Holste Says: ...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. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

Anyone who has ever been involved in a large scale project, especially one that is spread over an extended period of time, perhaps12 to 18 months or more, knows that there will be unforeseen issues. This is in-part due to (2) factors – project disruptions and marketplace volatility. Unless you own a powerful rabbit’s foot - 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 considered and accounted for.

Start-up delays are perhaps the most common and most insidious project event. They include annoyances such as equipment deliver delays, design errors/corrections, and change orders. The resultant 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 expected ROI dropping it below what would have been approved in the first place.

A contingency fund that anticipates and in-turn mitigates risk is a good idea especially if the project involves system technologies new to the company, higher levels of picking and shipping automation, and/or prototype equipment. However, there may also be considerable business risks associated with not doing the project.

Damn the Torpedoes – Full Speed Ahead!

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

Therefore, at a minimum consider asking the following questions:

Is the system robust to variation in SKU mix, customer order profiles, and multiple marketing channels?

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 types of operator skills are required, and how many system operators and service technicians are needed?

The Crystal Ball Factor

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 admired, it must be tempered by the need to survive to fight another day. A phased-in approach allows for subtle changes to the master plan if business conditions change.

Knowledge and experience are the keys to improving the odds in favor of project success. MODEX 2016 in Atlanta, GA, April 4 – 7 2016 provides a great opportunity to exchange ideas with industry professionals – check it out at www.modexshow.com