A successful warehouse management system (WMS) implementation can provide an 18-24 month requirements include: compliance labeling, floor ready displays, advanced ship notices, into account the added cost in damaged customer relations a facility's unique product, movement, and storage characteristics
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WAREHOUSE MANAGEMENT SYSTEM BUSINESS CASE DEVELOPMENT Warehouse Management System Business Case Development
2www.highjump.com
Table of Contents
INTRODUCTION
3BUSINESS CASE DEVELOPMENT 3
ECONOMIC PRESENTATION
4NET PRESENT VALUE
5PAYBACK PERIOD
5SENSITIVITY ANALYSIS
5BENEFIT CATEGORIES
6BUILDING BLOCKS
7INVENTORY ACCURACY 7
FEWER ERRORS
7TANGIBLE
8 LABOR 8DIRECT LABOR
8CLUSTER PICKING
10BATCH PICKING
10BONUS COVERAGE
12INDIRECT LABOR
13ADMINISTRATIVE LABOR
13INVENTORY 15
CARRYING COST 16
INVENTORY WRITE-OFF 17
PHYSICAL INVENTORY COUNT 17
SHIPPING ACCURACY 17
SPACE 18BONUS COVERAGE - WAREHOUSE IN A WAREHOUSE
18EQUIPMENT 19
SALES 20DEMURRAGE
20EXPEDITING
20PAPERWORK 20
INTANGIBLE
21CUSTOMER SERVICE
21PERFORMANCE MEASUREMENT 21
MANAGEMENT INFORMATION
22BONUS COVERAGE - WAREHOUSE MOBILITY 22
WORKLOAD MANAGEMENT 23
EDI REQUIREMENTS
23VALUE ADDED SERVICES
23EMPLOYEE SATISFACTION
23EMPLOYEE LEARNING CURVE
23VISIBILITY 24
MISPLACED ORDERS
24CYCLE TIME
24UPGRADE PATHS
24SYSTEM AVAILABILITY 24
USER GROUP NETWORKING
24CHANGE MANAGEMENT 24
CONCLUSION
25APPENDIX 26
Warehouse Management System Business Case Development3www.highjump.com
INTRODUCTION
A successful warehouse management system (WMS) implementation can provide an18-24 month return on investment. A WMS also serves as a foundation for instituting a
material available at the right place and at the right time is no longer enough. The new postponement, light manufacturing, and collaboration. Leading companies are realizing minute. Many of the processes and activities being managed and monitored by Supply Chain Event Management (SCEM) applications relate directly to warehouse operations. As the focus on SCEM applications continues to grow, the need for real-time activity organization. implement a new system could depend on a solid business case. A good business caseBUSINESS CASE DEVELOPMENT
What if investment cost estimates miss the mark completely? What if assumptions are business case for your new system implementation. A sound business case is critical to obtaining the management and employee support so important to a successful system implementation. The business case will consist of investment of the project over the same planning horizon. Table 1 summarizes the general investment categories associated with a WMS implementation project.Investment Category% of TotalExamples
30 - 60License, database, server, printers, PCs, access points, scanners
System Integration30 - 35Consultants, operational changesSoftware Vendor
Assistance10 - 15Professional services, project management, ǻ WAREHOUSE MANAGEMENT SYSTEM BUSINESS CASE DEVELOPMENTCost is a consideration but not
a critical decision factor for our distribution facilities. Our distribution operations are a constraint controllingThe faster I can get product shipped
out to customers, the faster I can add cash to our organization." - VP of Distribution for aUS pharmaceutical company
Warehouse Management System Business Case Development4www.highjump.com
ǻ5 - 10Interface programming
Storage Lanes Internal
Corporate Costs
5 - 10ǻ
Contingency & Other5 - 15Just in case money
Annual Maintenance15 - 20Normally priced as a percent of the contract valueTable 1: WMS Investment Summary
The business case will focus on the operating cost savings estimates resulting from development is critical. If it is one person"s estimate, suspicion will be high. If however, the estimates are composite opinions of a representative group (the development team) it is more likely to be widely accepted. Figure 1 highlights several of the areas a WMS canFigure 1: WMS Impact on Shareholder Value
your rivals gain a competitive advantage over you through a major technology shift, your company"s very survival may depend on following suit with a similar technology investment. losing business. The narrative in the business case will be used to describe intangibleECONOMIC PRESENTATION
Remember, your WMS project is just one of potentially many projects competing for your of the WMS in the warehouse, senior management also needs to understand howWe decided to look at
another solution due primarily to our current systems limited capability to perform based on the architecture.It takes us about 1.5
hours to run our pick allocation plan.Considering we attempt
to ship everything by the end of our 8 hour day, 1.5 hours is a our overall productivity.We want a new
technology solution, code structure to help us process orders more - Director, Supply ChainTechnology, Automotive
Service Parts
Warehouse Management System Business Case Development5www.highjump.com
organization during the planning phase. The best way to accounting organization to work on your team, even if only for a short while. They can help you identify the preferred economic project will be funded. approval for a project, consider using Net Present Value (NPV) and Payback Period approaches. These tools will provide a support from company leadership.NET PRESENT VALUE
rate of return. In developing a NPV calculation, it is helpful to (typically 3-5 years for a system project). Generally the initial cash outlay and project planning are recorded in year 0 while all required rate of return (discount rate) is applied to determine projections become. This concept is referred to as discounting. Essentially discounting determines the value of future cash have been determined, the NPV is calculated by summing the values across each year (Table 2). If the NPV is zero or positive, the project should be further considered for acceptance. Its required rate of return. If the NPV is negative, the project is of return is less than the required rate of return.YearPV FactorPVCum PVComment
0(3.00)1(3.00)(3.00)
Initial Project
Investment
11.00(1 + .08)0.93(2.07)
21.00(1 + .08)20.86(1.22)
31.00(1 + .08)30.79(0.42)
41.00(1 + .08)40.740.31
51.00(1 + .08)50.680.99Payback Period = 4.7 Years,
IRR = 20%
Table 2: Net Present Value Calculation
PAYBACK PERIOD
The payback period is an ad hoc rule looking at how quickly a project pays back the original investment or, in other words, when the NPV of the project equals zero. The time period can be calculated quickly by using the NPV table (Table 2) and estimating when the cumulative present values become positive. shorter the payback period, the more desirable the project, especially when there is a high degree of uncertainty over the planning horizon.SENSITIVITY ANALYSIS
outcomes are not achieved or if an underlying assumption changes, a sensitivity analysis is used to simulate what-if how a result will change if the original projections are not achieved or underlying assumptions change. Sensitivity analysis allows managers to gauge the margin of safety associated with questions: Warehouse Management System Business Case Development6www.highjump.com
If the initial project investment is underestimated, how much can the investment increase before the project becomes ǻ
The margin of safety can also be stated in terms of percent To maintain an 8% required rate of return for project WMS: investment. Table 3 is a sensitivity analysis comparing alternative NPVRequired6%0.370.791.211.632.05
Rate of8%0.190.590.991.391.79
Return10%0.030.410.791.171.55
Table 3: Sensitivity Analysis for Project WMS
normally considered relevant in most investment decisions. depreciation factors. These numbers are best developed and presented by the accounting representative on the development will make a positive NPV even better and might even make a negative NPV worth a second look.BENEFIT CATEGORIES
WMS. The categories have varying levels of savings associated with each and can be characterized as tangible ǻ
systems is maintaining credibility and uniform buy in to the is severely challenged. What dollar value do you put on a 10% better decision-making based on real-time access to activity performance measures? What dollar value does better decision-making bring to the company? Will improved inventory visibility allow the company to reduce inventory levels, or do may be met with skepticism during leadership review. Much of the information required to develop a credible business case is information that can be collected from reports and information require support from other sources (normally, the accounting Depending on the level of detail required in the investment consultants. should be measured on management"s general level of It is critical to discern, in advance, management"s willingness less aggressively, in general. If, however, poor customer service regarding improved customer service, may be the key to man agement buy in.