Post on 08-Aug-2020
© 2018 MHI® Copyright claimed for audiovisual works and sound recordings of seminar sessions. All rights reserved.
Presented by:
Tony Arsenault, Regional Business Director
Calculating the True Cost of Your Operation
Horizontal Carousels Vertical Carousels
Vertical Lift Modules
3
• Understanding Terminology
• Identifying Cost Justification Factors in your Operation
• Discussing the “Tools”
• Real World Examples
Agenda
First… Understanding Terminology What is R.O.I.?
➢ Return on Investment is simply a generic term used to describe financial justifications for investing in something
Initial Capital Investment…➢ Is the total cost of equipment including freight, installation, implementation & training.
Cost of Capital…➢ Whether it comes from bank borrowed money, selling stocks or bonds, or some other
form, is the same interest rate used for the Discount Rate.
What is Discount Rate?➢ This is the % rate used to discount future monthly free cash flows to Net Present Value
What is Payback?➢ The length of time before the money you save with new equipment will equal your original
investment
4
5
• What is I.R.R.?
– Internal Rate Of Return is the Percentage Of Return where value of the Initial Capital Investment equals the sum of The Present Value Of Future Cash Flows
Initial Capital Investment – (C1+C2+…C60) = 0
Initial Capital Investment $250K
Future Free Cash FlowsMonth 1: $12KMonth 2: $15K
Month 60: $17K
Future Free Cash FlowsDiscounted @ IRR
C1
C2
C60
Understanding Terminology
• What is N.P.V.?
– Net Present Value is the difference between the Initial Capital Investment and the Present Value Of Future Cash Inflows Applying the Discounted Interest Rate
6
Initial Capital Investment $300K
Future Free Cash FlowsMonth 1: $25KMonth 2: $27K
Month 60: $17K
Future Free Cash FlowsDiscounted @ Discount Rate
C1
C2
C60
(C1+C2+…C60) - Initial Capital Investment = NPV
Understanding Terminology
• I.R.R.– Your I.R.R. Must Be Above Your Company’s Minimum Benchmark Rate
– I.R.R. Does Not Consider Project Size
• A Percentage Rate Alone Doesn’t Tell Us Much When Comparing Two Different Capital Projects
• N.P.V.– Any N.P.V. Above Zero Is Attractive
– Can Compare Projects Of Different Size because NPV is measured in terms of real $$
• Payback– Used To Assess Long Term Risk
– Shorter Paybacks Are Preferred
7
Understanding Terminology
8
• Recovered Floor Space
– Reduce Costs (Utilities, Lease, etc…)
– Utilize Space Recovered For Add’l Revenue Generation
• Eliminate or Reduce Off-Site Storage Costs
• Reduce downtime due to picking errors
• Security / Better Protection of product(s) stored
• Employee Turnover
o Increasing Employee Satisfaction
• Avoid Ergonomic Related Injuries (Safety Personnel)
Common Justification Factors in Manufacturing…
Reclaimed Floor Space
• Reclaim Up To 85% Of Previously Occupied Floor Space
• Implement Value Added Activities
– Increased Manufacturing
– Add Kitting Operations
– Expand or Implement Quality Control
+add
increase
expand
9
10
• Reduce Labor Costs
o Do more with less
• Increase Throughput (Batching Orders)
• Reduce Picking Errors
o 3 Touches v.s. 1 Touch
o Cost of Returns (Shipping, etc…)
o Customer Retention & Satisfaction
• Employee Turnover & Training Costs
• Reduce Shrinkage & damaged goods
• Annual Auditing Costs & Cycle Counting
Common Justification Factors in Warehousing and Distribution…
11
• Avoid Need for New Construction
o Additional Utility Costs, Higher Taxes, Permitting, etc…
• Avoid Moving Costs, Loss of Production, etc…
• Avoid Need for Off-Site Storage (Lease, Transport, Labor)
• Avoid Ergonomic Related Claims
• Avoid Need for Additional Labor to meet Growth demands
• Avoid or Reduce Shrinkage & damaged goods
• Avoid or Reduce Annual Auditing Costs & Cycle Counting
Cost Avoidance…
12
• Competitive Advantage?
• Reduced Environmental Impact?
• Reduced Workplace Ergonomic Related Injuries?
• Employee Retention & Satisfaction?
• Enhanced Image & Reputation?
• Accountability & Tracking – Who took what & when?
• Improved Inventory Accuracy helps Avoid…
o Overstocking
o Missed Orders
o Rush Charges
o Expired Inventory
o Production Delays & Shutdowns
Other Considerations….
Finally, know your “Tools”…
13
• In its most simplest form, % ROI can be calculated as follows:
(Savings & Gains from Investment – Cost of Investment)
--------------------------------------------------------------
(Cost of Investment)
Example:
($190K - $100K) / $100K = 90% ROI
Finally, know your “Tools”…
14
• Some Simple Project Justification Tools include:
• Manufacturing
• Distribution
Finally, know your “Tools”… Manufacturing
15
Will Dynamic Storage Increase Your Profits?
Quick Cost Justification for Manufacturing & MRO Type OperationsManually managing parts inventory on rack and shelving can result in manufacturing downtime - wasting both time and money. Complete this quick cost justification worksheet by filling in the blue shaded cells and consider the impact of dynamic storage in your manufacturing operations.
Consider the Cost of Labor…
Sample Manufacturing Figures Compare Your Own Numbers!
Standard Shelving or Rack
Dynamic Storage SolutionYOUR
Current SystemDynamic Storage Solution
Cost of Employee per Year (Fully Burdened)
$50,000 $50,000 $0$0
Same As Current
Number of Employees Picking & Stocking(in Parts, Stockroom, Warehouse or Toolcrib Area)
6 2 00
Reduce by 66%
Total Labor Cost per Year $300,000 $100,000 $0 $0
Multiply Above Multiply Above
Cost Savings per Year None $200,000 None$0
Subtract Totals Above
Finally, know your “Tools”… Manufacturing
16
Consider the Value of Floor Space…Sample Manufacturing Figures Compare Your Own Numbers!
Standard Shelving or Rack
Dynamic Storage Solution
YOUR Current System
Dynamic Storage Solution
Revenue Generated in Manufacturing Area
$10,000,000 $10,000,000 $0$0
Same As Current
Total Square Foot of Manufacturing Area 100,000 100,000 00
Same As Current
Revenue per Square Foot $100 $100 #DIV/0! #DIV/0!
Divide Above Divide Above
Square Feet of Parts, Stockroom, Warehouse, or Toolcrib Area
2,500 500 00
Reduce by 80%
Recovered Floor Space (Sq. Ft.) None 2,000 None0
Subtract Above
Additional Revenue Opportunity per Year
None $200,000 None #DIV/0!
Finally, know your “Tools”… Distribution
17
Will Dynamic Storage Increase Your Profits?
Quick Cost Justification for Order Picking OperationsWhen done with a manual sheiving or racking system order fulfillment can be a labor intensive effort - often wasting both time and money. Complete this quick cost justification worksheet by filling in the blue shaded cells and consider the impact of dynamic storage in your order fulfillment operations.
Consider the Cost of Labor…
Sample Distribution Figures Compare Your Own Numbers!
Standard Shelving or Rack
Dynamic Storage SolutionYOUR
Current SystemDynamic Storage Solution
Cost of Employee per Year (Fully Burdened)
$40,000 $40,000 $0$0
Same As Current
Number of Employees Order Picking 6 2 00
Reduce by 66%
Total Labor Cost per Year $240,000 $80,000 $0 $0
Multiply Above Multiply Above
Cost Savings per Year None $160,000 None$0
Subtract Totals Above
Finally, know your “Tools”… Distribution
18
Consider the Value of Throughput…
Sample Distribution Figures Compare Your Own Numbers!
Standard Shelving or Rack
Dynamic Storage Solution
YOUR Current System
Dynamic Storage Solution
Revenue Generated $2,500,000 $7,500,000 $0 #DIV/0!
Number of People Order Picking 6 6 0 0
Sustained Number of Line Items Picked Per Person Per Hour*
30 120 00
Increase up to 400% or more
Sustained Number of Line Items Picked as a Company Total Per Year**
345,600 1,382,400 00
Increase up to 400% or more
Average Revenue per Line Item Picked $7.23 $7.23 #DIV/0! #DIV/0!
Additional Revenue Opportunity per Year**
None $5,000,000 None #DIV/0!
*assumes standard rack and shelving without software, picklights or batching, assumes dynamic solution includes multiple machines in a workstation with software, picklights and batching
**assumes 240 single shift working days per year
Finally, know your “Tools”… Distribution
19
Consider the Value of Floor Space…Sample Distribution Figures Compare Your Own Numbers!
Standard Shelving or Rack
Dynamic Storage Solution
YOUR Current System
Dynamic Storage Solution
Revenue Generated $2,500,000 $2,500,000 $0$0
Same As Current
Square Feet of Warehouse or Distribution Facility
100,000 100,000 00
Same As Current
Revenue per Square Foot $25 $25 #DIV/0! #DIV/0!
Divide Above Divide Above
Square Feet of B & C Movers in Warehouse or Distribution Area
50,000 12,500 00
Reduce by 75%
Recovered Floor Space None 37,500 None0
Subtract Above
Additional Revenue Opportunity per Year
None $937,500 None #DIV/0!
Finally, know your “Tools”…
20
• Another option is to use a more thorough tool that calculates all pertinent information:
– Financial Justification Tool
• Others can be found on the internet or, possibly, within your own organization
Financial Justification Tool…
21
Financial Justification Tool…
22
Financial Justification Tool…
23
Financial Justification Tool…
24
Financial Justification Tool…
25
Financial Justification Tool…
26
And…..Do Your Research
27
• How many transactions performed per person daily?
• Your company’s annual sales for your location only?
• Annual turnover of employees?
• Cost to recruit, hire, and train new employees?
• Who are the decision makers & how does this affect them?
• Find out the annual costs for shrinkage?
Real World Exercise #1
Customer: East Coast Distributor of Door & Window Hardware
Application: Order Picking
Scenario: Parts inventory stored takes up 1,353 sq.ft. In this area, (7) people pick orders and replenish inventory each day. Average daily picks for orders is 524 picks in one 8 hour shift. Average hourly wage for pickers is $10.95 / hour. This customer has several locations but their annual sales revenue in this location is $11M. The cost of this warehouse space, including utilities, insurance, etc…is $4.75 / sq.ft.
Their attrition rate is a problem. They lose and hire a new employee each month. Estimated recruiting, hiring, and training cost is $1656 per person.
Cycle Counting costs them $15K annually and they wrote off $84K in damaged, lost, etc…. product last year.
Picking accuracy is excellent @ 99.5% keeping cost of misspicks down to $17K annually.
28
Real World Exercise #1 continued…
Customer: East Coast Distributor of Door & Window Hardware
Application: Order Picking
This customer received a proposal for (4) Horizontal Carousels, software, batch lights, lift table, and installation for $300K.
Using a throughput simulation tool, it was estimated that one (1) person could pick 900 lines in an 8 hour shift allowing them to redirect the other (6) individuals to other useful tasks.
Let’s take a look at the ROI
29
Real World Exercise #1 continued…
30
Real World Exercise #1 continued…
31
Real World Exercise #1 continued…
32
Real World Exercise #1 continued…
33
Real World Exercise #1 continued…
34
Real World Exercise #1 continued…
35
Real World Exercise #1 continued…
36
Real World Exercise #2
Customer: $40M Manufacturer of High End Automated Stone Cutting Equipment
Application: Repair parts depot
Scenario: The customer is currently storing & distributing repair parts for equipment sold to customers on shelving that occupies 6,844 sq. ft. They have (4) people picking and replenishing 700 parts total on one 8 hour shift each day. The burden rate (fully loaded) for the employees is $23.50 / hour. The customer has told you their operating costs for space is $30 per sq. ft. and they estimate the profit per transaction is $5.00. Total plant size is 325,000 sq.ft.
You are proposing (2) 26’ Tall VLMs & Software for $236,638.60 delivered and installed.
Throughput will increase to 850 Transactions with half the people. Picking accuracy is 97% currently & shipping costs are $4 per transaction on average.
Calculate the ROI using 25% Corp. Tax Rate & 8% Discount Rate
37
Real World Exercise #2
38
Real World Exercise #2
39
Real World Exercise #2
40
Real World Exercise #2
41
Real World Exercise #2
42
Real World Exercise #2
43
Real World Exercise #2
Now…..let’s look at the same thing with the “Simple Cost Justification Worksheet”…..
44
Real World Exercise #2
45
Real World Exercise #2
46
Ask Yourself These Three Questions
What are the financial consequences of inaction?
Is the cost of doing nothing at all far more expensive than the price to implement a solution?
What is the risk versus the reward?
47
1
2
3
Thank You!
48
For More Information:
anthony.arsenault@kardex.com
www.kardexremstar.com
Or visit MODEX Booth B4735