It's Payback Time!

Jan. 1, 2003
Material handling automation can make a big difference on the bottom line. All you have to do is prove it. Here's how.

Ready for the ProMat show? Got your exhibitor list all marked up? Technology hot buttons identified? Ready to find a deal?

Not so fast. Before you head to Chicago, make sure you head upstairs to get upper management’s buy-in. And do it soon. You have lots of competition for their attention. After all, the economy is still shaky and the CFO wants sure things when it comes to capital investments. Is material handling technology a good bet? Even consultants are finding it a hard sell. Ask Jack Bonanno, vice president of Sedlak.

“We aren’t losing work to our competition, but to the uncomfortable question management is asking these days: ‘Do we really want to do this project?’ I believe material handling projects are put on the back burner. It used to be if our client could achieve a two-year payback, that was pretty reassuring. Today, people want more immediate paybacks.”

Jeff Hutchinson, associate partner with Accenture, agrees, adding that competition for capital funding in his clients’ organizations is fierce.

“A supply chain person will be competing against engineering and R&D for the dollars they want,” he says. “The individual material handling components, from conveyor to RF, are much more of a commodity, and the software players are heading in the same direction. The challenge is to show how you support the bottom line, showing what the payback can be, and getting that approved before you can get a pilot project up and going.”

That said, there are effective ways to make your case for material handling automation. These include new strategies for proving ROI, gaining creative financing, crafting contracts, even soliciting requests for proposal. Consider these strategies before giving another thought to any technology-specific fix you may have been contemplating.

When is your ROI?

Today’s fast-paced business environment and shorter product life cycles call for faster returns on investment for material handling equipment and systems. Paul O’Connell, president of Operations Concepts Inc. (OCI), says two years used to be the standard.

“End users are spending months doing the ROI before they purchase equipment,” he says. “Those who do Activity-Based Costing [ABC] can get a one-year ROI. They know down to the penny what it costs to make their product or to provide the service they offer.”

ABC requires quarterly updates to your costing structures, although many companies that do business internationally do it on a monthly basis. The challenge is to maintain accurate record keeping and a knowledgeable management staff willing to report the changing costs within their environments in a researchable fashion.

“These systems rely on data accuracy,” O’Connell continues. “The best companies teach their engineers, warehouse managers and line supervisors how to make sure their data are correct. Measures of productivity are now being put in the workplace in areas that have never seen it before. In a receiving department, you’re no longer being looked at for your ability to receive X number of pallets; you’re being judged on your ability to reduce the number of adjustments made to the purchase order, receive X number of pallets an hour and provide fast, efficient and accurate crossdocking to all areas throughout the DC or manufacturing plant.”

ROI can no longer be confined by organizational walls, either. As more data about inventory is shared among supply chain partners, so, too, must cost data be made available and understood.

“In grocery, there’s more awareness of what supply chain costs are,” says Dave Jefferys, manager integrated system sales, Siemens Dematic. “For example, if I were to pack product on pallets at a warehouse that is store friendly, when it got to the store the pallet could be placed in an aisle dedicated to those products. That makes it much easier to replenish that one aisle off that one pallet. While it might cost three extra people in the warehouse to make sure all the product that arrives on that pallet is right for that aisle of the store, it might save me a person per store. If I have 600 stores, it can save me 600 people. Another consideration is there’s less stock per delivery to the store but multiple deliveries. This might give you higher distribution costs but greater product availability and increased sales. It’s those sorts of things people are looking at, the whole supply chain rather than just one area of it.”

Lean before mean

ROI is calculated in different ways, depending on an industry’s supply chain dynamics. This calculation can help you determine the right balance between material handling hardware and software. One casket maker wishes it had known that before investing in an automated storage and retrieval system (AS/RS). It’s since come to learn that leaner is better.

“Lean manufacturing takes the geography out of the process and reduces material handling,” explains Sam Swoyer, vice president, TBM Consulting Group. “At the end of the line, this casket manufacturer would put the finished product into an AS/RS. The reason it was there is there was all this handling to try to get the loads configured to the truck schedules.

“By working on the flexibility of the assembly line and the downloading of requirements from DCs to this plant, we were able to improve the flexibility so they could go directly to the truck. If they’re taking a load of caskets from the plant to region A, the line schedule is predicated on the truckload that would leave first thing in the morning. That had an impact on the necessity of this AS/RS. We didn’t eliminate it because there are some times you can’t run to the truck schedule. But now it’s only 30 percent of the solution as opposed to 100 percent.”

This company obviously didn’t expect its operations could get leaner before it bought the AS/RS. And expectations are a major element in ROI calculation.

Just gotta survive

Sometimes investments don’t have returns. They’re just the cost of doing business. Bill Zilich, director of project management for FKI Logistex, Integration Division, remembers a conversation he had with the program manager at the new UPS Air Hub in Louisville, Kentucky.

“When I asked him what the return on investment [for the material handling systems] was, he said there was no financial ROI. That hub was built strictly to provide customer service,” Zilich recalls. “You have to look at it as a way to stay in business in this depleted economy. More and more, companies aren’t looking for ROI, they’re looking at what they have to do to survive.”

Indeed, sometimes ROI can be misused as a selling tool by unethical salesmen who don’t understand the intricacies that go with it. Rick Duris, president of Business Technology Group Inc., systems integrators, says he’s seen his share of marketing hype on the topic.

“These guys are barking up the wrong tree, because in this economy, nobody’s thinking about investment,” Duris says. “I submit that every CEO waking up in the morning isn’t thinking about how to best invest his money. He’s thinking about survival. When I do systems consulting, I tell clients I may not be able to give you an ROI in a year, but I won’t impact your cash flow. I’ll give you terms so you can pay for the project out of the profits generated. The opportunity for vendors is to get into creative financing.”

Be creative

Fran Korosec, manager of business development for material handling solutions at Lockheed Martin, says that to help justify an automation project, sometimes it helps to employ creative contracting methods.

“A creative contracting approach that Lockheed Martin has used in the past is where we are compensated based on improvement in the customer’s operation,” he says. “Payment for the system comes from a percentage of operational cost savings achieved. If there are no savings, then there is no payment. If there are savings, then the payment amount becomes a variable commensurate with the savings realized.”

Korosec adds that for this to work, a mutually beneficial arrangement needs to be developed between the contractor and the customer, and special attention must be paid to developing a very clear, concise and, most importantly, measurable “statement of work” that defines the project deliverables and measures of success.

Sedlak’s Jack Bonanno says leasing is proving to be a good way for both parties in an agreement to benefit from automation.

“Because there’s risk associated with sitting on large capital investments in material handling systems and distribution centers, more and more companies are going to leasing terms,” he says. “That eliminates some of the risk in having all that capital sit as an asset. One major manufacturer bought one of our clients and owned all the buildings and material handling equipment. Now they’re looking at ways to take that capital off the books and lease back the facilities. It takes that fixed capital and puts it in their pocket.”

Material handling equipment vendors are also getting into leasing. Markem Corporation, a provider of identification systems, software, supplies and services for product coding and marking, teamed up with B.L.I. Leasing Company to offer customers several creative leasing programs. These include a 90-day trial, which lets customers use the equipment without committing to purchase. The vendor also offers graduated payment plans, allowing customers to start with lower payments and “graduate” to higher payments as the equipment generates more income. There are even seasonal payment plans where customers can match their lease to their business cycle, paying more when they are in their busy seasons and less in their “off” season.

Even when you are looking to buy, you can take months out of the process by being creative during your requests for proposal (RFPs).

“A traditional RFP process for a solution may not make sense anymore,” says Accenture’s Jeff Hutchinson. “If I issue a blind RFP saying ‘Here are my requirements, now give me your cost back for it,’ vendors will make themselves look great, but until you start making the phone calls and digging in, you won’t really know. We suggest assuming they all do the basics, and look instead at what’s unique about your business. If you look at your unique requirements first, then get down to one or two vendors that can meet them, you can do a simplified RFP to get a cost quote in 30 to 60 days. You’ll get a better answer and cut your RFP process in half.”

Get it in writing

Whether you’re talking about contracts, leases or RFPs, their terms must be clearly stated, and relationships and responsibilities should be easily understood. For example, what happens when the system for which you contracted fails? Any contract between you and a supplier should spell out what constitutes a failure, including its effects and the time to repair the system, according to John S. Usher, a professor in the Department of Industrial Engineering at the University of Louisville.

“Reliability, availability, and maintainability are commonly used concepts,” he adds. “However, the supplier may simply rely on intuition and experience, and hope the system is designed well enough to meet these goals.”

Usher suggests you ask the following questions:

• Is the system robust to variation in operating conditions?

• Is it modular and, thus, easy to repair?

• If one component fails, does the whole system fail or can other parts still operate?

Knowing the answers to these questions will help you answer other questions like:

• How many repair technicians should I staff?

• How many spare parts do I keep on hand?

• How often do I do preventive maintenance?

The answers to these questions will give you the clearest picture of automation’s ROI in your environment.

In our March issue, Part 2 in this series will go deeper into the financial justification of an automation project. Is it better to build your material handling system gradually over time or should you subscribe to the “Big Bang” theory?

Who Are the Stakeholders?

Ken Cordes, director of project management for FKI Logistex, Crisplant, says he requires input from every stakeholder in an automation project.

“During the sales phase we identify what customers are looking for from us and work closely with them to try to identify how they’ll operate the machine, get a feel for how strong their operations are, then try to tailor a system that fits their needs best,” he explains. “The project managers in charge of putting in the system sometimes have a different set of expectations from the folks who will be operating the system, so when you talk about software implementation, remember maintenance operations might not have had a lot of automation in the past.

“Maybe we’re going into a DC where they’ve had a manual system, or minor, non-integrated automation. We may find the maintenance or operations folks aren’t well equipped to own and operate the system. We’ve invited our customers to be actively involved with the project. Typically we involve whoever will be main-taining the system so they can ensure all the lights are going on the right way, all the trays are tilting and all the belts are turning.

“When we do operations testing we try to involve their operations folks to make sure of expectations from a product conveyability standpoint. We want these folks to know the design constraints we built the system around. Which packages are too big to go down this slide? What’s a bad bar code and a good bar code?

“We typically ask if the project manager will be different from the people who will be owning it. That allows us to take a different path because we want the project manager to be successful within their organization. They’re the ones who typically have to justify the ROI.”

Phasing In Automation — Starting With WMS

The State of Mississippi Alcohol Beverage Distribution operation, because it is a state government entity, sees money for logistics projects maybe once every 20 years, according to Kevin Hume, director for the consulting services of ESYNC.

“So the systems purchased and the operational design have to be both responsive to operational changes and bulletproof to support such a long service life,” he continues. “For some clients, WMS technology has become more of a cost of doing business in order to compete with the service levels, operational efficiencies and visibility of their WMS-enabled competitors. That’s where the ROI comes in. In Mississippi’s case, WMS was a guiding hand to determine the most effective use of the available funds.

The state of Mississippi’s liquor distribution operations are supported by an enterprise environment that lacked real-time control. ESYNC specified the WMS functional requirements, conveyor control requirements, carton and pallet flow rack and a completely redesigned layout for the state’s fulfillment operations. All this is being done inside an existing building with on-going fulfillment operations.

The transition to the new system will occur in two phases. The first phase includes construction of new picking mezzanines and installation of conveyor and flow rack to support two pick lines through to shipping. This phase will focus on the operational changes and the communication between order management and the conveyor control system. In phase two, the WMS (System 21 from Geac) will be integrated with the conveyor control system and operational changes.

“By limiting the scope of phase one to the major operational changes, and communication of orders between order management and conveyor control, we can focus on the customer facing elements first,” Hume adds. “In this phased environment, the customer can be insulated from the operational challenges of integrating WMS technology at the same time major operational changes occur. If we had attempted to implement the operational changes, conveyor control and WMS in a single effort, the implementation footprint and associated risks from both a customer service and operational perspective would be immense.”

Cutover 1 is scheduled for August 30 and Cutover 2 is September 30. WMS configuration will be completed as this issue of MHM goes to press.

“There’s been a year of planning to this point,” Hume concludes. “The state’s mandate was to develop the most flexible and durable operational environment that is capable of supporting whatever operational challenges may unfold in the next 20 years.”

Another multi-phase WMS deployment was recently completed by Haworth Inc., the world’s second largest designer, manufacturer and marketer of office furniture and seating. It launched irista’s iristaWarehouse application as the first step in a multi-phase deployment that will ultimately integrate the WMS with Haworth’s Oracle Applications ERP and Manugistics’ Transportation Management Systems. By choosing this best-of-breed approach, Haworth is able to apply these solutions while streamlining its distribution operations and improving customer service through on-time and accurate deliveries, according to Michael Moon Sr., vice president, Global Information Services.

“Successful implementation of a new system tends to be measured on how quickly you can reduce the length of the dip in productivity that always comes with new system startups and gain the benefits promised,” Moon says. “We were able to move quickly beyond the startup and already are starting to achieve planned benefits.”

For more information ...

... on the material discussed in this article, use the following contacts:


B.L.I. Leasing Company,

Beaver Materials Handling Co., (416) 746-7471

Business Technology Group Inc.,

Carter & Burgess,

Contech Systems Inc.,


FKI Logistex, Crisplant,

FKI Logistex, Integration Division,

FYX Inc.,

Geac, System 21,


Lockheed Martin,


Markem Corporation,

Operations Concepts Inc.,


Siemens Dematic,

TBM Consulting Group,

University of Louisville, Department of Industrial Engineering, [email protected]

W&H Systems Inc.,

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