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How to get an excellent ROI on the acquisition of a WMS

4 years ago
Rita K
What factors contribute to an excellent ROI on the acquisition of a WMS?
A world class Warehouse Management System is expensive.  Most valuable things are.  How can a company anticipate the benefit to be realized from the installation of a function-rich WMS?
There are several factors that ought to be considered.  While this is not an exhaustive list, some factors to consider include:
Inventory quantity, value, turnover and availability
Operating costs, including personnel, facility, equipment and error rates
Customer satisfaction, including out-of-stock, order error and returns
Because every business is unique, there are a host of opportunities for cost reduction and profit enhancement that will differ from company to company.  Let’s look at where your business can improve in these areas.
Inventory accuracy can be a serious problem.  If you don’t know what you have, you can’t know what you need, whether you can fill orders, or how much racking space you require?
Are you missing shipments on orders?  How fast can you grow if you don’t know how many customers have abandoned you?
Having accurate real-time inventory is critical to maintaining optimal inventory levels.  That means both min / max levels for your “everyday” products, but also having the correct amount of inventory for peaks and valleys, not only for your “general” inventory, but also for merchandise that may be seasonal.
This requires both a perfect record of inventory every moment of the day, but also the ability to integrate historical and projected sales information into your purchasing function – connecting on hand inventory with future demand. 
Further integrating lead times from various suppliers is also essential, because you can’t necessarily get inventory “just in time,” if it’s coming from China and must be manufactured prior to shipment.
Finally, if you ship from multiple locations, it is imperative to know what inventory is at each location and where the optimal shipping point may be.  This can be a complicated equation if a customer orders three items and two are available in a shipping location near the customer, but all three are available in a more distant facility.  Do you ship two shipments, or select the more distant shipping location, but ship the whole order together?  This will depend on shipping cost, packing configuration and other factors.
Inventory must be easy to add, as well.  If your business requires bringing in new products frequently, it will be very important that the inclusion of new items into your inventory be fast and easy.
Inventory must be recognized as individual items, but also must be able to be assembled into kits.  Value added services (special packaging, adding coupons, etc.) must also be facilitated by your WMS.
An excellent WMS will provide all these advantages while simultaneously allowing you to reduce your warehouse staff and maintain the smallest possible facility, thereby reducing facility cost.  Only an excellent WMS permits the densest inventory storage while allowing peak picking efficiency and real-time, transparent inventory awareness.  Perfect inventory awareness also eliminates the need for shutting down your operation to conduct annual inventory counts.  Instead, any discrepancy ought to generate a cycle count of the particular item, a resolution of any discrepancy and the continued perfect accuracy of your inventory records.
If we assume a company with two warehouses, with 10 warehouse staff in each and the prospect of increasing the size of one of the warehouses by 25%, it is easy to calculate what a significant savings an excellent WMS could offer.
Assume the average warehouse worker earns $18 per hour, with a burden rate of 25%, for a total of $22.50 per hour.  The annual wage cost for each warehouse would be about $45,000 per warehouse worker, or $450,000 in wage costs per warehouse, for a total of $900,000 in warehouse wages annually. 
By eliminating two warehouse workers in each location, the savings could be $180,000 annually.
Additionally, if a more efficient operation allowed the company to delay moving to a larger facility, the savings can be anticipated as follows.  Assume the current facility is 50,000 square feet.  Assume a new facility would be 75,000 square feet.  Assume that each facility would rent at $0.75 per square foot (that is almost certainly a conservative assumption because the new facility rent would probably at a higher rate per square foot, as rate keep rising in most commercial real estate markets).  The rent in the old facility would be about $450,000 per year.  The rent in a new larger facility would be $675,000 per year, an increase of $225,000 per year.  By using dense storage techniques while also achieving greater labor efficiency, the savings in reducing two warehouse staff per location and delaying the move to a larger warehouse would therefore save over $400,000 per year!
But wait!  There’s more!
Operating Costs
Without an excellent WMS most companies 1) lose orders (resulting in lost customers), 2) find missing items at shipping and have to delay shipment and re-pick orders, 3) move inventory (because they keep “like” inventory in the same area, resulting in moving other inventory when new shipments arrive (i.e., when the “widgets” are on the rack beside the “wodgets,”  and a new order of “widgets” is about to arrive, the “wodgets” are moved to another rack so that the incoming “widgets” can be put away adjacent to the existing inventory of “widgets.”), 4) shut down the facility to conduct annual counts of inventory, 5) pay excessive freight charges because of ineffective “cartonization” and weight discrepancies, 6) suffer excessive equipment costs because they have too many forklifts and other material handling equipment because inventory is not put away in optimal locations, 7) pick inefficiently because pickers are not routed on optimal paths.
Perhaps your company has additional inefficiencies that will add to this list.
An excellent WMS will cure all these problems.
Lost orders are a thing of the past because all orders become paperless and until an order is picked and shipped, it remains on the system and cannot be lost, or deleted.
Orders are picked correctly and completely the first time and every time, because the inventory is 100% accurate.  The cost of lost orders and the consequent frustration suffered by your customers can be very difficult to calculate, because you simply don’t know how much future business you might have lost.  If your “fill rate” is less than 95% and an excellent WMS can improve that to 99.5%, it is only necessary to imagine what an increase in sales of 4.5% would equate to.  If your sales are $25 million per year, that number is $1,125,000 per year.  Obviously, that potential will depend on how many orders you might be losing today.  But, if you analyze your “fill rate” and see it’s anywhere under 99%, you have a huge opportunity for increased sales and profit.  Unfilled and lost orders cause your customers to seek other suppliers.  This is a very real number and you owe it to your company to try to calculate your lost opportunity cost.
Inventory need never be moved to keep all the “widgets” together.  Because all inventory locations become virtual, putaway can be directed by the WMS and picking activities are directed by RF handheld devices to where the inventory is.  Additionally, when it makes sense to group inventory in a particular location (e.g., fast moving items should be close to the shipping station) an excellent WMS will accommodate those opportunities for increased efficiency.  Again, it isn’t easy to calculate the exact cost of inefficiency in this context, some assumptions must be made.  If, as calculated above, your annual wage cost for warehouse staff is $900,000 and 5% of their time is spent moving inventory to make room for incoming shipments, or doing other non-productive inventory movement, that cost would be $45,000 per year.  Nobody likes to admit that their warehouse staff is unproductive 5% of the time, but if you are moving inventory unnecessarily, it’s almost certainly that costly.
Because inventory is 100% accurate in real time there is never again a need to shut down to conduct a physical inventory.  This will save most companies several days each year of lost production.  Instead, if there is ever an inaccuracy in the inventory (e.g., a warehouse worker has picked something from the wrong bin) the next time a pick is directed to that location the quantity will be verified, initiating a cycle count, which will once again, put the inventory back into perfect accuracy.  If you have to shut down your facility even for a single day (and most companies that conduct physical inventory counts shut down for two to three days) the cost in lost shipments, unnecessary labor and the attendant administrative cost of entering data and reconciling inventory levels can be extreme.  Every company is different, but it is not unusual for annual physical inventory counts to cost in excess of $25,000 each year.  This is usually an unrecognized cost.  Every business ought to take a serious stab at determining the cost of conducting an annual physical inventory.  An excellent WMS will eliminate this cost entirely.
Many companies ship too much air.  Excessive freight charges due to wrong carton sizes are very expensive and even if your customer is paying those freight charges, they are annoyed when they receive a large carton containing a small item.  Additionally, UPS and FedEx are now back-charging for weight discrepancies, which cannot be charged back to your customers.  Together the impact of not having an excellent WMS that ensures packages are correctly cartonized to optimize shipping methodology and cost and dispatched with accurate weights and measurements to UPS and Fed Ex can be extremely expensive.  This is another category that must be assessed by each individual company.  Suffice to say that the cost is probably a great deal higher than you are accounting for.  At the very least for a company with sales of $25 million annually, the cost is in excess of $10,000 per year.
Equipment costs can be dramatically reduced when an excellent WMS is in place.  Having inventory located in the most efficient locations and directing warehouse staff to pick using the correct equipment will significantly reduce operating costs.  The example of inadvertently sending a picker out to pick an item off the fourth level of a rack with only a pallet jack illustrates the cost of inefficient processes and not assigning the correct equipment to the tasks assigned to the warehouse worker.  Also, by increasing receiving, putaway and picking efficiency, fewer forklifts are required.  Integrating material handling automation further decreases operating costs.  All of this can be easily accomplished with an excellent WMS.  Time and motion studies must be conducted to get an accurate cost of inefficient use of equipment and the failure to integrate automated material handling systems.  After the facility itself, people are almost always the largest warehouse expense.  By looking at how much more efficiently an individual employee could work (e.g., with the correct equipment, picking methodology and appropriate automation) and extrapolating that savings across your entire warehouse staff, a rough estimate (at least) can be established for potential savings.  While each company may find that the number of forklifts required is reduced, there is additional capital cost (but reduced operating expense) to bring in material handling automation.  Most companies with sales in excess of $25 million annually conclude that the savings in equipment cost and labor cost reduction amount to over $100,000 annually.
Optimal picking routes for warehouse workers can offer big savings in operating costs.  In many companies two forklifts can be sent to the same aisle.  Workers can be directed to the four corners of the facility to pick a single order.  Assigning equipment and personnel the most efficient way offers a proven path to operating cost savings.  Picking items in a wave, instead of picking by order, allows consolidation of picked inventory at the shipping station, rather than in a tote assigned to a single warehouse worker.  When a company picks “by order” and uses paper pick lists, the cost is huge and usually invisible.  Instead, using an excellent WMS and RF technology, items are picked for a wave of orders and put together at the shipping station.  As such, worker 1 picks all the red widgets, worker 2 picks all the blue widgets and worker 3 picks all the purple widgets.  All picked inventory is brought to the shipping station where it is consolidated to particular orders (e.g., order 1 has a red, a blue and a purple widget, order 2 has three purple widgets, and order 3 has two blue and a red widget – these were only assembled into orders at shipping).  It is typical to see a 25% increase in labor efficiency when going from a “paper” system to an excellent WMS using RF technology.  Again, using the example of a company with $900,000 in warehouse wages, that savings can be as high as $225,000 each year.  Moreover, workers are sent on the most efficient paths for putaway and picking.  Congestion in warehouse aisles is eliminated and picking accuracy is greatly improved.
Customer Satisfaction
Mistakes cost money.  An excellent WMS will also offer sophisticated order management processes and will be tightly integrated to billing, shipping and purchasing functions.  The data generated by inventory transactions is automatically and instantly transferred to such other systems as appropriate.  The elimination of manual data entry guarantees a huge improvement in error rate.  People inputting data make mistakes.  An excellent WMS with tight integration to other systems does not.  Mistakes cost money in a variety of ways.  Customers are annoyed if their orders are incorrect, improperly billed, late, or cancelled.  Returns must be processed smoothly and without error.  This can only be accomplished with an excellent WMS.  Every company should do a thorough audit of error rates from every source (inventory, billing, returns, data input, etc.) and assess what level of improvement could be achieved.  A 95% fulfillment rate might sound impressive, but that really means that 5% of your shipments were wrong!  Add to that the cost of customer dissatisfaction because of errors made in processing returns and (to add insult to injury) the cost of improperly handling returned inventory (repackaging, returning damaged inventory to stock, etc.). The cost in lost sales due to customer dissatisfaction can be enormous.  The cost of inventory inaccuracy because of bad “return-to-stock” processes can be huge and, even worse, the cause of future fulfillment errors.  It is not uncommon for companies to have an invisible cost of $100,000 per year due to unrecognized customer dissatisfaction.  This figure grows annually, as well, because every lost customer is lost forever, meaning that the roster of customers lost forever grows each year.
The numbers are gigantic.  For a company with $25 million in sales and two 50,000 square foot warehouses with 10 warehouse workers in each warehouse the cost in lost sales could be as high as $2,300,000 per year.  Assuming a 12% pretax profit on those sales, that’s over $275,000 in lost profit each year.  Indeed, the lost profit is typically higher than that, because the incremental sales that could be achieved by purchasing an world-class WMS are always more profitable because fixed costs are already absorbed by existing sales.
Conservatively, such a company would almost certainly enjoy increased profit of over $300,000 annually.
In conclusion, it’s quite interesting to examine the reasons most companies purchase a new, world-class WMS.  It typically relates to their a) inventory accuracy levels, b) inventory value to sales ratio, c) facility limitations, d) shipping cost management, e) compliance with shipping partners technology, f) customer demands for better interface (particularly with B-to-B customers) and / or g) adding a new business (such as adding 3PL services to an existing distribution business).  Often the benefits of solving these challenges are sufficient to drive a company to seek out a new, world-class WMS.  When that company looks at the opportunity for increased sales and profits as a separate and distinct advantage to be achieved, the WMS decision becomes very simple.
Where do you find a cost-effective, world-class WMS?
You already have.
Take control.