 Cliff Holste, Materials Handling Editor
There is always some debate about how much of the ROI from LMS comes from methods, engineered standards, or the planning and reporting software itself.
There is no right answer to that question, and it is often situation-dependent.
One thing we can say for certain is that LMS offers a strong and extremely consistent level of return on investment, with a high payback for the effort versus other logistics solutions.
Results that Usually Match Expectations
One of the most attractive aspects to Labor Management is that it may have the most consistent, predictable levels of return of any supply chain software investment.
Most LMS vendors have assessment programs. This is usually at two levels: the first will assess whether it appears likely that LMS can deliver a solid return. Given the dynamics, this answer will likely be Yes for all but the smallest operations. Still, it’s good to hear some specifics, and begin the education process internally by getting this initial assessment. The next level of assessment will involve a more detailed study of your operations. There may or may not be a small charge for this work, which you may be able to have applied to the final cost of a purchased solution.
Such ROI analyses are common for every category of supply chain and logistics software applications. Here’s the difference with LMS:
If the analysis estimates the savings at 8%, a high percentage of the time the actual result really will be close to 8%. It may be 6% or 7%, but rarely is the project not a financial success. The actual results compared to estimates are the closest in LMS of just about any supply chain software application.
This means the financial risk of LMS projects is very low. This fact should be emphasized in selling the project internally to executives and the CFO.
From 65 to 100% in 12 Weeks
How are the savings achieved? When many companies first investigate LMS, they find it difficult to believe that their operators, who are hard-working and may be supported with tools like Warehouse Management and RF devices, could possibly be
operating at such a low level of productivity as estimated by LMS providers.
But it’s true. Even DC operations that appear well managed and use tools like WMS and RF, it is common to have operators in labor-intensive areas like case or piece picking and replenishment performing at only 65-70% of a fair and achievable standard when the LMS program and software are first launched. Companies like this, with solid management and technology support, at first often can’t believe this level of improvement is still possible.
In 10-12 weeks, the majority of operators in most companies adopting LMS will be performing at 95-100% of that standard, meaning there are productivity gains in labor-intensive areas of 25-35%. Given that order picking often represents 50% of total DC labor costs, the savings from these areas alone can be substantial. One grocery chain we know of had used traditional engineered standards for many years but lacked the capacity to make them fully discrete based on exact attributes of each piece of work. It was surprised to find that even they were able to gain 15-20%, depending on the area, as a result of discrete standards and improved LMS reporting software.
Typical Savings
Depending on the operation, its maturity, and other factors, we see companies either reducing total labor spending, or increasing throughput somewhere between 7-20% from LMS solutions.
While certain areas like order picking may see improvements of 30-35%, others, functions such as receiving or putaway will generally not see improvement numbers this large. Depending on how you calculate labor costs, there may be certain job categories from supervisors to janitors whose productivity will not be directly impacted from an LMS program.
If you have fewer than 30-35 operators in a DC, finding the ROI may be tough, though approaches that use less upfront engineering can still deliver solid payback.
Operations that have between 35-50 workers generally can achieve a solid ROI even with engineering, but the savings will be relative to the size of the payroll. It may take 12-24 months to get a full payback, though highly labor intensive operations, such as service parts distribution, will do better.
Operations with 50-100 operators can drive substantial savings, usually with payback under one year.
Distribution centers with over 100 workers can drive substantial savings, and frequently achieved payback in 6-9 months. Those companies with hundreds of workers in each DC and a network of DC s across the country can literally save millions of dollars per year, sometimes even tens of millions.
(Distribution Article - Continued Below)
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