The Achilles heel of a warehouse based online service

The fire at Ocado’s brand new automated, robotic warehouse in Andover has exposed a fundamental weakness of its warehouse based strategy. A very small number of units are absolutely central to the operation and taking one out – as has happened here – can have a huge impact on the business.

In fact Andover was still building up. Had the fire happened a year later the impact would have been far far worse.

How could it have happened?

There’s still much to learn from this fire and most comment at the moment has to be speculation. But how was it that the fire took hold and left the warehouse completely devastated when there was an ‘award winning’ sprinkler system in place? Reports suggest that the sprinkler system was ‘correctly activated’. Was it Arson, or was it just an accident? In time we should find out.

Andover was far from operating at full capacity. Ocado says that it was satisfying 10% of current demand, and was running at about half capacity.

A note on capacity

There are 3 other CFCs – the original in Hatfield, Dordon north of Birmingham, and a new one in Erith in south East London. Andover was planned to satisfy 60,000 orders a week far less than the 200,000 orders per week planned in Erith, though some of that is pledged to Morrisons. Those figures compare with an average of 296,000 orders per week for the whole business in 2018. So there should be capacity in the system to absorb the loss of Andover, except that the journey time from any of the existing warehouses to the Andover region must be at least 2 hours, without taking into account that the journey involves using the M25.

The core of the business

The warehouse was the first entirely robotic warehouse and marked a major step forward in warehouse technology. One of the problems for Ocado from the start was that the warehouse technology capable of handling such a high volume business just did not exist. Ocado has had to develop it itself and it is that expertise that it has been able to sell around the world, to the extent that it is already involved in developing over 20 CFCs over the next three years working with Sobeys, Casino, Kroger and ICA. Technological development is absolutely central to the business and a great example of its success is that the new, fourth CFC, in Erith, South East London, achieved a capacity in 3 weeks that took Andover 32 weeks to reach.

Inherent vulnerability

The fire highlights the underlying vulnerability of Ocado’s warehouse picking strategy. It may be that operating as it does should be more efficient in the longer term, but it highlights how much the company depends on a very small number of very high tech units. If a Tesco warehouse burnt down, it would probably be able to replace the lost capacity quickly by renting space in other warehouses. If a superstore burnt down, the impact on group sales would be barely noticeable. But Ocado can’t just go out and rent warehouse space because it’s the high tech picking capability that it needs.

Longer term impact

The capacity lost is much less than it would have been if Andover had been working at full capacity, but its short term loss will severely inhibit Ocado’s expansion plans. A fifth CFC was expected to be announced in early 2019, but now Ocado has to rebuild Andover as well. Insurance will cover some, perhaps most, of the extra cost.

The longer terms damage, though is more difficult to assess.

For example:

How much will customer service suffer, especially among new recruits in the Andover region?

To what extent will the City lose faith in the business?

How will all those foreign retailers who have signed up to the system feel about it now? Although there are encouraging reports that at least two of the international partners have already pledged to continue.

Will the loss of Andover affect the Morrisons deal? Morrisons was due to take space in Erith, so may not be too badly affected.

And what about the rumour of a tie up with M&S? This seemed to us to make a lot of sense for both sides. Ocado’s current deal with Waitrose runs until September 2020 and if it were not to be renewed it would leave a big gap in Ocado’s appeal which M&S would be able to fill well. And from the other point of view, it would be a great way for M&S to develop an online food offer.

Where next?

This fire hits right at the heart of the Ocado business. It’s not just the impact on service levels in the short term, it’s much more about trust in the operation in the longer term. For Ocado the strategy will be one of damage limitation – understanding how it could have happened and taking steps to prevent a recurrence.

Back to top