Automation's ROI: A Hard Look at Soft Benefits

Competitive pressures and the after-effects of a recession are making the soft benefits of automated material handling hard to ignore these days.

Numbers people never had much use for a crystal ball when calculating the return on investment for automated material handling. When it came to spending their company's money, they were fundamentalists, relying on labor based, asset based calculations that showed tangible savings inside their four walls. That was the universe they understood.

The most recent recession changed a lot of numbers people's religions. First, they stopped spending altogether. Then as the economy gradually improved, and business started coming back, they had to play catch-up. But somehow their universe had changed. Savings inside their four walls wouldn't be enough to give their companies a competitive advantage. Customers had new demands for products and service. Suppliers had varying abilities to cooperate in meeting those demands. A new vision was needed — outward into the supply chain and inward into a new ROI philosophy.

Even Scanning Gets the CEO's Attention

Brian Paul is one of those responsible for establishing that vision for his company. As vice president of operations for Impact Products, based in Toledo, OH, he knew that his company's vision was being blocked by reams of paper. Impact wants to see itself as the premier provider of cleaning and janitorial supplies to industrial distributors. Its broad product offering includes more than 2,000 SKUs, some of which require personalization.

That was no longer manageable with their manual shipping and receiving processes. Paul realized that when he did an eye-opening workflow analysis.

“Once you have that in front of you then you can start seeing where you can automate,” he says. “Instead of having someone re-key something into an RF terminal, you can automate that so it's just a scan. A lot of customer specific requirements come through a sales order. In our operation they were notes on the top of the order. We determined we could eliminate that by electronically presenting that information to our shipping personnel as they were processing and palletizing the order.”

Impact's small package processing operations involved manually weighing each carton and hand entering information into the system. Paul realized that by eliminating paper and automating that process they could eliminate errors and deliver information on a real time basis to people vs. waiting for information. This was information his CEO was ready to hear.

“We knew we could reduce actual direct labor,” Paul said. “We also knew we had to answer to our president and CEO and our board of directors regarding ROI. They were eager to move forward on the project after I made a presentation because of the impact it would have on our cost structure. They realized automation would help us get where we wanted to go as a company and help us make best use of our facility. We wanted to be in position to handle business opportunities that came our way via acquisition or core growth.”

The immediate opportunity lay in establishing communication between customers and customer service. Impact's customers want to minimize freight by consolidating orders. To do that, Impact would have to know what their customers' requirements would be so it could automate the process. After looking at several system vendors, Impact decided to work with Interlink Technologies and Psion Teklogix to automate its fulfillment system.

Part of the system's ROI lay in soft justifications that might not have been factored in only a few years ago.

“I can train someone in our shipping area in a matter of a few hours where it used to take us days because there were too many variables coming through the paper solution,” Paul explains. “Now there's just a fixed format. We've put people on our shipping line without the need for them to have any tribal knowledge.”

The core ROI of this system comes from a clear view of the fulfillment operations.

“My management team can now see what's going on in the whole process, where before much of this information was on multiple pieces of paper and there was no way to assimilate it,” he adds. “It's like sitting in a control room of a ship and all the windows are painted black. With the knowledge we've gained over the last year we've seen pockets of opportunity where people now have more time in their day. We're able to use those people in our cycle counting process, which is now real time at the location level. We've also implemented a very aggressive cycle counting process which has dramatically improved our location accuracy in the warehouse. That improves our efficiency and reduces our costs. In the old system I'd have had to add people to the payroll to get the same results.”

The bottom-line ROI was based on a reduction in labor of about 20%. Paul says that expectation was met from the day the system went live, simply by eliminating all the re-keying of data. The return will continue as Impact is now open to opportunities for corporate growth through acquisition and through better supply chain communications with suppliers and customers.

Paybacks Upstream and Downstream

The providers of logistics technology realize that their own success depends on helping clients achieve a quick ROI, so they're doing so by establishing collaborative relationships with them. Mike Kotecki, senior vice president of HK Systems, says there's pent-up demand for these solutions, therefore more willingness to partner — and to consider the softer side of ROI.

“I'm hearing customers more creatively and more open-mindedly approach ROI and look for things that are traditionally a little softer like product damage and employee satisfaction, sales value, depreciation, flexibility, growth potential, visibility, things that are a little less easy to quantify,” he says. “They hope to come out of this recession with a more technological solution than just hiring five forklift guys back.”

But Tom Brady, vice president of Intelligrated's solution development group, doesn't think this customer attitude is solely the result of a troubled economy. He thinks customers have been getting ready to adopt a new attitude toward automation for at least five years.

“What I'm seeing almost uniformly with customers now is a holistic approach to ROI,” he says. “Years ago if you were looking to do something in a distribution center you only considered what went on in that DC. Now folks are looking at how a change in process affects upstream and downstream processes. They're looking at net end-to-end supply chain performance. Before, it was the logistics team that was involved in this for their DC. We used to fight the silo game, where the distribution folks had different metrics and performance criteria than the transportation folks, and transportation was sometimes in conflict with store operations, and store operations were sometimes in conflict with the merchants and the buyers. Now you're getting all those people involved in the process.”

This holistic approach to ROI is more tolerant of potential losses in some areas if the overall benefit shows significant benefit to the enterprise. For example, in a retail supply chain, there is often a focus on store operations. The thinking is, by taking one or two people out of every store through improved store efficiencies, it may be worth a little extra labor in the DC if the net overall effect for the organization is a plus.

Even environmental sustainability gets factored into many ROI calculations these days. For example, Brady says there have been changes in packaging as a result of this focus. That means lighter cartons, partial cartons and shrink wraps with trays that affect how companies handle product.

“From a net-landed-performance perspective,” he explains, “that's OK if I have to change those operations so I can do the right thing socially. In the process I'm driving cost out of the overall supply chain.”

Transportation Factored In

Soft justifications tend to harden with time and desperation. An organization's managers, with their backs against the wall competitively, often allow qualitative benefits to be assigned quantitative values. The 3-5% improvements of years past are no longer enough for companies that have low-cost global competitors. They're trying to find 30% improvement in efficiencies. That can often be found in transportation.

Bill Torrens, director of sales and marketing for RMT Robotics, tells of a tire manufacturer that put in a gantry-based AS/RS to eliminate labor in a distribution center. However, they also found they were able to load trailers in route-stop sequence. So instead of sending trailers to satellite DCs, unloading them and shipping to customers from those sites, they were able to deliver directly to customers.

“Not only did they deliver those tires within 24 hours when the industry standard was 48-72, but when they got to the satellite distribution centers they were half full. Now their satellite DCs only had to be half the size of what they were before. Their savings outside the building were larger than the savings inside the building,” Torrens says.

In a global economy built on supply chain vs. supply chain competition, combining material handling and logistics factors yields a solid ROI.

Feature/Benefit Analysis

If taking a supply chain view of the ROI of material handling and logistics automation sounds like too much work, Ken Ruehrdanz feels your pain. That's why, as industry manager for Dematic Corporation, a global supplier of integrated material handling solutions and services, he's come up with the following “rules of thumb” list managers can start with to match automation's features to their chief pay-backs.

Feature ROI
Smaller system footprint Reduced building cost/land cost
High density storage Less cost to operate
Load sequencing Precise load building
Less staff Less labor to operate
FIFO rotation Use oldest product first
Controlled access to inventory Omit potential of theft
Improved inventory control Omit “lost in the warehouse” products
Inventory accuracy Improved order accuracy (inaccurate orders are very expensive)
Computer control Real time control of inventory
Reduced product damage Lower costs
Fewer fork
trucks required
Safer, & eliminate damage to rack, facility and products
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