Senthil Angamuthu, Steve Nation and Jeff Wrona
When a company wants to implement a new WMS system, it is always a question of cost vs. benefit. A company should realize that this technology could provide significant operational and financial benefits to their organization. Most companies, however, are uncertain about how to cost-justify the potential spend. We will explore cost-justification further in a moment, but first let’s identify the reasons to implement WMS.
There are many valid reasons for wanting to implement WMS or increase the functionality and capability of your existing WMS solution:
- The need to keep pace with competitors
- Comply with trading partner requirements
- Maintain customer confidence
- Move with the times by adopting new technology
- Increased accuracy and productivity
However, when it comes to justifying expenditure, you need to take a hard look at the way your distribution centers are currently operating in order to see how the increased functionality is going to repay the investment. It may also be useful to consider what the additional functionality is intended to deliver and ask yourself, do I have these capabilities in the warehouse/DC right now?
Benefits and Value
A good WMS should be able to:
- Give high levels of productivity and accuracy.
- Help to achieve a consistently high level of utilization of manpower and equipment.
- Ensure that your warehouse team works to disciplined processes.
- Sustain a very high level of efficiency.
In addition, you would expect the WMS reporting and analysis tools to give you detailed management information and historical traceability of stock movements. And you’d expect it to be able to exchange information with other software applications, whether your own, those of your customers, suppliers or whomever.
Inventory control is also an obvious benefit because no business wants to be stuck with too much — or too little — product. It also makes the best use of employee’s time. “If you have 100 percent accurate reporting as to the locations of everything, and the system directs everyone on where to go to get it, staff will not be traveling up and down the aisles of the warehouse looking for the required items.”..
So knowing how operations should function in your warehouse is the first step to calculating your ROI. If you know your operations lack some of these things, or that they are unsatisfactory you may have a clear idea about what providing or improving them will be worth to you. If it’s not clear, then ask yourself these questions:
- What problems or pains in our warehouse operations do we have?
- What do these problems relate to?
Remember that the system will not automatically resolve all problems. Where there are operational issues, they will need to be addressed in relation to the operation of the system. A system will improve many things but it needs to work in conjunction with correct operational practice.
Calculating Cost and Payback
At this point, understanding how much the solution might cost, and how soon you might expect to achieve payback is useful. As a very simple example, if a solution costs $175,000 and you want to achieve payback within 24 months, then you need to realize benefits of around $7,300 per month. This is not a complex, scientific approach, merely a quick way to look at the savings that the system needs to generate.
So how do we achieve payback? There are different ways to look at this, but at the simplest level, payback is gained by increasing productivity, accuracy and efficiency at existing cost levels, or by maintaining current productivity, accuracy, and efficiency while reducing costs. Payback is the initial period of return on investment where directly related costs are recovered. Once that is achieved, savings become a return in the truest sense.
There are many other dimensions to the payback question:
For example, what value can be placed on being in a position to accept more business from new or existing customers due to the efficiency of your warehouse operation?
Equally, how much benefit is there in maintaining a winning reputation for efficiency, not just with your customers, but with any person or organization whose business has an interface with your operation?
To remain focused on the operational side, and determine specifically where savings will be made, you will need to consider these sorts of questions:
- Are your labor resources performing near optimum productivity?
If not, then some of that resource is wasted. The first priority of an efficient operation is to ensure that whatever resource is paid for is fully employed.
- Are certain tasks or processes inefficient?
If so, money is being wasted while staff spends time on things that could be done more efficiently, especially when they could be performing other duties.
- How many put away, replenishment, and pick errors are occurring currently?
Errors due to inaccuracy cost dearly to rectify in terms of labor, management time, extra handling, transport and related paperwork.
- Are practices being supported that could be eliminated by the introduction of the WMS functionality?
In a typical operation there will be activities, especially peripheral or supporting ones that could be eliminated altogether.
- Are inventory levels too high or being held for too long?
It is recognized that greater stock accuracy means stock-holding can be reduced and stock turn improved, so the associated cost of holding stock can be reduced.
These are some key areas to examine in your operation, and for each one there may be considerable detail. There could also be unique operational considerations, where improvement might incur major benefits for the operation. Turning the answers to these questions into meaningful figures will therefore involve some time and effort.
It is likely that both high-end and low end-figures will be produced regarding potential savings in each area. This is normal, as until the new functionality is implemented and the user learning curve has passed, optimum efficiency and productivity cannot be quantified precisely.
Some areas will improve within expectations while others may exceed it. Ultimately the preceding exercise is very worthwhile. Its purpose is that you can be confident, first by implementing the WMS functionality that will provide benefits for the company, and second, that the benefits gained result in a timely payback and prompt return on investment.
Senthil Angamuthu, is an industry veteran in Supply Chain Execution where he directed and worked with several WMS implementations in Retail and CPG industries. He is currently working as President of Exxova’s Retail and SCM practice. He started his career with Manhattan Associates and later worked as an Analyst at American Retail Group. He was also the founder of S3 Group, Inc a supply chain management and consulting firm and built the company with clients like Hugo Boss, Ferragamo, APL etc..
Steve Nation is a VP of Business Development in EXXOVA, Inc, a management consulting firm specialized in ERP implementation and Supply Chain Management. He started his career in Supply Chain operations with Georgia-Pacific Corporation and then spent several years with Pitney Bowes implementing WMS and TMS solutions in CPG, HiTech and Food and Beverage industries. Steve also worked as a Director of Business Development at S3 Group, Inc, a supply chain management and consulting firm where he directed and built the practice around CPG and Retail industries.
Jeff Wrona is with Exxova, Inc as Operations Director in their Retail and SCM practice. Mr. Wrona, is a Warehouse Management consultant with over 25 years of Industry experience in CPG, Apparel and Fashion Industries. The organizations that Jeff has supported have ranged from small American companies to large Japanese global conglomerates. Prior to that Jeff was Director of Operations in S3 Group, Inc where he directed and executed several Manhattan Associates implementation and upgrade projects.