Before new warehouse management software (WMS) can be advocated, a company must first know the business implications associated with adopting it. This involves identifying and dollarizing the key areas where financial savings can be achieved.
A key area where most companies cost-justify a WMS purchase is in direct labor savings. To this end, it is important to properly allocate labor, or, determine the amount of labor required to perform each task in the distribution center. There are many methods to do this. Perfect precision is usually not required here, so companies will generally not need to resort to engineered time studies at this stage. The goal is to determine in a typical day the number of man-hours required to execute each major type of transaction, based first on the current state processes.
Then, in the same manner that labor was allocated to current processes, labor also needs to be projected for the future processes. The same spreadsheet approach is often sufficient here as well. Estimate the amount of future labor which is required to execute each task. Sometimes it can be helpful to model pick travel paths and assess the amount of labor required in a typical day with the new processes compared to the old. Some third-party pick-path modeling tools are available that can construct a rudimentary model of this data that is less precise than a true time-study, but more than sufficient for these purposes.
Estimated labor savings can often be “sanity checked” by looking at industry benchmarks in areas which lend themselves well to comparison across companies, such as “lines picked per hour per worker.” Projected savings from process re-engineering can be compared to typical productivity rates which other companies have realized, and a realistic estimate of labor savings can be achieved.
It is also important at this stage to try to quantify the savings which can be achieved from improved customer service. What is the true cost to rectify a miss-shipment? How often do these errors lead to lost business? If a company ships to major retailers, how much do they spend annually on charge-backs due to non-compliant shipments?
A less common area where WMS systems can lead to operational savings is in the area of space utilization. WMS systems can help companies improve their slotting and “right-size” bins in the warehouse. This can often lead to compressed storage footprints and more efficient use of space. Under some circumstances, it makes sense to include space savings in the financial justification for a new WMS. In Commonwealth’s opinion, however, these savings should only be included if (a) they are directly attributable to the new WMS, and not some other technology, and (b) the space which is saved can be directly monetized, i.e. by reducing the need to pay for outside storage space or delaying a facility expansion.
A case can also be made that WMS system can help reduce inventory in some instances. Often the additional data that a WMS can collect on handling steps and the number of times a product is touched during its lifecycle in the distribution center can be used to raise awareness of true inventory carrying costs and can help build the case for more efficient inventory management processes. All of these factors must be taken into account for each area of the warehouse which is being considered. The output of this step is a projected annualized operational savings for each category.
Other Financial Considerations
Of course, not all companies deploy new WMS systems with the primary goal of achieving operational savings. Other common reasons for implementing a WMS include:
- Scalability: Enabling new processes which will allow the company to grow more quickly than otherwise would be possible.
- Revenue growth: A new WMS system may allow the company to offer new services such as e-commerce distribution which would have been difficult to do without technology.
- Supportability: Many companies may have functioning WMS systems that support the business needs, but which are legacy systems that are no longer easily supportable. They may have been internally developed, and the resources who understand the code base and architecture may be growing fewer every year. Implementing a new WMS may be critical to an ongoing risk-mitigation plan.
While these other considerations may be harder to “dollarize,” they should be factored into the financial justification for a new WMS in some way.
Stay tuned. The next blog in this series, Estimate Implementation Costs – The Fifth Step in Selecting the Right WMS, will outline how a company can determine how much they should invest to achieve the projected savings. Can’t wait? Read the white paper, How to Choose the Right WMS – Part I: Distribution Center Process Optimization.