WOBURN, MASS. (FORTUNE Small Business Magazine) - Deep inside a drab industrial park, a pair of foot-high, Labrador-sized robots - No. 306 and No. 20 - are motoring on a collision course. Each carries a shelving unit - one packed with boxes of books, china, and groceries; the other, mechanical parts - and as they chug industriously along, unaware of each other's presence, I cringe. I can picture the coming crash, the smashed plates clattering across the floor. But just before they hit, the robots come to a quick stop. No. 20 abruptly pivots 90 degrees to the right - clicking once, sharply, as it does so - and heads off in another direction. No. 306 continues forward, safely carrying its cargo to its intended destination.

While Nos. 20 and 306 carry out their polite pas de deux, the other robots of their 30-strong fleet glide around me. I am standing in a 20,000-square-foot warehouse, watching Mick Mountz - the clean-cut, subdued keeper of the robots - demonstrate what he believes will become the future of warehouse automation. Mountz is the founder of Kiva Systems (kivasystems.com), a three-year-old startup that promises to double or triple the productivity of its clients' distribution centers. So far, he has secured nearly $7 million in venture funding and enticed more than 35 potential clients to meet the robots.

If Mountz's systems work as well as he says they do, he has solved a problem that has dogged companies for ages: how to efficiently automate warehouses. "Pick and pack" - selecting the relevant product from a warehouse and placing it into an outgoing box - presents the most intractable challenge. Companies lose money when workers stand around waiting for a conveyor belt or carousel to pass them boxes or products. Operators have to find time to restock the machines and shelves. Even the most successful firms struggle to keep costs down. In 2005, Amazon.com spent about $193 million on order fulfillment, up 16% from the previous year.

"Picking is generally the larger labor component of the warehouse operation," says Bob Silverman, president of Gross & Associates, based in Woodbridge, N.J., a materials-handling consultant for companies such as Tommy Hilfiger. "The steps you take to improve productivity in picking have the biggest impact on your bottom line."

Mountz devised his solution about four years ago when he experienced a sudden brainstorm: What if you could tell a warehouse to bring a nonstop stream of products directly to the packers?

That's pretty much what is happening in this warehouse, which is infused with a constant sense of movement. There are no storage racks bolted to the floor or walls. Instead, dozens of robots slide under the four-foot shelving units, lift them, and carry them to pickers, human employees stationed around the warehouse's perimeter. The robots are even programmed to use a lift elevator, which they take to bring shelves to and from a mezzanine, ten feet above the warehouse floor. The robots are controlled by software that keeps track of their location and the location of every item and every shelf. When a picker scans an order, the software determines the closest shelf that carries that item and zaps the mission via wireless signal to the nearest available robot. The robots, moving at a walking pace, deliver the shelf to the picking station, where a laser pointer automatically illuminates the item for the picker.

Most warehouses require intense organization; every widget must be placed on the appropriate shelf with other identical widgets, or it risks getting lost. With Kiva, items and shelves can be placed anywhere in the storeroom and don't need to be returned to the same place - the software keeps track of where everything is. The result is a dynamic warehouse, where locations of shelves and items are constantly changing. Mountz says the increased flexibility means that Kiva's pickers can work on several jobs at once, filling orders that contain as many as 600 products in an hour. That's three times faster than other automated systems.

Kiva charges $1 million for its "starter kit" - five pick-and-pack stations, 30 robots, and 300 shelves, which take up 20,000 square feet. Equipping a 100,000-square-foot warehouse with a Kiva system costs $4 million to $6 million. (Equipping the same warehouse with a traditional automated system - carousels, warehouse-management software, and automated vehicles - costs somewhere between $5 million and $10 million.)

Right now, only two Kiva-equipped warehouses exist. The original, where I'm standing, sits inside Kiva headquarters in Woburn, Mass., about 15 miles north of Boston. The other takes up one-fifth of Staples' Chambersburg, Pa., distribution center. Kiva signed a contract last fall with Staples to build out a 100,000-square-foot Kiva system and showed up in Chambersburg in March to install it. Based on its software, Kiva determined that Staples needed 30 robots and about 500 shelving units. But if Staples decides it wants to expand the warehouse, Kiva can ship additional robots - an unlimited amount within three months - and add more shelves.

Staples hasn't made that decision yet. "The system worked really well during the pilot program - we saw some huge productivity gains," says Don Ralph, senior vice president of logistic operations for Staples North American Delivery. "But as with any new technology, we have to see whether the product can withstand the stress of what our system will place on it."

Other observers are less optimistic about Kiva's chances, saying that many warehouses won't benefit at all from the technology. "I can't see anyone storing refrigerators or washing machines this way," says warehouse management consultant Ken Ackerman, who is also the editor and publisher of Warehousing Forum, a warehouse logistics newsletter.

Mountz is used to facing skeptics. As a marketing manager at Apple in the late 1990s, he oversaw the launch of the Power Mac G4 desktop computer, Apple's foray into the business market. In 1999, Mountz took a job at Webvan, the short-lived web-based grocery-delivery company headquartered near San Francisco, and it was there that he learned the challenges of warehouse automation. "Webvan spent more than $30 filling each order. Its business model called for something in the $10-to-$15 range," says Mountz. "There was no good, cost-effective equipment or technology."

Webvan's problems inspired Mountz's design for Kiva. In 2002, one year after leaving Webvan, he began peddling his idea to warehouse operators and college friends, recruiting alumni from Caltech and MIT to help build a prototype. Kiva was incorporated in 2003, a year that saw Mountz spend 300 days on the road, consulting with eight potential clients to hone his concept and soliciting venture capital firms. In the second quarter of 2004, Kiva unveiled its first functional pick-and-pack system: five robots and 16 shelving units, covering a 5,000-square-foot area. For inventory, Mountz and his then six-person crew used empty yogurt containers, cereal boxes, and software packaging.

In the fall of 2004, Mountz finally landed pilot-program contracts with two companies willing to test the technology. Staples deployed a small system in one of its Dallas warehouses, and Genco, a company that provides logistics services to other businesses, such as Hershey, built a system in its Lebanon, Pa., warehouse. In December, Boston's Bain Capital Ventures led the investment of $6.5 million in Kiva (Clearwater Capital, a venture capital firm based in Sewickley, Pa., invested about $1 million in 2003). Earlier this spring, Genco and Staples signed on to deploy small Kiva systems in their working warehouses.

Kiva still has a way to go before its technology becomes a mainstay. Analysts say that until Kiva can produce concrete data proving the system saves customers money and time, warehouse operators will have a hard time justifying purchase of the technology. "They're a group of very talented individuals - they deliver quality with this sense of urgency," says Staples' Ralph. "But as with any company their size, as they grow and expand, will they be able to keep it up?"

Back at Kiva headquarters, Mountz doesn't seem particularly worried. He's talking about how the area around Boston is rich with manufacturing talent, so when the time comes to ramp up production for his two newest customers - he hasn't announced them yet - he'll be ready. Suddenly he trails off midsentence. A robot's bleat, the only noise coming from the maze of silent bots, has captured his attention. "It's letting us know it needs to be recharged," he says, watching it roll to the sidelines toward the charging rack. "Have you ever seen anything as cool as that?"

1. When a packer receives an order, he enters it in Kiva's software system, which tracks the warehouse's inventory as well as the location of every product and shelf.

2. The software finds the nearest available products and directs robots to deliver the shelving units to the pick-and-pack station.

3. There, a laser pointer automatically illuminates the product on the shelf and the box in which it should be packed.

4. Afterward, the robot carries the shelving unit to the nearest vacant spot.