When an organization decides to invest in an automated material handling system for their warehouse, fulfillment center or distribution center, return on investment (ROI) is frequently a large part of the justification for the expenditure. More specifically, companies want to design a system that maximizes their ROI — whatever it may be.
That’s why the most important parameter in defining and measuring ROI success is the one that must be determined at the outset of the project: what is the primary objective of the system? This goal is the benchmark against which all design options and equipment choices will be weighed.
Typically, companies seek automation for one (or more) key reasons. These include:
1. Reduction of labor costs. It’s getting harder and harder to staff a warehouse as the current labor pool is aging, and younger workers are less interested in these types of jobs. Adding automation allows an operation to do the same amount of work (or more) with fewer people; it also never gets sick or injured, takes lunch breaks, or requires benefits such as healthcare and vacation time. Labor savings is often one of the biggest contributors to an automated system’s projected ROI.
2. Increased accuracy, efficiency, throughput, and/or capacity in the same space. Building a new facility or expanding a current one is expensive and time consuming. Implementing automation maximizes existing floorspace while improving handling speed at higher volumes with significantly fewer errors than manual operations. Further, today’s operations — particularly those in e-commerce retail — must cope with increasing order complexity, a vast proliferation of stock keeping units (SKUs), and intense competition. The ability of automation to help cope with all of these factors further enhance a project’s overall ROI.
3. Support for additional revenue generation and growth. Plans to expand product lines, add more inventory, or serve new customers — and the anticipated boost to the bottom line that’s expected to follow — is often a key consideration when justifying and calculating anticipated the ROI of an automated system design.
4. Ability to meet customer expectations. With today’s e-commerce shoppers expecting fast (and free) next-day delivery — and, in some cases, same-day delivery — of a broad and continuously growing variety of products, an investment in automation can help increase order fulfillment speed and accuracy. This, in turn, helps to secure current customer loyalty and attract new business, driving growth in revenue that maximizes ROI.
Payback is often measured in years (3-5 versus 7-10), but there are a variety of other design decisions and factors that contribute to ROI calculations. By working with an experienced systems designer and integrator — and sharing those objectives — the optimal design that meets all goals can be selected.
Variables That Impact ROI
Keeping the ultimate ROI objective in mind when creating potential system designs and specifying the equipment to be installed means, in turn, the evaluation of a variety of choices and potential trade-offs. These choices may also yield additional, and possibly unanticipated, benefits that further contribute to — or detract from — the ultimate ROI goals.
1. Equipment availability – Automation is hot right now, and original equipment manufacturers (OEMs) are often several months out on delivery. The projected delivery timeframe may have a minor, or substantial, impact on the target ROI.
2. Equipment cost – A less expensive system may deliver a quicker ROI, but if it’s unreliable or not the right fit for the operation, it may not carry the most impactful ROI. Or, worse, degrade or even negate the overall expected returns.
3. Implementation time (and associated downtime) – Installing, testing, and commissioning a new system in an existing space not only takes time, but it also impacts the rest of the operation. Downtime will be necessary in certain areas as the new components are added. That operational disruption will need to be accommodated and timed to have the least amount of impact on overall productivity — and on total ROI.
4. Ongoing maintenance costs – Automation may not take breaks like humans, but it does need regular preventive maintenance and service. The frequency and complexity of those service needs, as well as the determination of who is to provide that service (in-house technicians or contracted service providers), will impact the overall ROI of the project.
5. Equipment efficiency – The amount of power the system uses may, or may not, impact the total ROI of the project.
6. Improved ergonomics – Automating dull, dangerous, repetitive tasks not only improves worker efficiency, it also improves overall employee ergonomics by handling heavier loads, bringing goods to the operator, minimizing walking time, eliminating bending, stretching, reaching, and so on. With better ergonomics often comes a reduction in workplace injuries, which can have a positive impact on worker’s compensation costs. This, too, can contribute to potential system ROI.
7. Reallocation of labor to higher value tasks – If employees are freed from the mundane and routine tasks, they can be reallocated to other areas within the operation where they add higher value. Returns processing, specialized packaging, kitting, quality control, and other tasks that cannot be automated offer a tangible positive impact to overall automation ROI.
8. Effective employee training – Because automation is designed to be intuitive — often including visual cues and other prompts about how to correctly perform required process tasks — time required to train and on-board new employees (or current employees who are new to the system) is greatly reduced. This enables workers to be more productive sooner than they would be learning a new, manual task. Further, with automation freeing up employees from more rudimentary, lower value work, they can be cross-trained on different processes and in different areas of a fulfillment center. This allows an operation to re-allocate employees from one zone to another to assist with increased workload demands during the day or in peak seasons. The increased flexibility accommodates the need for additional headcount when called for by order demand, while reducing dependence on temporary labor and further enhancing ROI.
9. Strategic system design – Perhaps a fully automated, end-to-end solution won’t be as effective as selecting different systems for different process areas. Generally, just as one-size-fits-all never applies to automated warehousing and distribution, the same goes for different processes. Strategically deploying automated storage and retrieval systems (AS/RS) in one area, autonomous mobile robots in another, and put walls in a third might be the key to successfully maximizing overall project ROI, rather than assuming a single system will address a facility’s needs.
Working with an experienced system designer and integrator can help to sort out all the automation options and help you determine which design will ultimately deliver the maximum ROI based on your company’s unique objectives. Need help? Connect with us.
Curt Kincaid, Vice President of Solutions, email@example.com
With nearly 20 years of experience in supply chain, warehouse operations and distribution center design, engineering and management, Curt Kincaid brings a background in mechanical engineering and hands-on expertise from all sides of the industry: as an operations manager for shippers and third-party logistics (3PL) solutions providers, and with two systems integrators.