All new projects must have a business case that demonstrates the value of the venture, so when building a business case for a Warehouse Management System (WMS), it’s essential to ask whether the investment is financially justifiable. Understanding when, how and to what extent a WMS will contribute towards process efficiencies and cost savings is key to making the right decision for your business.
When building a financial business case for a WMS, your intention should be to articulate a clear path to an attractive return on investment (ROI), including an evaluation of the expected benefits, the commercial aspects; such as the cost, investment and funding arrangements, the potential risks, the timescales involved, and rationale on the basis of its expected commercial benefit.
All businesses want to have a positive profit margin and reap a return on investment in their business activities. Thankfully, there’s no denying that Warehouse Management Software can have a significant impact on your warehouse processes. In fact, a WMS can provide specific benefits in gaining a strong Return on Investment (ROI). Such benefits include:
– Improving Processes in Inventory Management
– Reducing Likelihood of Human-Errors
– Optimising and Saving Space
– Improving Worker Productivity
– Reducing Labour Costs
– Improving Customer Service
Here we’ll help in defining the ROI from your WMS in 4 simple steps by considering the financial value of a project in relation to its cost:
Start by collecting all of your current expenses, not just consumables, such as paper, toner and ink, but also labour costs, such as wages, benefits, overtime, power usage, inventory adjustments, freight etc. If you wish to break these components down further, then please do so. Other costs that also need including are;
• Staff time spent unproductively; focus on the time spent waiting for a task to complete.
• Inventory adjustments (£ value); for finance reporting, the total £ value of adjustment (positive and negative) are summed, and the book inventory value is adjusted to reflect. For operations, try; the full £ value of adjustments and sum it to represent the £ value of inventory adjustments taken.
• Inventory adjustments (validity); 99.7% is a generally accepted standard. For those below this, either you are not fulfilling the demand from your warehouse, or you may have inaccuracies on your inventory.
• Labour cost calculations; calculate the cost (in labour) to perform re-work, re-stock, second cycle counts, re-shipping, mis-picks, orders picked during overtime, and order shipped during overtime. Then perform the same calculations in lost revenue where appropriate.
By now, you should have a spreadsheet with all recorded costs. The next step is to create a value statement for each expense, determining how a WMS implementation could improve your operation with cost savings expectations. By doing so, you’ll also be able to communicate your needs to warehouse management system vendors, to ensure you receive the bespoke services your warehouse requires.
By completing this activity, this should turn your costs into operational observations. For instance, referring back to ‘time spent unproductively’, the objective might be to reduce this by half, creating a potential 1 year saving of £8,000 or a 3 year saving of £24,000.
There are three aspects to every warehouse process:
• Process flow; the accomplishment of specific steps within your business
• Data flow; how electronic or written data travels through your organisation in relation to each activity
• Productivity; the measure you use to determine how much work has been completed
Each of these aspects must be understood, as gaining a credible return on investment relies on the measure of improvement in each.
Many WMS merchants offer you a ROI calculation that focuses on areas where they’ll bring cost savings. Accepting such calculation is recommended, but additionally, aim to perform independent, critical calculations within your company.
Understanding the benefits, ROI, and the impact of a WMS on your operations is good business after all, as with any business investment, it’s important that you get your money’s worth.
By following the 4 steps above, you will increase the credibility of your ROI calculations, helping you to build a strong business case for the potential implementation of a Warehouse Management System.