Before new warehouse management software (WMS) can be advocated, a company must first know the business implications associated with adopting it. This involves projecting future savings and estimating the implementation costs. In the last blog we outlined how to identify and dollarize the key areas where financial savings can be achieved. This blog covers how to estimate the WMS implementation costs.
Determine the Solution Budget
Now that the company has a sense of the potential savings which are available, they must next determine how much they are willing to invest to achieve those savings. A good starting point is to ask what payback period is acceptable on the investment. Multiplying this payback period by the projected annual savings can establish a rudimentary budgetary figure for the maximum the company wants to spend on a solution. Companies shouldn’t forget ongoing costs as well – most WMS providers charge anywhere from 18% to 22% of the software license fee as a recurring annual support cost to keep the system current and rectify problems.
Solicit Feedback from Potential WMS Vendors
The cost of implementing WMS software can vary tremendously based upon factors like operational complexity, degree of customization, and user and site count. Experienced resources who have participated in multiple implementations over many years can often help estimate the general costs associated with the project. However, in order to get an estimate that is precise enough to satisfy most internal financial review processes, it is usually important to have dialogue on some level with actual WMS vendors. At this stage of the process, it is not usually advisable to embark on a full vendor selection study which can take many months of work. However, conducting an abbreviated “feasibility” analysis process can often be effective at this phase. The major steps to a feasibility analysis include:
Create a Challenging Functionality Matrix
In software implementations, the Pareto principle often applies: 80% of the problems are caused by 20% of the process requirements. In order to have any degree of confidence in a vendor’s costing quote, the vendor must be made well aware of “the 20%” and factor this into their pricing estimate. To facilitate this, list the processes which the company believes will be the most challenging for a new WMS to accommodate. This is not the full Detailed Process Specification, but a small subset of ten or twenty key process at most, which are expected to be most difficult to achieve from a software perspective. These are compiled into a small spreadsheet which lists them in a concise format, called the Challenging Functionality Matrix. Next to each line item of functionality, vendors must indicate whether this feature is available as standard functionality, or whether it requires extensive configuration or customization to achieve.
The company next identifies five or six potential WMS vendors to share the Challenging Functionality Matrix with. If the company chooses to proceed later with a full WMS vendor selection process, they will not be limited to only use the five or six vendors chosen for the feasibility analysis. These vendors should represent a range of vendor types, from Tier 1 to mid-tier vendors, as well as specialty vendors who may have a focus on the particular industry type in question. It is important to understand the basic pricing and functional capabilities that each vendor can provide.
Vendors Complete the Challenging Functionality Matrix
Vendors review the Challenging Functionality Matrix and indicate where their software must be customized to accommodate this functionality. Vendors complete a Budgetary Request for Proposal and indicate approximate cost of their software with implementation. It is important to remember again that this is not a full WMS Vendor Selection Study. Vendors should spend no more than a couple of days completing this information, not the weeks of time which will be required later on.
Don’t Ignore Current Software
The same Challenging Functionality Matrix should also be distributed and reviewed with the support team for the existing software platform. If one of the options under consideration is retaining or upgrading this software, then it will be important to have an estimate of the cost and level of effort required to do this.
Stay tuned. The next blog in this series, Build the Business Case – The Sixth Step in Selecting the Right WMS, will outline how to compile a well-rounded business case which examines the various options which are available to a company. Can’t wait? Read the white paper, How to Choose the Right WMS – Part I: Distribution Center Process Optimization.