Logistics News

By Cliff Holste

March 7, 2012

Not Quite a Crap-Shoot – Realizing Your Projects ROI May Be A Bit of a Gamble

Getting Timely Payback On A DC Automation Project Requires Planning, Attention To Detail, And A Dose Of Good Luck

It’s only when companies purchase some type of standalone “off-the-shelf” equipment that can be plugged-in and turned-on do they get instantaneous savings following the lump sum investment. For custom designed projects like automated order fulfillment systems, the costs for planning, design engineering, fabrication and installation are typically spread over 12 to 18 months or even longer if a new building is involved. Only when the project is fully operational can the company begin to realize the operational benefits, productivity gains and resultant savings.

A lot can happen, and usually does over that period of time. So, it's important to factor in things like cost escalation and the inevitable schedule delays. Start-up delays are perhaps the most common, and most insidious, project event. The loss of expected project savings, accompanied by additional installation costs and inefficient work-around operations can drop the ROI below what would have been approved in the first place.

Holste Says: Often material handling providers can propose low end solutions (for small businesses) that can be quickly deployed, and that will provide benefits once enjoyed only by the large operations. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

Other common ways to disrupt a project's financial gain includes cost escalation due to increased scope, change orders, and/or overruns. By the time you finally get the thing up and running, you may have exhausted or exceeded your contingency fund. Although cost overruns negatively affect the projects ROI, unless they are extreme, there impact is typically less costly and painful than that caused by frequent project delays.

Perhaps the biggest risk of a protracted startup is the continued stress it has on customer relations. After a year or more of abnormal business dealings, even the most loyal customers will becoming weary of the uncertain performance patterns and are ready for it all to end ASAP!

Financial Success Depends On Volume

When planning and designing a material handling system, companies expect that the new system will be capability of handling future volume. The new systems throughput capacity may be 2X or 3X current volume. Therefore, the annual savings (yield) will fluctuate based on actual sales volume, usually beginning small in the first year, and then gradually increasing as the number of customer orders and volume of goods shipped increases. This should be reflected in the payback calculations showing a gradually increasing ROI as volume grows over the forecasted period. However, if business conditions change, such that the projected customer and volume levels never materialize, that could negate the ROI entirely.

Proceed With Caution

Does all of this mean that companies should shy away from DC automation projects? Not at all! If you don't invest in the future, it will surely be bleak. Instead, observe the following important principles when working through the financials of your automation project.