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Cliff Holste

Supply Chain Digest
Material Handling Editor

Logistics News - Sorting It Out

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.

May 24, 2017

Sorting It Out : Moving Forward With Automation Projects While Avoiding ROI Pitfalls

Stay on Schedule and be ready with Properly Trained Operators


Given the vast scope of automation technologies on exhibit at ProMat 2017 this year, it’s clear that the interest in DC automation is expanding. However, interviews and feedback received from business managers clearly indicates that while they see the potential automation offers for their operations, there is some level of concern relative to achieving payback. This is because there are often unforeseen factors that alter the flow of cash and, depending on exactly how those factors play out, can determine how close the project comes to its promised ROI.

Only when companies buy an off-the-shelf machine that can be easily installed “plugged-in” and turned-on do they get immediate savings following the purchase. For custom designed projects the costs for planning, design engineering, manufacturing and installation are typically spread over 12 to 24 months or more before the system is in full operation. Only then can the company start to realize the benefits and resultant savings.

Holste Says...

There can be no doubt that the next generations of workers are going to be attracted to the more high tech workplace environments.

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

Other common ways to disrupt a project's return include running into unexpected problems, change orders and/or cost overruns. By the time you finally get up and running, you may have spent more than originally budgeted. Although, cost overruns certainly do affect the ROI, the impact is typically less painful than a major unexpected project delay. 

Then there's the matter of anticipated savings that may never be realized. For example: The system will be designed to handle forecasted sales volume for 3 to 5 years in the future, usually beginning small in the first year, and then gradually rising as business increases. This projected sales curve would be reflected in the initial ROI calculations. However, if business changes such that the forecasted volume levels never materialize, that will most likely extend the payback period. 

As with any project, the key is to be proactive and observe the following important principles when working through the financials of your project.

  • If the project won't fly with a realistic budget and within an acceptable time frame, then don't start.

  • If the system technology is especially complex, it may be a good idea to divide the project into steps or phases that are more readily manageable. This approach also allows for some adjustments to be made to future phases to accommodate business and/or operational changes.

  • To help ensure that your project stays on schedule, hire an experience Project Manager (PM). A PM is most often included as part of the system providers services. But, you need to understand that the provider’s PM works for the benefit of the provider. To increase your comfort level, you can hire a consultant or industry expert to provide independent PM services.

  • Start operator training early to avoid costly startup delays.

This last point cannot be over stressed. A startup support task force should be assembled well in advance of the project completion date. The mission of this multi-discipline task force is to provide all the technical and management resources needed to keep the project moving forward and on schedule. Engaging the task force early in the life of the project helps to ensure that the right personnel are available when they are needed. When people unfamiliar with the original planning and system design are brought onboard in the late stages of the project, there is a danger that overall system objectives, no matter how well documented, will not be fully understood or properly supported and implemented. 

Final Thoughts

ProMat 2017 points out that there has been and continues to be an enormous amount of R&D spent in the development of automated technologies for DC applications. There can be no doubt that the next generations of workers are going to be attracted to the more high tech workplace environments. Shippers can be assured that service providers realize what’s at stake for them as well as for you – in other words both parties have skin in the game.

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