Technology
P.O. Box 541, FI-33101 Tampere, Finland

Esko Heinonen
Institute of Production Engineering
Tampere University of Technology
P.O. Box 589, FI-33101 Tampere, Finland

ABSTRACT
Cost efficiency is one of the corner stones of logistics business. In warehouse logistics, many
companies have taken action to replace the manual work with automatic warehouses, conveyors,
and other automation applications. The primary aim of automation is to reduce the costs of
operations. This does not seem to always come true, because the most common problems associated
with automation systems in use have been cost-related. Automation as a long-term investment with
many implicit cost effects changes also the needs and practices of accounting information.

The aim of the study was to examine what kinds of effects automation of activities has on both costs
and cost accounting in warehouse logistics environment. The study was based on two research
projects on the same electronics wholesalers warehouse logistics. Two accounting systems built in
these projects were compared, one of them related to a manual process and the other to a highly
automated process.

The changes in the process must be reflected by the cost accounting system. Automation changes
the operations performed in warehouses, which is why the activity structure should be renewed after
the automation project has been carried out. Analyzing the cost structures of activities is useful for
revealing where the automation has the greatest impact on operations. Also the assignment of costs
and resources to activities may have to be modified, while the validity of most traditional,
personnel-related drivers may decrease in automated environments. In terms of cost efficiency, one
of the challenges is to optimize the use of large investments, such as automatic warehouses. The

1
primary finding was that while automation improves warehousing and picking activities, it may
increase the costs at the beginning and end of the process. This may happen due to the inflexible
nature of automation, which requires standard-sized load carriers to be used and thus involves extra
sorting and consolidating.

Keywords: Cost accounting, Automation, Warehouse logistics

1 INTRODUCTION

It is not a long time ago since logistics was considered merely a necessary cost of business. Only
lately has logistics aroused interest as a possible source of competitive advantage. This has also put
additional pressure on logistics costing. It has been noted that the costs of logistics cannot be
controlled without controlling the processes and activities (van Damme & van der Zon, 1999).
Logistics environment has also been undergoing changes and therefore the assumptions of earlier
accounting methods regarding stable and predictable market, long product life-cycles, large
production runs, and a large portion of direct variable costs may no longer be valid today. In
general, logistics is an area where increased visibility and accuracy of costs has awoken increasing
interest (Graham, 2003; Themido et al., 2000). The importance of accuracy in cost accounting is
emphasized when operating in highly competitive narrow-margin industries, for example
wholesaling.

One of the biggest changes that are taking place in logistics is that warehouse operations are more
and more often carried out with the help of automation instead of human work. Racks in
warehouses are filled by shelving lifts instead of forklifts. Transfers are done automatically utilizing
belt and roller conveyors. Also information gathering and distribution can be carried out
automatically. The role of labor has changed from performing the aforementioned tasks to
monitoring and controlling the system. The phenomenon in itself is not a new one: the replacement
of human work with machinery has been proceeding rapidly for 200 years, since the Industrial
Revolution (Schwarzbach, 1985).

Two important objectives when automating warehouses are improving cost efficiency and
controllability of operations. Automation may be a means for increasing volumes and offering
smaller batch sizes without losing profitability. Improved controllability of production helps to
enable price differentiation and thus gives rise to new kinds of service innovations, for example
providing customers with a possibility to outsource their warehousing activities. Altogether, the
effects of automation are manifold but far from clear in terms of actual costs of operations.
Although automation projects in warehouses have in general been successful, the most common
problems have been cost-related (Dadzie & Johnston, 1991). This may be a result of both unrealistic
expectations and difficulty in reflecting the variety of effects in costs.

The original objective of the study was to examine what kinds of effects automation of logistic
activities has on the costs of a company. The costs can be examined from the perspective of
resources or activities, for instance. In addition to direct cost effects, the examination can be
extended to cover all other effects (e.g. batch sizes, quality, etc.) of automation in warehouse
logistics environment. Understandably, these effects have their counterparts in costs, too.

In practice, we concurrently committed ourselves to assessing how cost accounting itself has
changed. Earlier, a lot of indirect costs were assigned based on direct labor. At the moment, a large
proportion of these costs is incurred through automation systems. What kinds of challenges do these

2
changes set for cost assignments? A traditional belief is that an increased level of automation
transforms variable costs incurred through employees into fixed costs of machines and information
systems. Another question is how changes in volume will affect automation profitability and how
these changes should be treated in cost accounting. It is also necessary to examine the cost effects of
each part of the process separately. Sub-optimizing certain parts may lead to moving bottle-necks
somewhere else.

The study is based on development projects related to two cost accounting systems of an electronics
wholesaler. The research method used was action research. There have recently been hopeful
expectations to see this method in logistics environment (Nslund, 2002). The researchers role has
been interventionist, with the firm purpose of seeking ways to improve cost accounting in the case
company. The data consists of interviews (almost one hundred altogether) and observations carried
out during the research projects and in constructing the cost accounting systems.

2 VIEWS FROM LITERATURE

2.1 Objectives in automating warehouse logistics

Compared to the case of manufacturing, the adoption of automation has occurred at a much slower
rate in warehouse logistics. According to the survey by Dadzie and Johnston (1991), the percentage
of warehousing firms adopting automation had lagged behind for years and only in the late 1980s
did its adoption become comparable with that in manufacturing. They considered the main reasons
for that to be the lack of the requisite information technology and the inability to consider
warehouse as a developable function and a crucial component of a firms competitive strategy. As a
result of technological development and a change in attitude, these obstacles seemed to have been
overcome. Increased labor costs have forced managers to pay attention to warehouse activities and
automation has become a desirable option. Accordingly, a huge increase in adoption decisions was
expected and a significant number of firms had taken action to automate their warehouse activities.

The most commonly used automation applications in warehouse logistics have been hybrid lift
trucks, horizontal transfer systems, and automated storage and retrieval systems (Dadzie &
Johnston, 1991). The main purposes of use have been horizontal movement, storage and retrieval
inventory handling, and item picking for orders. Thus, most warehousing activities can be covered
or at least assisted by automation. However, hardly any automated warehouses are actually
completely automatic; most of the processes include also manual phases. For example, Kerremans
et al. (1991) point out the difficulty in making a distinction between automatic and manual
(mechanical) processes while carrying out their survey. Also Schwarzbach (1985) states in his study
that there is no one measure of automation and that thus subjective estimates of the level of
automation can be used. Naish and Baker (2004) have divided automation in materials handling into
four levels: 1) simple manual, 2) mechanically assisted, 3) simple automation, and 4) complex
automation. According to Dadzie & Johnston (1991), it is typical for companies to automate their
processes only partly. The trend seems to be toward rather simple applications for a limited number
of activities.

There are multiple benefits one aims to achieve by automating processes. These include reducing
labor, increasing speed, accuracy, and reliability, lowering energy costs, and better use of space.
According to the survey by Dadzie and Johnston (1991), labor cost reduction is the most commonly
used criterion used in the decision to automate cited by 89 percent of their respondents. Some
arguments that are less obvious and more difficult to measure include less damage, better image,
and less reliance on staff (Naish & Baker, 2004). The benefits do not come without costs.

3
Arguments against automation include lack of flexibility with changing throughputs and order
profiles and lengthy implementation and commissioning time, during which the service level may
dip (Naish & Baker, 2004). If the business involves great flexibility, it may be more convenient to
stick to manual operations.

Many effects of automation are indirect and hard to measure, which is why it is often difficult to
make fully rational decisions (Naish & Baker, 2004). There is an indication that technological
change has an impact on both cost composition and cost structure (Kerremans et al., 1991). Naish
and Baker (2004) claim unrealistic or undefined objectives as being the main reason for an
automation project ending up a failure. They argue that the objectives should be set not only
qualitatively, but also quantitatively, such as a certain decrease in costs. Probably because of
unrealistic expectations regarding decrease in cost level, the most common problems with
automation systems have been cost-related (Dadzie & Johnston, 1991).

2.2 Cost accounting in logistics environment

The accounting and control of logistics costs are becoming increasingly important as companies
seek ways to achieve competitive advantage. As processes become smoother, cost information must
be more detailed and accurate enough to support identification of opportunities to reduce costs. This
places pressure on cost accounting systems which must trace the costs of different cost objects.
(Pohlen & La Londe, 1994)

Activity-based costing (ABC) has been utilized almost for two decades to achieve improved
assignments of costs to different products. ABC is a process in which costs are assigned to
resources, resources to activities, and finally activities to different cost objects, such as products or
customers. There exists a lot of research on ABC in logistics environment (Fernie et al., 2001;
Harrington, 1995; Lin et al., 2000; Manunen, 2000; Pohlen & La Londe, 1994; Stapleton et al.,
2004; van Damme & van der Zon, 1999). Especially companies with large proportions of indirect
costs have indicated benefits from using ABC (Pohlen & La Londe, 1994).

On a general level, warehousing activities include 1) receiving, 2) put-away, 3) warehousing, 4)

storage, 5) order picking, 6) packing, marking and staging and 7) shipping (Roth & Sims, 1991).
This division or minor modifications of it have been typically used in previous research on ABC
systems in warehouse logistics. Alternatively, a simpler division into inbound, warehousing, and
outbound has been used (See e.g. Themido et al., 2000). The activity drivers that are typically used
for these activities are presented in Table 2. The typical resource drivers are presented in Table 1.

Table 1. Examples of assignment bases of resources Table 2. Examples of assignment bases of activities
in warehouse logistics. in warehouse logistics.
Resource Resource drivers Activity Activity drivers
Direct labor Use by activities Receiving # of received lines
Management & Put-away # of received lines
# of direct labor
overhead
Warehousing # of pallets, shelf-meters
Equipment Use by activities
Storage # of pallets, shelf-meters
IT infrastructure and
# of direct labor Picking # of order lines
maintainance
Property Square meters Packing, marking, etc. # of order lines
Facilities Square meters Shipping # of pallets, # of orders

4
Most of the previous studies on logistics costing have concentrated on a stable situation and manual
processes. For example, Fernie et al. (2001) state that the most extensive element of their research
was concerned with determining the cost of warehouse labor by product and customer group.
However, the increasing amount of automation creates new kinds of information needs, which may
challenge accounting. According to Sriram (1995), the challenges occur mainly because the initial
investment in automation is significant and the benefits are often indirect and come home only in
the long term. Accounting, in contrast, is often concentrated on short-term implications. Another
difficulty may be in assigning costs to automated activities. While in the manual processes such
drivers as number of personnel and labor hours are used in most assignments, they may not be as
valid in automated processes.

Schwarzbach (1985), one of the early spokesmen for the need for change in cost accounting
systems, argued that the labor-oriented principles that have been traditionally used are not enough
in modern accounting. He (1985) noted that companies with a high level of automation had not
adapted their costing systems to reflect the environment. Especially, half of them still used direct
labor hours in allocating overhead costs to products. Most of the companies did not perform
analyses of overhead cost behavior for determining product costs. More than half of the highly
automated companies did not separate machine operating costs from other overhead. The study of
Schwarzbach (1985) was one of the incentives for developing ABC, which aims at improving the
allocation of indirect costs.

The study by Schwarzbach has been followed by many others that point out the decline in direct
costs (See e.g. Ber & Jeter, 1993), the continuous use of direct labor as a basis for allocating
overhead costs (See e.g. Drury & Tayles, 1994), and the effects of automation on cost accounting in
particular (See e.g. Kerremans et al., 1991). Cooper (1989) points out that a costing system may be
obsolete if the company has experienced increased automation. Machinery turns the focus of costs
away from direct labor, but may increase the costs of programming and engineering. If direct labor
is used as a basis of allocation after automation, the product costs may become distorted. Quite
positively, according to Foster (1990) the introduction of FMS has been followed by an increase in
the use of machine hours as cost drivers and the abandonment of treating labor as a direct cost. This
increase, even if realized, seems not to be extensive enough, because according to Drury (1994) 68
percent of companies in automated environment still used direct labor as a basis of allocation for
overhead costs. The study of Lukka and Granlund (1996) reports that in the Finnish manufacturing
industry 61 percent of companies consider that the application of new philosophies of operation and
advanced manufacturing technologies has affected product costing. Whether these affects have
resulted in reasonable decisions in terms of assignments of costs can be questioned, because
according to Kerremans et al. (1991), only half of the companies performed technical studies and
one third statistical analyses to determine cost behavior (variable/fixed) and traceability
(direct/indirect). In the rest of the companies, these divisions were based on more or less arbitrary
judgments by management.

If the assumption that automation transforms variable costs into fixed costs holds true, it is essential
to consider the effects of volume. Kmrinen et al. (2001) have illustrated that volume affects the
cost efficiency of picking activity, when it is either manual or automated. Especially they pointed
out that the rate of capacity utilization has a radical impact on picking costs. If there is fluctuation in
demand, it may be difficult to achieve the desired rate of utilization. Companies that fail to consider
automation from the capacity utilization point of view may encounter the danger that cost savings
are not realized as planned.

5
3 CASE RESULTS
3.1 Turbulent environment of the case company

A characteristic of the case industry is that the gross margin is extremely low, which makes cost
efficiency one of the cornerstones of the business. For this reason, the cost information must be
timely and accurate. This is why the accounting systems to be used must fulfil high requirements
and the accounting procedures must be carefully thought through. A decade ago, the company was
concentrating on quality, even at the expense of higher costs. A satisfactory level of quality was
achieved a few years ago, and since then the main focus has been on costs.

There are two phenomena that make the companys operating environment extremely turbulent:
growth and seasonal variation. Figure 1 (left) depicts the heavy growth that has taken place in the
recent years in the companys sales and the number of order lines delivered.1 In the last seven years,
the average growth per year has been 27 percent in sales and 50 percent in order lines. In addition to
growth, also the yearly seasonal variation is very high. For example, for 2003 (see Figure 1, right)
the maximum monthly sales (December) are over double compared to the minimum monthly sales
(July). There is almost the same result in the case of the number of order lines. This sets additional
challenges in maintaining cost efficiency. In the short run, the capacity of all the resources should
be utilized as well as possible. In the long run, the capacity should fulfil also the future
requirements.

4 000 1 000 300 100

Number of lines in thousands

Number of lines in thousands

Sales in millions of

Sales in millions of
3 000
200

2 000 500 50

100
1 000

0 0 0 0
ay
Mb

v
ar

Mr

ct
n

p
n

c
Au l
98

99

00

01

02

03

04

Ju

No
Fe

Ap
Ja

De
Se
Ju

O
19

19

20

20

20

20

20

Number of order lines Sales

Figure 1. The yearly trend in order lines and sales in 1998-2004 (left) and the monthly variation in order lines
and sales in 2003 (right).

During the last couple of years, the warehouse logistics of the company has gone through
significant changes. The most radical change has been in the degree of automation. This study
examines the warehouse logistics process in two situations: the first is in 2001 and the latter in
2004. The earlier process can be considered completely manual, because no automatic applications
were in use. Although the process in 2004 includes also manual operations, it can be considered
highly automated from any viewpoint. There were two automatic warehouses that were operated by

1
In the following examinations, all the figures have been coded for reasons of confidentiality.

6
crane lifts: one for pallets and one for plastic miniload-boxes. All transfers and shelving, except
unloading from trucks and loading onto trucks, were carried out automatically by conveyors and by
horizontal and vertical lifts. Manual activities like picking are assisted by sorting devices and pick-
to-light applications, which enable the employees to easily access the goods and place them in the
right locations. According to the classification by Naish & Baker (2004), the current system can be
considered as complex automation, which is the most advanced level in their hierarchy.

The motivation for automation was manifold. One of the greatest influences was growth, which was
a natural result of striving toward cost efficiency through economy of scale2. It was impossible to
handle the growing number of orders manually, which is why some kind of change in the process
was inevitable. Automation was considered the most cost efficient way to achieve growth. A basic
assumption was that automation would be able to displace enough employees and therefore perform
the operations at lower costs. The most troublesome operation in the manual process was picking,
which was alone responsible for about one third of total warehouse costs. In addition, costs were
expected to decrease in general in all parts of the process. A concrete financial objective was a
payback time of 20 months. However, because of the continuous changes, it could not be
determined more accurately where and how the cost savings would actually be realized.

Another important reason for adopting automation was the need for more visibility and improved
control of events. An automation system combined with a highly developed information system was
to provide more information of what is going on in the warehouse and how to manage it. Last but
not least, automation was intended to improve the company image. It creates the sense of a
technological pioneer with standardized and high-quality procedures. As one of the interviewees put
it: Customers are like crows: they like everything that glitters..

3.2 Effects on cost accounting practices

Since the struggle towards cost efficiency, the case company has paid a lot of attention to accuracy
of accounting. This has led to two research projects in which cost accounting systems were
constructed in the companys warehouse logistics. The first project was carried out in 2001-2002,
when the process was manual. At the end of the second project in 2004, the process was automated
to a high degree. Both projects aimed at designing an activity-based costing system. During the
projects, a lot of data was gathered and analyzed. Despite the subjective decisions that always have
to be made when designing a costing system, some general observations could be made.

Automation changes the warehouse logistics process by eliminating activities, changing their
nature, and even creating new ones. Therefore, it is necessary to redefine the activities that are
performed in the process. In general, the changes are mainly results of the inflexible nature of
automation, which requires standardized procedures to be used. A simple example is handling
various load carriers: pallets need different warehouses and conveyors than miniload-boxes. This
causes an extra burden, because the items that are not stored on pallets must be sorted in miniload-
boxes in connection with receiving and put-away. The most significant changes occur at the end of
the process. In the manual process, picking can be performed in a flexible way, combining picking,
packing, and palletizing at the same time. In the automated system, picking is assisted by
automation so that the items are transferred to fixed picking stations by lifts and conveyors.

2
An interesting note concerning economy of scale was provided by company representatives. The manual process does
not benefit from strong growth; quite the opposite: longer distances in manual picking lead to more costs when the
warehouse becomes physically larger.

7
Therefore, only one type of load carrier can be handled at a time. Thus, picking and packing is done
in one area and palletizing in another. To sum up, the changes in activities included:

After receiving, items that are not stored on pallets New sorting activity was created
must be sorted to plastic miniload-boxes
Transfers to and from the warehouses and shelving Warehouse arrangement activity
are done by conveyors and lifts instead of fork-lifts was transformed to automatic
box/pallet transfer
Manual stocktaking is not needed, because the Stocktaking activity was
information system is able to track the situation in eliminated
real-time
Picking is assisted by automation so that items are Multiple changes in picking-
delivered to picking stations by conveyors related activities
Items need to be palletized at the end of the New palletizing activity was
process because this cannot be performed along created
with picking in picking stations due to handling-
unit standards

Another effect of automation on cost accounting is the changes in the assignment of costs.
Traditionally, most overhead costs have been allocated on the basis of direct labor. This is
justifiable if the proportion of overhead costs is small and it is at least partly correlated with direct
labor. However, in automated environment the proportion of machine costs of total costs may be
significant, and thus assignments should be made on a better basis. For example, in the manual
process, the proportion of machine and equipment costs was about 6 percent of total costs. In the
automated process, the corresponding figure was 23 percent. This leads to considering the assigning
of machine costs in a more rational way.

A somewhat surprising result was that it is not only the depreciation costs of automation that need
an alternative basis of assignment. It was also noted that automation results in a significant increase
in certain overhead costs that should therefore be assigned to automation instead of direct labor.
Some of these results were expected, but the magnitude was not. In addition, it was unclear how to
reflect these changes in the cost accounting system. As a result, these costs were assigned through
automation to automated activities. Examples of the effects of automation on these costs and the
effects they had on the assignment of costs include the following:

Electricity costs were almost doubled
About 20 percent of the time used in
IT updating and maintaining goes for
automation-related issues
Maintaining automation required
establishing a group of four full-time
employees plus additional resources
when needed
Logistics management uses a
significant proportion of its time on
automation-related issues
50 percent of electricity costs are assigned
through automation
20 percent of IT costs are assigned through
automation
The costs of the maintenance group and
additional resources are assigned through
automation
The percentage of management time
consumed by automation is assigned through
automation

A challenge for cost accounting is created by growth and volume variations, which according to
Figure 1 are both significant. A basic assumption about the effects of automation on costs is an

8
increase in fixed machine costs. This is why it is necessary to consider the cost efficiency of the
processes with different levels of volume. Practically, the only variable costs in the process are
packaging materials and some temporary labor. According to the company representatives, the
capacity of the manual process could be easily adapted by increasing or decreasing labor. In the
automated process this is far more complicated. An automated application is either occupied or not,
and thus adaptation of capacity according to volume variations is coarser. A good example is
picking activity. In the manual process there can be dozens of employees doing picking in a flexible
way, while in the automated process there are five fixed picking stations that are either on or off.

3.3 Changes in cost structures of activities

To obtain a picture of what kinds of changes in activity costs had occurred with automation and
whether they are meaningful, the cost structures of the two processes were compared as a whole and
by activities. The actual division of activities was finer than for example that suggested in Table 2,
consisting of 19 activities in the manual process and 22 in the automated one. Due to the changes in
activities, the two processes were not directly comparable. Therefore, the costs of some activities
were combined according to more generic activities to make comparing possible. These groups of
activities were 1) receiving and put-away, 2) warehousing, 3) storage, 4) picking and packing, and
5) shipping. It must be noted that it is not even self-evident to which category an automated activity
belongs. For example, in modern automation-assisted stations, it is possible to do both inbound-
related activities and picking. In addition, some of the shipping-related activities of the automated
process could be done in connection with picking in the manual process. In comparing the figures, it
must be noted that the volume was almost double in 2004 compared to the situation in 2001. That is
why absolute changes in costs do not give a full picture of the situation and also volume
comparisons were performed.

100 %

80 %
IT
Absolute costs

60 % Rent &
utilities
M achines
40 %

Labor
20 %

0%
2001 (M anual) 2004 (Automated) 2001 (M anual) 2004 (Automated)

Figure 2. Average monthly cost structures of the two situations. Absolute costs are on the left and percentages on
the right.

According to Figure 2, the largest change has been in machine costs. The machine costs of the
automated process are more than five times those in the manual process. Even the relative change is
significant. Surprisingly, with automation also labor costs have increased. The relative proportion of
labor costs has decreased a few percentage units. The absolute increase in rents and utility costs was
expected, because a new hall was built. Relatively the proportion of rents and utilities of total costs

9
seems to be independent of the level of automation. The large decrease in IT costs may seem
surprising, but it is not a result of automation.3

In Table 3 and Figure 3 the effects of volume variations are illustrated by proportioning the costs of
warehouse logistics with different levels of volume. Minimum, average, and maximum volumes in
the examined years (2001 and 2004) are given, as well as the maximum practical capacities of both
processes. In determining the costs, it is assumed that only labor costs change while other costs
remain the same, which holds approximately true. In general, with automation the costs per order
line have decreased to approximately half of those in the manual process with the average volumes
of both processes. What should be noted is that in the manual process it seems that thanks to the
larger amount of variable costs the cost per unit decreases relatively little when the volume
increases and ultimately stabilizes. In the automated process, the amount of labor increases at a
much slower rate than volume. Thus, the capacity of fixed resources should be utilized as well as
possible. However, in the automated system the absolute maximum capacity is quite easy to define,
while the manual process allows increasing capacity almost limitlessly.

Table 3. The effects of changes in volume on costs per line. The examination concerns monthly figures.
2001 (Manual) 2004 (Automated)
% of # of Cost per % of # of Cost per
Monthly volume maximum direct order maximum direct order
capacity labor line capacity labor line
Minimum of the year 33 % 60 10.00 43 % 75 4.83
Average of the year 46 % 80 8.45 58 % 90 3.87
Maximum of the year 66 % 120 7.61 79 % 110 3.22
Maximum capacity of the
100 % 200 7.38 100 % 110 2.54
process

10
M inimum of the year
8
Cost per order line

Average of the year

6

4 M aximum of the year

2 M aximum capacity of
the process
0
2001 (M anual) 2004 (Automated)

Figure 3. Costs per order line with different levels of capacity in manual and automatic process.

Figure 4, where the cost structures are organized according to groups of activities, gives a more
detailed picture of where the changes occur. First, it can be seen that the costs have increased a lot
in the early activities of the process, meaning receiving and put-away. This happens because the
items must be fed to storages in standard load carriers, mainly on pallets or in miniload-boxes.
Especially, disassembling items from pallets and placing them in miniload-boxes is time-consuming
3
The IT costs go mainly to maintaining and updating the information system. Investment types of costs have been
divided into periods while the costs of continuous maintenance have not. In 2001 the amount of maintenance seems to
be greater than today. The decrease, however, is not a result of automation but of other changes.

10
and requires a lot of manual work. That is why the costs may even increase at the beginning of the
process. In warehousing, the absolute costs remain about the same, which means that viewed in
proportion to the increase in volume, the costs per order line are significantly lower. In addition, the
structure of warehousing costs is totally different in the two processes. In the manual process,
stocktaking, transferring, and shelving consume a lot of manual work. In the automated process,
transferring and shelving are done by conveyors and lifts and stocktaking is practically not needed,
because the information system is able to keep track of the items in storage real-time. Altogether,
warehousing is an activity in which the positive impact of automation is significant.

IT
Absolute costs

Rent & utilities

M achines

Labor

M an. Aut. M an. Aut. M an. Aut. M an. Aut. M an. Aut.

Receiving and put- Warehousing Storage Picking and Shipping

away packing

Figure 4. Comparing the cost structures of manual and automated processes by groups of activities.

In storage, the effects of automation are less dramatic, but still noticeable. The absolute costs have
increased somewhat, but relatively less than the volume. The machine costs have increased a lot,
because shelves are considered to be machines too, and in the automated process they meet much
heavier requirements of endurance and quality. Labor costs, in contrast, have decreased a little. In
general, in the automated process the warehouse space seems to be utilized better than in the
manual process, because the costs of rent and utilities have remained approximately the same.
Picking and packing4 is another area where automation seems to be beneficial. Even though the
volume has almost doubled, the picking and packing costs have decreased. This is mainly because
of the slight fall in labor costs. Automated picking stations increase the picking costs a bit, but this
does not counteract the effect of decrease in labor. The most surprising effects of automation
occurred in the latter stages of the process: shipping costs increased more than tenfold. The
explanation is the same as for the beginning of the process. Due to the standard requirement of the
automated process, in certain activities only one type of load carriers can be handled. Whereas in
the manual process palletizing and customer order consolidation could be done in connection with
picking, this is not possible in the automated process. Instead, the items arrive at the shipping area
as separate packages which must then be palletized for transportation. This requires much manual
work.

4
In the manual process some of the work carried out in the packing phase belongs to the shipping phase in the
automated process, and thus this division is arbitrary to some extent.

11
Even though the uneven division of cost changes in different parts of the process may seem self-
evident, this may not be the case for those making the decision to automate. That may also render
estimating the possible consequences of automation difficult to predict. Focusing only on a certain
part of the process may lead to sub-optimization in which the cost effects of the whole process are
ignored. For example, in the case company, the cost effects of automation caused disappointment in
certain areas because the objectives were set for the process as a whole, but they could be realized
only in warehousing and picking. Thus, the potential encumbrances at the beginning and the end of
the process should be considered as a counterbalance. In addition to disappointments, the bottleneck
of the process may be moved to another part of the process. A concrete example is the increase in
labor at the end of the process, which has led to considering the implementation of more
automation, for example automatic stickering machines, in the shipping phase.

3.4 Additional costs and benefits

In addition to the issues mentioned above, there have been many effects of automation that are
certainly related to costs, but the actual amount of which is difficult to express. This subchapter
aims at illustrating these effects. Most of them are at least partly a result of inflexibility. Whereas a
human being is able to perform multiple tasks, handle a variety of types of items, and use common
sense, automation is strictly limited to certain standard procedures. The incapability of automation
to handle different types of load carriers has had far-reaching and less obvious cost effects.

Although this study concentrates especially on cost changes in activities, an interesting and
surprising cost effect could be seen in material costs: packaging material costs doubled after
automation. In the manual process, the items were stored in their own transport packing, which
could hold multiple items and could be further utilized in the picking phase. In the automated
process, the loads that it is not desired to store on pallets must be unpacked from their original
packing and placed in miniload-boxes. In addition, customer orders are picked in cardboard boxes
that only come in a limited number of sizes. The whole picking process, especially the
determination of the size of cardboard box, is highly computerized and allows only standard sizes to
be used. Because of the layout of the process, effective moving and reuse of original packing would
be complicated. For these reasons, the original packing cannot be reused at all.

Inflexibility of automation has also forced the case company to enhance its service level. Since in
the automated process items are stored individually, each customer order must be made up
separately in the picking phase. This can also be done rather cost efficiently. Customers have
eagerly used the opportunity and made orders in smaller batches. This, of course, means a better
service for them. Since automation, batch sizes have been decreasing and have only recently
reached a steady level. This has impacted on the whole industry, and competitors have encountered
pressure to improve their service levels. For the case company, however, this was not a free choice
but rather a natural consequence of the inflexible nature of automation.

A major objective of the decision to automate was to improve the visibility and controllability of the
process. A concrete example of this is that manual stocktaking could be eliminated and replaced
with real-time information that is obtained automatically. In addition, automation may also
significantly improve cost accounting. Combining automation system and information system
creates an environment in which a lot of data can be collected from the process. Compared to
manual work, it is easy to measure multiple parameters of automated tasks. Examples of these are
serial number level identification, which gives access to product characteristics, the number of
items handled, and even time-stamps. In the case company, time-stamps have been utilized in

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measuring the actual time taken to perform tasks (See Varila et al., 2004). This can lead to very
accurate and versatile cost accounting.

One of the aims of better controllability is to ensure quality. This, however, has not worked as
expected. Especially, after the implementation phase of the automation system, quality disorders
were common. The situation has improved, but the result has not been in every way satisfactory. In
the manual process the role of software was supportive, whereas in the automated process it
completely guides and controls the operations. Down-time may cause a huge number of quality
defects because of very short through-put time of the automated delivery process. The customer
order cannot be fulfilled at a given time because the system runs out of capacity. Especially
problematic are software errors which are very difficult to trace. They are often a consequence of an
error in parameters or algorithms, which may consume a lot of time to find and fix.

The decision to invest in automation cannot be based on the cost differences between two stable
situations only. The time horizon plays an essential role in this decision. Cheap technology may be
more cost efficient in the short run, but incapable of being extended to meet the futures capacity
requirements. Expensive technology may prove to be more suitable if the system is expected to be
extended in the future. Technology becomes obsolete quickly and thus a thorough technological
analysis is needed along with cost analysis. Also the impact of technology on company image
cannot be underestimated. It gives a good impression to customers and forces also competitors to
improve their actions.

4 SUMMARY AND CONCLUSIONS

Like many other companies, the case company has heavily automated its warehouse logistics
activities during recent years. One of the main objectives has been to increase cost efficiency and
achieve better controllability over the material flow. Whether these objectives have been achieved
has been more or less ambiguous in the case company and in companies that have gone through
automation in general. This paper aimed at analyzing the effects that automation has had on costs
and on the practices for accounting them in a single case company. Two accounting situations were
analyzed in detail: one involving a manual process and the other a highly automated process.

Before analyzing the actual effects of automation on costs, a thought was given to how cost
accounting practices should change when moving from a manual to an automated environment. The
greatest source of all cost effects of automation seemed to be its inflexible nature. It requires
standard-sized load carriers to be used and only one type of load carrier to be handled at a time. In
addition, automation clearly increased the amount of some indirect costs. For example, electricity
costs doubled, a maintenance group was established, and a significant proportion of the time usage
of management and IT department has been consumed by automation-related issues. As a result, in
the costing system for the automated process, significant part of the costs are assigned through
automation to automated activities instead of direct labor.

In comparing the actual costs, it was observed that the absolute costs had increased, mainly thanks
to the huge and obvious increase in machine costs. However, in comparing volumes, the cost per
order line had dropped to less than half in the case of automation with average volumes. What is
noticeable regarding the cost structures is that the absolute labor costs had even increased
somewhat. A closer look at cost structures in different parts of the process reveals that the labor has
moved from picking and warehousing to the beginning and end of the process. This is because it
takes a lot of manual work to sort items at the beginning of the process and to palletize the separate
packages for transportation at the end of the process. Luckily, the cost savings achieved in

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warehousing and picking outweigh the cost increase in other parts, thus leading to an overall
increase in cost efficiency. However, if the objectives of automation are based on expected savings
in certain parts of the process, the result can be disappointing regarding other parts. Sub-
optimization could also lead to moving bottlenecks elsewhere instead of eliminating them. This is
of great significance, because according to Dadzie (1991) companies typically automate only a
limited number of activities. Therefore, as a managerial implication, it can be concluded that when
making a decision to automate materials handling activities, the process must be optimized as a
whole, not as separate parts.

Along with the direct cost effects in logistics activities, automation had several less obvious or less
expected impacts that are related to costs. Due to inflexibility and the use of standard load carriers,
the original packages of the items must be unpacked and cannot be utilized later for packing
customer orders. As a result, packaging material costs doubled after automation. In terms of quality,
automation has not completely fulfilled the high expectations of better controllability. The number
of quality disorders has remained quite high, but because the disorders are often result of an error in
parameters or algorithms, they are much more difficult and time-consuming to fix. Customers,
however, can see also the positive effects of automation, since from now on every customer order
has to be consolidated, thus leading to the possibility to order in smaller batches.

This paper has demonstrated some of the cost effects of automation in a single case-company.
Despite the limitations of the single case study, other companies in a similar situation may find food
for thought in this study. Management accounting researchers, for their part, seem not to be finished
with the work of exploring the effects of automation in their field.

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