Holste Says: If a business is to gain a competitive advantage it must be willing to take a calculated risk in order to stay ahead of, or at least even with its competitors. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

Still, many logistics companies find that they can no longer sit on the sidelines. Being the last horse out of the gate is never a desirable position. If a business is to gain a competitive advantage it must be willing to take a calculated risk in order to stay ahead of, or at least even with its competitors. Even if you are the perceived industry leader, and are well ahead of whoever is in 2nd place, you know that the competitive gap can close quickly.

Based on interviews with logistics executives, as well as feedback received from various Supply Chain Digest surveys, it is clear that even among the most optimistic companies, getting almost any large custom designed DC system improvement or expansion project approved is going to involve some handwringing and extra effort. Possible exceptions would be for purchases of “off-the-shelf” or pre-engineered equipment that can be plugged-in and turned-on. In that case risk is much lower as companies can reasonable expect immediate savings following the lump sum investment.

Mitigating Project Risk

Anyone who has ever been involved in a custom designed project, especially one that is spread over an extended period of time, perhaps12 to 18 or more months, knows that there will be unforeseen issues. This is in-part due to 2 factors – project disruptions and marketplace volatility.

Therefore, getting extended projects approved requires acknowledging that there will be disruptions (both internal and external) as well as cyclical business fluctuations. In addition, there are some issues like cost escalation and the inevitable delayed start-up that should be recognized and accounted for.

Start-up delays, for whatever reason, are perhaps the most common and most insidious project event. The loss of expected savings in the first year of system operation, probably accompanied by additional cost for de-bugging and temporary workaround operations, can erode the ROI dropping it below what would have been approved in the first place.

A little investigative research, such as talking with companies who have recently completed a similar project, will reveal other common ways to disrupt a projects return, like factory errors, equipment delivery delays, design errors, and user requested change orders. A conservative contingency fund here might be a good idea especially if the project involves system technologies new to the company, higher levels of picking and shipping automation, or prototype equipment

Damn the Torpedoes – Full Speed Ahead!

Reliability, sustainability, and maintainability are commonly used concepts among material handling industry consultants and system providers. While your project will consist of a high percentage of standard equipment, the system design will most likely be unique to your business requirements.

Therefore, consider asking the following questions:

• Is the system robust to variation in SKU mix and customer order profiles?
• Is the system modular and scalable up and/or down?
• What is the backup or workaround plan if/when there is a major system failure?
• What type of skills and how many system operators and service technicians are needed?

Typically, the project will be designed to handle forecasted sales demand for some time in the future (3 to 5 years). Therefore, the actual annual savings will fluctuate with volume, usually beginning small in the first year, and then gradually ramping up as business volume increases. This growth factor projection would have been included in the initial ROI calculations. However, if the sales forecast is flawed, or if market volatility and/or business conditions change such that the projected annual volume levels never materialize, that will reduce or, depending on how you look at it, protract the actual ROI. Unfortunately, a contingency factor here, big enough to offset the difference, will probably kill the project.

In the final analysis, you are left with trusting that the sales forecast is realistic.

Of course, there are design, construction, and financial risks in every project. But, there are also substantial business risks in being too conservative relative to adopting advances in technology that are proven to increase throughput and lower per piece handling cost.

Final Thoughts

There was a time when “damn the torpedoes – full speed ahead” was a much admired, albeit somewhat macho strategy. However, from a business prospective, while the entrepreneurial spirit is still strong, it has been tempered by the need to survive to fight another day. By doing what you can now, and preparing “what if” contingency plans, you can improve your odds for long-term success.

Knowledge and experience are the keys to improving the odds and ProMat 2013 is a fertile ground for exposure to both – check it out at www.ProMatShow.com

Thanks for your feedback and comments throughout this year.

Good Luck & Best Wishes going forward into 2013!