Most distribution center operations have seen significant increases in warehouse labor costs, as well as all time high lease costs for a new facility. These factors have driven more companies to consider warehouse automation to remain in the current facility longer and reduce the labor costs. These two cost components can radically increase your cost per order. However, this does not mean that companies should simply employ automation without achieving a cost-effective warehouse automation ROI.
One of the first aspects in determining the warehouse automation ROI is to ensure that the automated solutions being considered are realistic for your business. Many companies begin their process with some “YouTube shopping”, becoming enamored with a certain automation system. That skips over any detail consideration of current process, systems and costs.
Companies then try to make that automation fit within their order fulfillment process. This is when a Warehouse Automation Assessment will help determine what truly can work within your operations, and which technologies should be avoided.
A Warehouse Automation Assessment will also help to clearly define what your requirements, goals and needs are within the operations. It is very difficult to accurately measure the effectiveness and ROI, if you are not clear on what you are trying to solve or improve. The automation assessment should answer these important questions:
- Do you have an accurate baseline of your productivity by department?
- From your company’s business plan, what are the key targets that operations must meet in the next few years? These should include average week’s order volume, peak week order volume, units per order, peak storage required in units, order throughput response times, inventory and order accuracy, etc.
- How much will the proposed warehouse automation cost? This includes manufacturer’s systems costs, support agreements, increased personnel costs internally to support the solution, etc.
- How much does the warehouse automation cost to maintain over the life of the solution?
- How much will you save long term from better storage density, reduce labor costs and improved accuracies? How do these savings change over time?
- What is a realistic plan and timeframe given the changes in process required, training and implementation?
Avoiding Common Warehouse Automation ROI Mistakes
1. Define Assessment Process. Many people want to jump right to the warehouse automation investment, and have a salesperson tell them how quick they can get simple payback. However, it is important to establish a process for evaluating the proposed solution.
An evaluation of the design goals, internal costs and throughput rates required for your business is required. This ensures that you have done your due diligence and can accurately project the warehouse automation ROI. This due diligence is critical before signing a purchase order and giving a non-refundable deposit.
Do reference checks and site visits to understand these solution implementation costs, benefits and implementation.
2. Develop Realistic Design Goals. Be wary of salespeople that reference the manufacturer’s engineered throughput rates when calculating the ROI. Your product’s physical characteristics and fulfillment process will also need to be considered. This is especially true with order picking automation.
If a system has an engineered throughout rate of say 300 picks per hour, it is very likely you will not achieve this. You must consider the process that occurs in your operations. Throughput rate is affected by simple tasks such as having to polybag a picked item, counting numerous units for a SKU, labeling SKUs once picked, etc. Just considering the engineered throughput rate will lead to an inaccurate ROI.
3. Know Your Inventory Accuracy. Be sure you know current inventory accuracy rates at the bin level, as well as four wall inventory accuracy. Many systems can drive increased accuracies within the warehouse operations. But most companies that have a good warehouse management system and implement a disciplined cycle counting process will have less savings to be recouped.
If you have barcoded processes throughout fulfillment how much can your accuracy truly be increased? Some salespeople may present a wider gap in inventory accuracy to help reduce the ROI timeframes.
4. Determine Order Accuracy Metrics. As with inventory accuracy, do you know your current order accuracy on an on-going basis? The cost of a mis-picked order can be high and automated solutions can significantly reduce these errors. Be sure to factually know the percent of mis-picks and the cost of a picking error to calculate the warehouse automation ROI.
5. Changes in Headcount. The focus is often just on the decreases in headcount. Be sure to understand what increases in headcount are required. With certain automated solutions, there is additional staffing or skills that must be considered. The headcount is around two main areas: IT staff to manage the new system and required systems integrations to the WMS.
Additionally, are there automation maintenance techs required to keep the solution running optimally. These increases in headcount and wage rates are not always presented during the sales process.
6. Use Fully Loaded Labor Costs. Within a distribution center, the picking process is often one area with the greatest savings. Various automation technologies can increase the pick rate by three to four times the current rate. It is important to not just consider your base pay rates for labor.
Look at the fully loaded labor costs (i.e., wage rates, recruitment and hiring costs, benefit costs). Warehouse automation will certainly reduce the training costs, as well as the amount of time to have a worker reach maximum productivity.
7. Realistic ROI Timeframe. When considering the warehouse automation ROI timeframe, it is better to have the vendor state the typical timeframe to recoup the investment. From here you can evaluate how realistic the timeframe is given your processes, IT, automation needs and goals. Remember that only three things that can change the ROI.
These are the total cost of the system including your internal costs; the savings to be gained in future time periods; and the time to recoup the savings. If you do not know your current baselines, be wary of a salesperson that makes an ROI fit your timeline by simply overstating the expected savings. Especially without them knowing your business.
These are seven critical Assessment elements to prepare an accurate warehouse automation ROI.
Warehouse Automation ROI - Using an Assessment to Calculate ROI
As previously discussed, a warehouse automation assessment is the most complete way to truly understand the following:
- Processes and operations to automate. An Assessment will objectively help you to determine which functions should be automated and can gain a favorable ROI. Our assessments help educate clients on the warehouse automation market also.
- Automation versus conventional process. An Assessment will provide an objective understanding of how proposed technologies can improve the operations long term versus remaining as a traditional warehouse with conventional processes. This process considers the changes in SKU assortment, changes in sales channels your business plan, and changes in your supply chain.
- Technology deployment and your business plan. An understanding of which technologies were evaluated but were determined to not be good options based on your goals and needs. Salesmen can only propose specific solutions for companies they represent. Our automation assessment considers all technologies available for application in the distribution industry. These assessments assist to prove out all reasonable technologies and educate clients on all aspects.
- Cost/Benefit objectives determined. An objective review of your current costs and potential savings based on improvements that could be made by implementing automation. Our process includes an in-depth review of the fully loaded labor costs, storage costs, as well as inventory and order accuracy costs.
A Warehouse Automation Assessment is a structured methodology to evaluate your current operation, growth plans and business goals and to determine which processes will have a favorable ROI. It is critical to the due diligence process for any automation project before investing in automation.