How to Make ROI Real

Dec. 1, 2004
Three Steps to Proving You'll Deliver a Return.

Experts will tell you that defining your business objectives is the first step in determining how to get the best return on your investment.

For example: If your objective is to get a quick payback all along your supply chain, and you think the application of radio frequency identification (RFID) technology is the way to go, forget it. Yes, RFID holds much promise and might even make you money in the long term; the short term is another story.

"Users are not thinking in terms of immediate ROI," says Monique Showalter, director of RFID marketing at Zebra Technologies. "They're thinking of compliance with mandates." She adds that an ROI on RFID technology could be six years down the road, or after you've implemented a full RFID solution into your business.

That's an example of return on your objectives.How do you predict the return on your investment? One way is to use the product-neutral formulas available on Web sites of numerous manufacturers of material handling equipment. Or, you can listen to those who've navigated the treacherous path to ROI.

Partners not suppliers
"Start-up curves for new production lines are much steeper now," says Tim Olsem, director, engineering at Pepsico. "While we focus on the total system cost, and an ROI of three to five years, we, like others, are also looking for onestopshopping when it comes to equipment suppliers."

He adds that part of his ROI process is to view the equipment supplier as a partner, not a supplier. "This gives us more commitment as we look for the long-term results rather than the short-term."

Allen Merritt, vice president, science and technology at Gold Kist, a poultry processing company, says the first thing you need to do when seeking the ROI to justify automation is create a roadmap.

"You have to define your need," says Merritt, "as well as the current and future players [ internal partners as well as technology partners and customers] in the project. And you must remain objective as you gather and provide the data."

He adds that the data you gather can also be used to leverage your ROI options or position with the boss during the justification process.

Another tip to keep in mind if yours is a large company, you probably have co-workers who have gone through this planning process. Tap into their knowledge to learn what is right and wrong for your particular product and industry. It will save you valuable time.

If you are the first in your company to undertake a major project, it might be beneficial to call in a consultant with experience in systems similar to what you're proposing. The advice here is that you're juggling time and money and you don't want to drop either.

What drives an investment?
"We can simulate a company's current manufacturing processes and transportation system, and compare it with competing alternatives," says Smith.

Manufacturing tends to be more acquisitionfocused than distribution because its always buying things. "Anything that has to do with making more of the product seems to get quicker approval," says Eric Smith, regional director-for ProModel, a company specializing simulation software and consulting. He says simulation increases the accuracy of what you're looking at because you can account for all the complexities of the interactions within a process.

And it's those alternatives that are critical. You have to make the up-front decision of what your business objectives are. Are you looking for survival or growth? Do you want to increase profits or market share?

"Each scenario is different," Smith explains. "If it's to be market share, a new machine with higher capacity might be the answer to current and future needs."

Smith says the benefit of simulating your current process provides a base to which you can apply any changes in process or acquisitions.

"We find," adds Smith, "many companies buy things that only exacerbate their problems. They don't know enough about their current processes because their investigative tools [for determining ROI] are inadequate."

Another important driver for determining return on investment is the concept of profit contributions. "Rather than look at what is the value of an acquisition, in terms of cost savings," suggests Smith, "look at value in terms of what is the unit profit to be obtained by moving the process from what you were doing to a new process." The benefit here is that you will maximize profits by minimizing purchases. Steve Boehm is business development manager at 3M. He says the company manufactures 60,000 products so he often finds himself on both sides of the ROI issue. "Most of our customers buying taping and sealing machines, as well as the consumables, are looking for a 12-month payback. And we probably do the same."

What matters most?
When the smoke clears, the leading driver for justification of a new material handling system or single piece of equipment, is order accuracy. You can build your product faster and with improved quality, however, without accurate order information, it won't matter.

"You can look at other things," suggests Merritt, "such as offsetting labor costs, but it's improved inventory management through accuracy that yields the ROI."

The point being made is that improved inventory management leads to many other aspects of material handling: less inventory means a smaller footprint is required for storage and equipment, for example. Improved inventory control means less material needs to be purchased or on hand.

As you define your project and look at alternative ways to create better inventory accuracy, keep in mind that you are spending your company's money and you must do so wisely. Constantly ask yourself what it is you have to do and what you can afford to do; what you should do and what you could do.

Advises Merritt, "There are a lot of 'what ifs' in ROI justification. You have to constantly be comparing what else you could be doing with the money you're proposing to spend."

It's not always about time
Sticking a number such as 18 months or two years on your ROI proposal might look good, however, there's more to ROI than quickly getting money back. There are intangible issues and people concerns you must beware of. Ken Thouvenot, vice president at FKI Logistex Company says when working with customers, they still look at a time-frame payback, and they're also looking at productivity.

"Productivity is always a major concern when people are looking at investing in a new palletizer, for example" says Thouvenot. "And safety and ergonomics, improving the workplace, are also near the top of their list these days."

He adds increased interest rates don't seem to be slowing down the buying momentum that is currently underway when people talk about ROI.

The axiom, "Without a map, any direction you head is the right one," doesn't hold when you're searching for a better return on your investments in material handling. As we've seen, knowing your objectives and alternatives, and compiling the right data either through observation or simulation, will go a long way in helping you achieve the results you plan for.

Six Steps Of ROI Planning

Mike Kotecki, vice president, HK Systems, offers the following steps in creating an ROI model of your project.

  • Define your planning horizon.
  • Define your objectives.
  • List alternatives.
  • Estimate cash flows for each alternative.
  • Compare alternatives.
  • Select the best alternative.

These steps are easier to visualize and follow on a spread sheet. If you're interested in the HK Systems company's tool kit, Cost Justifying Automation, visit the company's Web site, The tool kit includes an ROI tool, sample applications on Exel spreadsheets, a presentation on the process of justification and a sample application discussed in detail.

Here's Where To Start

Before you do anything, do your homework. If you'd like more information on the subject of generating a greater return on your investment, contact any of the following companies: