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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.

July 26, 2017

Sorting It Out : Understanding Key Drivers For DC Automation

How Much Will it Cost and How Can it be Justified?


There are many good reasons for logistics companies to consider automation. Most companies are looking to grow the business. However, productivity, throughput, and incremental labor costs are ongoing concerns. The need to reduce order processing time may be critical to growing the business, especially if launching an ecommerce initiative. Another driver for DC automation that happens more often that you may think, especially in well established small to medium sized companies, is simply the desire to emulate competitors who have more advanced or sophisticated operations.

 By now it should be fairly obvious that the current and future generations of workers are more likely to be attracted to operations that are automated as opposed to non-automated. This factor alone should drive adoption of automation for progressive logistics companies. It may in fact be a contributing factor behind the rapidly growing trend toward material handling automation among grocery, beverage, and pharmaceutical distributors, who traditionally have a longer planning horizon than general merchandise distributors. 

Whatever the reasons, the cost for equipment, controls and software can vary dramatically depending on the specific objectives and scope of the project. Before a company engages in an automation project it should have a clear understanding and consensus of the projects objectives, as well as some idea of the investment that can be justify.

Holste Says...

Many of today’s automation technologies save large amounts of time and money through the elimination of redundant, overlapping or repetitive activities. These benefits are the result of taking an integrated approach to planning and designing the material handling system.

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Although accounting methods vary from company to company, as it relates to DC automation projects, the Payback Method is the method most commonly used for calculating Return-On-Investment (ROI). Using this method the project is paid for out of labor savings. So, for example, if an automation project can reduce headcount by 10 people (5 per shift in a two shift operation), costing the company an average of $45,000 ea. per year (including benefits), then the project will produce an annual labor savings of $450,000. If the company’s payback period for capital expenditures is based on 3 years, a project costing $1,350,000 can be justified on labor savings alone.

Likewise, if more volume can be processed at a lower per piece handing cost, and/or the payback period can be extended, a larger investment can be made. By looking at the project from its potential labor saving prospect, a company can begin to understand what it can justify.

Many of today’s automation technologies save large amounts of time and money through the elimination of redundant, overlapping or repetitive activities. These benefits are the result of taking an integrated approach to planning and designing the material handling system. In other words – a WMS and/or integrated material handling system does not standalone. They have a strategic impact that increases overall performance.

The following chart lists important soft or intangible benefits, along with a suggested metric that system planners can use when evaluating and justifying an automated integrated system project.

Strategic Benefits of Automation


Suggested Potential Metric:

Ability to respond to fluctuations in demand

The maximum level of throughput that can be achieved in the short run.

Ease of data acquisition

Time to acquire data

Improved ability to meet shipping dates

The percentage of on-time deliveries

Improved company image to customers

Ascending or descending customer inquiries and orders for goods and services

Improved cost tracking

Level of confidence that the companies cost numbers are correct

Automated information conversion

Accumulative time spent by analysis retrieving data

New product introduction

Time measured in months or weeks

Reduced software upkeep (maintenance)

Historical costs

Reduced production lead-time

Lead-time associated with an order

Reduced business risk

Competitive ranking in marketplace

Reduce market risk

Cost of making operational changes associated with changes to customer order profiles

Improved space utilization

Cost of expansion or building a new facility

Reduced setup times

The percentage reduction in set up for VAS

Improved communications

Sales forecasting speed and accuracy

Value of real-time information

Value of reducing incomplete shipments and processing backorders

Improved safety

Worker satisfaction with the working environment and reduction in lost time accidents

Less congested work areas or Quality of Working Life (QWL)

Positive worker response

Less product damage

Reduced opportunities for product damage

Improved inventory security

Degree to which inventory can be accessed by unauthorized people

Improved inventory accuracy

Accumulative cost of stock-outs and shipping errors

Improved throughput

Cost of overtime and excess inventories

Calculating non-quantifiable factors associated with an automation system investment is a tricky business. On the surface some of these factors appear to add to the attractiveness of an investment alternative, but in reality they may not actually add to the financial worth unless one considers the long-term strategic implication.

The Material Handling Industry of America (MHIA), which is the trade association that produces the ProMat & Modex trade shows, has developed a user-friendly software decision support method called JUSTMAT® “Justifying Material Handling Investments” which can assist with the evaluation of benefits that go beyond the traditional accounting methods. If interested go to the above websites Learning Center and under Keywords enter Justmat. Of course many of the leading industry consulting firms can assist with calculating the benefits derived from a material handling investments and recommend how best to justify them.

Another important consideration a company should give some considerable thought to in the planning stage, has to do with managing the business while implementing an automation project. Obviously, the company must continue to pick and ship orders while the new system is being installed. This requires careful and meticulous planning. If the business experiences seasonal peak periods, the project implementation schedule may need to be adjusted to minimize disruptions during those periods. This may affect how long it will take to complete the project, which could have further cost and sales implications.

The risk of inconveniencing customers during the critical installation and switchover period is real, especially if something unplanned for happens (Murphy’s Law). Therefore, the company needs to evaluate the risks and develop a strategy for managing the unexpected. This may include building backup inventory at an off-site location.

In any event, explaining to your customers what you are planning, the projects expected benefits for them and the company, and keeping them informed on how the project is progressing may help to alleviate some of their concerns.

Next week we will discuss how advances in computer simulation technologies can improve the planning, design and implementation of automated systems while lowering risk.

Final Thoughts

When it comes to material handling automation projects, the more upfront operational planning and project cost justification analysis a company does the better prepared it will be to expeditiously move forward, thus avoiding a false start and the unfortunate project killing consequences that can have.

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