Holste Says: It is important to understand that with any type of creative financing arrangement changes in how performance is measured can be expected. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

Not all improvement projects are approved based on satisfying a particular Return-On-Investment (ROI) strategy. Over the years I have worked with clients that considered continuous improvement projects to be an inherent cost of doing business. Many of these businesses are privately held and the owners look at improvement projects as a way to keep the business healthy and growth orientated. They theorize that by offering more services like monogramming, gift wrapping, custom labeling and packaging, next day shipping, e.g., they will attract more customers and increase revenue. Companies that need to make operational improvements in order to satisfy customer expectations should not compromise their growth objectives in order to achieve an “acceptable” ROI.

Companies who need help justifying an improvement project should consider various types of creative contracting approaches. For example: when the focus is on improving and growing the business, service providers could propose purchase terms that allow their customer to pay for the project out of the cost savings and/or additional revenue generated by the project. For this to work a mutually beneficial arrangement needs to be developed between the provider and the company. Special attention must be paid to developing a very clear, concise, and measurable “statement of work” that defines the project deliverables and how payment will be calculated over a specified period of time.

The retail consumer marketplace has been offering creative financing methods on large ticket purchases for decades. This strategy has proven to grow sales volume. Given the current low interests rates, the opportunity is there for business service providers to propose creative financing arrangements that can help their customer’s move forward with improvement projects.

Given the dynamics or the market there is going to be some inherent risk associated with capital intensive investments. This is especially true in order fulfillment distribution centers where planning horizons are typically short. In this market segment leasing equipment and systems is gaining traction because it can alleviate some of the risk associated with having capital tied-up in a fixed asset that may become obsolete in just a few years.

This reality has motivated some equipment and system vendors to offer leasing programs. Their customers can rent/lease equipment for a defined period of time (6 to 18 months) without committing to purchase. Other providers are offering graduated payment plans, allowing customers to start with lower payments and “graduate” to higher payments as the equipment/system generates more income. There are even seasonal payment plans where a company can match their lease to their business cycle, paying more when they are in their busy seasons and less in their slow season.

It is important to understand that with any type of creative financing arrangement changes in how performance is measured can be expected. Measures of productivity are now being put in the workplace in areas that have never seen it before. For example: in a receiving department, you’re no longer being looked at for your ability to receive and store X number of pallets per day. Going forward, you’re being measured on your ability to reduce the number of adjustments made to the purchase order, receive X number of pallets an hour and provide fast, efficient and accurate product flow to all storage and processing areas.

Note: Outsourcing of the entire order fulfillment operation to an independent 3PL provider is an established practice that works well for some companies. However, it requires a very different business model from that of the owner operator model.

Final Thoughts

Being able to measure performance is critical to funding any improvement project. Companies looking to gain a competitive advantage that involves lowering operating cost and growing the business would be well advised to teach their operations managers and line supervisors how to make sure their metrics are correct and in-line with industry standards.