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About the Author

Cliff Holste is Supply Chain Digest's Material Handling Editor. With more than 30 years experience in designing and implementing material handling and order picking systems in distribution, Holste has worked with dozens of large and smaller companies to improve distribution performance.

Logistics News

By Cliff Holste

November 13, 2013



How Important Is Achieving ROI?

Adopting a Realistic Approach to Improvement Projects keeps Companies Moving Forward


Holste Says:

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Regardless of how a project is funded, being able to measure improvement is critical to accomplishing the stated goals and objectives.
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Previous Columns by Cliff Holste

Logistics News : How to Avoid Losing 4 Months of Non-Productive Labor Per Year

Logistics News : Understanding Expedited Deliver Services Impact on DC Workers

Logistics News : Reducing DC Operating Costs thru the Adoption of Automation Technologies

Logistics News : Calculating Inventory Levels Complicated By Shorter Product Life Cycles

Logistics News : Is Your DC Order Fulfillment System Out-of-Date?

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Not all improvement projects, especially in DC’s, are approved based on satisfying a particular financial ROI policy. Over the years I have worked with clients that understood the relationship between continuous improvement and the cost of doing business. Many of these businesses are privately held and the owners look at growth and improvement as a way to stay in business in a depleted economy.

Given the current historically slow recovery period, healthy/profitable companies aren’t necessarily looking for ROI - they’re looking at what they have to do to survive and grow. There is a lot at stake! Only companies with long planning horizons that keep pace with market and technological changes will continue in business.

 

Creative Contracting Methods Reduce Budget Pressure

Given the challenges of getting projects funded, sometimes ROI can be misused and/or overstated by overly aggressive equipment, system, and service providers who either don’t understand or don’t care about the business implications. Companies that must make substantial operational improvements in order to satisfy customer expectations should not be held hostage to some preconceived investment standard, nor should they have to compromise their operations to achieve an “acceptable” ROI.

When the focus is on growing the business, it would be smarter for vendors to propose terms that allow the customer to pay for the project out of the profits generated. In this environment the opportunity is there for vendors to propose creative financing arrangements that can help expand their customer’s business.

Companies who need help to justify an improvement project should consider various types of creative contracting approaches. With such an approach, payment for the project comes from a percentage of the operational cost savings achieved and/or increase in product shipped. For this to work a mutually beneficial arrangement needs to be developed between the vendor 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 Leasing Alternative

Given the high frequency of change that has become the “new normal” there is considerable risk associated with sitting on “bolt–to-the-floor” capital intensive investments. This is especially true in B2C distribution centers, where planning horizons are typically less than 36 months. Therefore, more and more companies are going to leasing terms. This approach eliminates some of the risk in having all that capital tied-up in a fixed asset that may become obsolete in the near future.

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

Note: While outsourcing of the entire order fulfillment function is yet another strategy that works well for some companies, it requires a very different business model.



Final Thoughts

Measures of productivity are now being put in the workplace in areas that have never seen it before. 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 judged 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 cross-docking to all areas throughout the DC or manufacturing plant.

Regardless of how a project is funded, being able to measure improvement is critical to accomplishing the stated goals and objectives. Companies looking to gain a competitive advantage that involves lowering operating cost would be well advised to teach their operations managers and line supervisors how to make sure their metrics are correct.

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