When presented with an opportunity to automate your warehouse operations, what are the chances you’ll be asked, “What’s the ROI?” Not to worry, calculating ROI on process improvements may not seem as daunting as you think.
The first step in determining the ROI to improve your warehouse operations is to take a look at your process today – whether it is a manual, paper-driven process, or a semi-automated process. From the receiving dock to the quality department, to inventory and pick, pack and ship, where do the challenges, bottlenecks and errors most likely occur? Chances are your labor force spends a lot of time looking for correct inventory locations, trying to match up items with orders, managing out-of-stock issues, and focusing on shipping the right product to the right customer. Once you’ve identified the areas in which the bottlenecks occur, evaluate the resources you have and the time it takes today. Then you’ll want to make some assumptions based on new technology, or automating where process is manual now, and determine the time it would take to perform the same task in your warehouse. For example:
Consider a consumer goods warehouse and distribution facility with a paper-based, manual picking process. With a large number of orders each day, locating stock items is a time-consuming task and vulnerable to picking errors. The packing process is also manual and errors occur most often on multi-item orders. In cases like this, duplicate items would be shipped in error, or items would be missing from the order altogether. The current error rate is 2.5% of total annual shipments.
# Pickers & Shippers = 8
# Shipments Per Day = 450
# Hours in Work Day = 8
Average # Picking & Shipping Errors Per Month = 225
Average cost to correct an error = $100 (includes labor and inventory costs)
Resulting in $270,000 a year in errors.
Now you can estimate the cost savings of automating the process by making a few assumptions:
- Automating the picking process using a warehouse management solution with bar code labeling and scanning / mobile computer devices will save 3 labor hours per day. Time savings primarily in locating inventory and picking the orders.
- Automating the packing process with bar code automation will save 1 hour per day. Time and cost savings in matching up order information with packed items to prevent missing or duplicate items.
- Estimated percent reduction in picking/packing errors = 95%
Once you’ve made some assumptions, you’ll be able to calculate the savings as a result of upgrading or automating these processes.
Based on the figures above:
Expense BEFORE Automating: $270,000 in errors annually
Expense AFTER Automating: $13,500 in errors annually, and 4 hours/day labor savings
ROI: < 1 year
Of course this is an oversimplified example, so you’ll need to pull in the professionals to help you develop the “real” numbers. Be sure to select a solution provider who can tour your facility and provide additional recommendations on automation improvements for your business. From there they will be able to recommend the optimal devices and software for your workflow and provide you with an accurate ROI to help you create a plan and budget!
Need help calculating your ROI on a solution that will change the flow of business for you? Request a complimentary ROI Analysis!