WP CostJustify WMS

Whether you seek to implement a new ware-house management system (WMS) or upgrade anexisting one, your ability to procure and implementa new system will depend on building a solid busi-ness case that details quantitative dollar justifica-tions as well as qualitative, intangible benefits. Thissupplement presents a tool you can use when devel-oping a systems justification, identifies benefit cate-gories to consider including in the business case, anddiscusses areas of opportunity within the variousbenefit categories. Note: This approach can beadapted to develop a business case for other logis-tics/supply chain solutions.

Assembling the teamDevelopment of the business case is generally a

completely separate part of the WMS project, andmay be done several months before a project isbegun. The business case should be developed by acore team, with the project manager (preferably anoperations person) and others expected to serve onthe project team during WMS implementation. A rep-

resentative from Information Technology can helpquantify the benefits of the improved technical man-agement of a new system. It’s also a good idea toinclude a representative from Finance or Accountingwho can help you identify the preferred economicjustification tool and identify the company’s accept-able level of cost/savings classifications, risk, andrate of return. The Finance representative probablywill not follow through on the implementation, butplays a very important role in developing the busi-ness case and in obtaining buy-in from the financialside of the business.

Analyzing costs and benefitsA project justification presents a cost/benefit

analysis that aligns the project goals, costs, and riskswith the company’s business objectives and financialexpectations. The bottom line, the value of the bene-fits over the life of the project (normally three tofive years) should exceed the total investment of theproject over the same planning horizon. Table 1summarizes the general investment categories asso-

Planning and Implementing a WMS

Developing an Effective Business Case for a

Warehouse Management System

Table 1. WMS Investment SummaryInvestment Category % of Total Examples

Software & Hardware 30 – 60 License, database, server, printers, PCs, RF access points,scanners

System Integration 30 – 35 Consultants, operational changes

Software Vendor Assistance 10 – 15 Professional services, project management, conferenceroom pilot, modifications

Host System Modifications 5 – 10 Interface programming

Internal Corporate Costs 5 – 10 Special training, back fill, retention

Contingency & Other Costs 5 – 15 “Just in case” money

Annual Maintenance 15 – 20 Normally priced as percent of contract value

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ciated with a WMS implementation project.The project justification will focus on the operat-

ing cost savings estimates resulting from the use of aWMS. Figure 1 highlights several of the areaswhere a WMS can help your organization leverageshareholder value.

Prepare an economic justificationAs a preliminary step to obtaining corporate jus-

tification and approval for a system project, considerusing Net Present Value (NPV) and Payback Periodapproaches. These tools can provide a good estimateof the economic justification for the system and help

gain early support fromcompany leadership.

• Net PresentValue (NPV). NPVcalculates the net mon-etary gain or loss thatis expected from a pro-ject by discounting allexpected future cashflows to the presenttime, using therequired corporate rateof return. In develop-ing an NPV calcula-tion, it is helpful tosketch the relevantcash flows over thegiven planning horizon(typically three to fiveyears for a system pro-

Increase Revenues

DecreaseCOGs

ReduceSelling Costs

Reduce Distri-bution Costs

ReduceAdmin. Costs

Reduce R&DCosts

WorkingCapital

Fixed Costs

Increase GrossProfit

DecreaseOperatingExpenses

CapitalDeployment

Cost ofCapital

Increase NetOperating

Profits

ImproveCapital Costs& Allocation

ShareholderValue

Creation

Figure 1. WMS Impact on Shareholder Value

Figure 2. Sketch of Relevant Cash Flows

Value Levers WMS ImpactIncrease priceIncrease volume (e.g. improved order fill rates)Improve mix (e.g. align services and cost to serve)

Improve manufacturing processes/technologiesReduce cost of inputs (direct material)Improve plant productivity (direct labor)Improve asset effectivity and plant overhead

Increase productivityDecrease staffingImprove trade spending

Reduce freight and indirect labor/warehousing costs

Optimize physical network/facilities

Leverage new and/or alternative distribution channels

Reduce customer service & order management costsReduce general overhead/management/administration costsReduce I/S costsReduce human resources costs/improve effectiveness

Reduce time to market/commercialization process

Reduce purchased goods inventoriesReduce Work in Process inventoriesReduce Finished Goods inventoriesOptimize AP and AR

Improve Asset Utilization and RationalizationImprove Investment Planning and Deployment

ject). Generally the initial cash outlay and projectplanning are recorded in year 0 with all future rele-vant cash flows in years 1 through 5 (see Figure 2).

Once cash flows have been estimated andsketched, the required rate of return (discount rate) isapplied to determine the present value of each yearlycash flow. Future cash flows are worth less thantoday’s dollars. The longer the planning horizon, theless valuable the cash flow projections become.“Discounting” the cash flow projections in effectdetermines the value of future cash flows in today’sdollars, or their present value. Once the present val-ues for each year are determined (in Table 2, divid-ing the cash flow in column one by the present valuefactor in column two) the NPV is calculated by sum-ming the values across each year. If the NPV is zeroor positive, the project should be accepted. Itsexpected rate of return equals or exceeds the compa-ny’s required rate of return. If the NPV is negative,the project is undesirable and is not justified eco-nomically. Its expected rate of return is less than therequired rate of return.

• Payback period. The payback period is thelength of time required for a project to pay back theoriginal investment — in other words, when theNPV of the project equals zero. The time period canbe calculated quickly by using the NPV table (Table2) and estimating when the cumulative present val-

ues become positive. In the example, the paybackperiod is 3.8 years. In general, the shorter the pay-back period, the more desirable the project, especial-ly when there is a high degree of uncertainty acrossthe planning horizon.

Your business case must be credible to the execu-tives who will be evaluating it. One way you canstrengthen the case’s credibility is to conduct a sensi-tivity analysis to examine how a result will change ifthe predicted financial outcomes are not achieved orif an underlying assumption changes. Sensitivityanalysis allows managers to gauge the margin ofsafety associated with the projects and the fundamen-tal assumptions driving the justification. The marginof safety is the answer to the what-if questions:

— If the projected cost savings (benefits) are toooptimistic, how far can they drop before the projectbecomes unprofitable?

— If the cost of the initial project is underesti-mated, how much can the investment increase beforethe project becomes unprofitable?

The margin of safety can also be stated in termsof percent change of initial investment or annualcash flows. Margin of safety can be presented for theprevious example as follows:

To maintain an eight percent required rate ofreturn:

— Annual positive cash flows should be at least


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Table 2. Net Present Value (PV) CalculationYear (1) (2) (3) Cumulative Comment

Cash Flow PV Factor PV PV

0 (3.00) 1 (3.00) (3.00) Initial Project Investment

1 1.00 (1 + .08) 0.93 (2.07)

2 1.00 (1 + .08)2 0.86 (1.22)

3 1.00 (1 + .08)3 0.79 (0.42)

4 1.00 (1 + .08)4 0.74 0.31

5 1.00 (1 + .08)5 0.68 0.99 Payback Period = 3.8 years

Table 3. Sensitivity Analysis For WMS Project Annual Cash Inflows

$0.80 $0.90 $1.00 $1.10 $1.20

Required 6% 0.37 0.79 1.21 1.63 2.05

Rate of 8% 0.19 0.59 0.99 1.39 1.79

Return 10% 0.03 0.41 0.79 1.17 1.55


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$0.75. There is a 25 percent margin of safety ($1.00 – $0.75) in the estimated cash benefits.

— The initial cash investment cannot exceed$3.99. There is a 24.8 percent margin of safety($3.99 – $3.00) in the estimated initial investment.

Table 3 is a sensitivity analysis comparing alter-native NPV calculations under different assumptionsof annual cash flows and required rates of return forthe NPV example shown in Table 2. For example,for an annual five-year cash flow of $0.80, the NPVis nearly $0 at a return rate of 10 percent, and $0.37at a return rate of six percent. The changing net pre-sent values reflect the relative sensitivity to cashflows and return rates.

This high-level assessment of the project’s eco-nomic benefit does not take into consideration otherfinancial variables normally considered relevant inmost investment decisions. To get a better picture ofthe true benefit the project will provide the company,the system justification should include tax anddepreciation factors. Considering tax and deprecia-tion impacts in an NPV estimation will strengthen apositive NPV and might even make a negative NPVworth a second look.

Categories of benefitsImplementing a WMS can drive a wide range of

benefits, all of which should be taken into considera-tion when developing your business case (see Figure8, page 17 for a formthat can help you cap-ture the necessarydata). Varying levels ofsavings are associatedwith different cate-gories of benefits,which may be tangibleor intangible. A tangi-ble saving is a quantita-tive dollar figuredirectly related to aspecific action orprocess affected by theWMS. For example,one benefit of a newsystem might be thefact that hardware forthe new system willcost 50 percent less to

maintain than the existing system hardware. Intangible benefits are much tougher to quanti-

fy. For example, what dollar value do you put on a10 percent improvement in customer service? If youanticipate better decision-making based on real-timeaccess to activity performance measures, what dol-lar value does better decision-making bring to thecompany?

Projected benefits that are not backed up withsolid evidence, or that are unrealistic, perhaps overlyaggressive, may be received skeptically during lead-ership review of the project justification. So it’s cru-cial that you do as good a job as possible to quantifyeven the intangible benefits. While much of theoperations data required to develop a credible busi-ness case can be collected from reports and informa-tion generally available to the warehouse, obtainingfinancial business parameters and detailed benefitassumptions may require support from other sources.Depending on the level of detail required in theinvestment and benefit assumptions, you may needto seek assistance from software vendors, internalengineering support staff or external consultants.

As you put together your business case, considermanagement’s hot buttons. For example, because thebenefits realized by improving customer satisfactioncan be difficult to quantify, they might not be show-cased in some business cases. However, for a com-pany where poor customer service has been a recentcorporate issue, highlighting specific benefits of

Figure 3. Benefit Category Charting

Man

agem

ent

Res

pons

iven

ess

improved customer service may be a key to winningmanagement buy-in. In this case, you might want todetail service-related benefits such as these:

• Improving scheduling consistency and on-timedelivery can help position the company as a supplierof choice.

• Improved customer service levels will increasesales and margins and reduce returns.

• Ability to give improved order status informa-tion increases responsiveness and customer confi-dence.

• Improved management of the overall billingcycle to customers will have a positive impact oncash flow, resulting in lower company interest costs.Timely and accurate customer invoicing brings cashin quicker.

Categories of savingsSavings categories that can be used when build-

ing a WMS business case are shown in Figure 3. Theitems in Area I are easily quantified. They are often atthe top of management’s wish list and generallyshould be included in your business case. The items inArea II may be quantifiable, depending on your oper-ation. They may be included in the business casedepending upon the situation. The items in Area IIIare difficult to quantify, so should generally be includ-ed in the business case in narrative format, if at all.

The savings categories shown in Figure 3 areillustrative. You can prepare a similar figure thatreflects your own situation, and that enables you toprioritize benefits and determine how to includethem in your business case.

Discussion of benefitsLabor. Labor benefits generally comprise more

than 50 percent of the overall WMS project benefit.Labor is generally classified in three areas; Direct,Indirect and Administrative. Table 4 summarizes theareas and types of potential labor classificationsimpacted by a WMS.

Because of the impact this benefit will have onthe project’s NPV and potential make-or-break deci-sion, make sure that you really understand the laborbenefits that can be realized with a WMS. Gettingthe level of detail required to accurately estimate thisbenefit may require other support, either from thesoftware vendor, your internal engineering supportstaff or a project consultant.

When identifying labor productivity improve-

ments, keep in mind the potential to reduce the needand excess costs of overtime throughout the year.For example, if operations are better planned andmanaged, material handlers are better equipped tocomplete the daily workloads during the standardwork day.

• Direct Labor. It is reasonable to expect up to a20 percent improvement in direct labor productivity.Direct labor is better utilized due primarily to a sys-tem’s ability to provide specific task assignmentsbased from a concise picture of inventory availability,inventory positions, and the overall movement activi-ties to be accomplished. System direction or task-interleaving dispatches operators to appropriate tasksgiven their capabilities, the available equipment andthe overall work load. System-directed activities mini-mize operators’ time spent identifying what actionsneed to be accomplished and planning the activitiesonce they have been identified. Note: Be careful notto overstate labor benefits associated with task inter-leaving. Task-interleaving does not work well in all


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Table 4. Labor ClassificationsType Class

Pre-receiving Direct

Receiving Direct

Returns Direct

Put-away Direct

Replenishment Direct

Picking Direct

Value Added Processing Direct

Shipping Direct

Supervision Indirect

Expeditors Indirect

Inventory Control Indirect

Training Indirect

Shipment Planning Administrative

Inventory Management Administrative

Trafficking Administrative

Order Planning Administrative

Customer Service Administrative

Data Entry Administrative

environments or processes and is generally not usedin the initial WMS implementation.

Look at potential labor savings by function, asdiscussed below:

• Receiving: At system start-up, labor require-ments in receiving generally stay the same for directmaterial handling but are eliminated for clericalactivities. Efficiencies in downstream warehouseactivities depend on the receiving process to captureand record accurate data. Efforts should be made toensure data integrity.

• Put-away: These activities can be combinedwith the receiving process to minimize materialhand-offs and staging, or put-away can be performedas a separate activity to expedite the turnaround oftrailers and improve dock utilization. In either case,the system’s ability to identify appropriate put-awaylocations and direct the operator to the location willminimize an operator’s time spent searching foravailable storage locations.

• Replenishments: In a forward pick/reserve stor-age environment, wait time for replenishments canbe eliminated if replenishment activities can be man-aged by the system. In a system-directed environ-ment, forward pick locations are triggered toautomatically generate replenishment commandsbased on inventory threshold levels. Replenishmentactivities are then performed in advance of pickoperators being dispatched. This offers a significantsavings potential if you can quantify the amount oftime pick operators spend waiting for material to bereplenished. Additionally, delays in the order pickingprocess can potentially lengthen the overall orderdelivery cycle time.

• Picking: Travel time can consume up to 65percent of a material handler’s pick activity time. Inpicking alone, you can expect a 25 to 50 percentreduction in overall travel time. This is accom-plished by batching orders to allow picking of multi-ple orders on one pass through the warehouse; byguiding operators through the most effective travelpath in an effort to minimize and practically elimi-nate backtracking activities; and by verifying inven-tory availability for picking prior to sending thematerial handler out to pick. On average, it takesfour times as long to pick an item that is not in thecorrect location or quantity than it does to pick thecorrect product or quantity.

• Shipping: Shipping operator productivity isimproved as a result of the WMS’s ability to consoli-

date and confirm complete orders prior to shipmentpreparation. When shipping operators begin to buildshipping loads, their time is spent preparing andloading orders rather than searching for misplaceditems and information.

• Crossdocking: The WMS has the potential tominimize the amount of labor spent on put-away, stor-age, and picking. Any labor savings claimed undercrossdocking should be net of any additional laborrequirements to support a cross docking program.

Less paperwork and fewer handwritten formswill improve labor productivity by freeing operatorsto focus on completing actions rather than handling/locating paperwork. However, do not be misled intobelieving that a paperless environment is a complete-ly hands-free environment. If the data collectionoption chosen is radio frequency (RF) or batch hand-held units, operators will still be required to handleand manage the handheld units. Handheld data col-lection units are, however, a better alternative thanpaper intensive systems in many operations.

• Indirect Labor. Expect up to a 30 percentimprovement in indirect labor productivity. As thesystem enables operations to run more smoothly,your supervisors can spend time proactively manag-ing the day-to-day operations of the facility and lesson firefighting activities. As plans are executed andproactively managed, fewer resources will be dedi-cated to expediting rush orders through the facilitydue to errors in inventory availability or lost prod-ucts. In addition, inventory control personnel canimplement and manage cycle counting programs andallow the company to receive the benefits resultingfrom reducing the need for an annual physical inven-tory. From a training and learning curve perspective,automating processes using a WMS makes it possi-ble for new employees to become efficient morequickly by simply following instructions providedby the WMS.

• Administrative Labor. Expect up to a 75 per-cent improvement in administrative labor productivi-ty. Paperwork reduction will improve overall dataintegrity and minimize the need to store large vol-umes of historical paper files. Less paperwork alsoresults in less paper handling and management bythe clerical staff.

You can also expect improvements in laborresulting from personnel in shipment planning, ordermanagement, inventory management and customerservice being able to depend on credible information


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provided by the WMS. Better information meansless time spent double-checking data accuracy.

The amount of labor saved will depend upon theparticular nature of your business. One approach tocalculating potential savings is to break labor downinto separate tasks, then identify which tasks will bestreamlined by using a WMS and how long thesetasks currently take. Calculate the labor saved foreach task, and extrapolate. The following examplesdemonstrate how to quantify labor benefits undervarious scenarios.

Example. If a data entry clerk spends 50 percentof each day keying in transaction information,roughly 1,040 hours each year are spent on the task.Assume this task would be eliminated using a WMS.Assuming there are three data entry people, andwages are $8 per hour, then you can expect to save$24,960 (3 x $8 x 1040 hours) in indirect laborcharges alone by automating the data collectionprocess. Note: This assumes the ability to eliminate1.5 data entry clerks. Keep in mind it is difficult toremove 0.5 of a labor requirement.

Example. A company installed an automated timeand attendance system in conjunction with a WMS.The business case development team estimated thetime lost using a manual system versus the automatedprocess as five minutes per day per employee.Applying this time to the total number of employeesand the average hourly rate allowed them to projectthe potential savings associated with this task:

A Number of employees 100

B Minutes lost per employee 5

C Average hourly wage $9.00

D Lost daily productivity $75 A x B / 60 x C

E Lost weekly productivity $375 D x 5 days

F Lost yearly productivity $18,750 E x 50 weeks

Inventory accuracy. If the physical inventoryon the books and the physical inventory in a ware-house do not match, the situation can be chaotic.When an order picker goes to retrieve an item and itis not there (or not enough is there), the picker mustcomplete a series of manual checks and backtrackingto fix the problem and get the order out the door. Inaddition to hampering productivity, misstated inven-tory levels lead to poor purchasing practices, poten-tial product shortages, and reduced customer servicelevels. Inaccurate inventory can also result in a lackof confidence in the warehouse, leading to the pur-

chase of more inventory than necessary to ensureagainst stockouts. This results in excess inventory,which ties up capital and negatively affects capacity.The results of inventory inaccuracy can be hugecosts, low productivity and bad customer service.The self-checking nature of a WMS, in addition to agood cycle counting program, ensures inventoryaccuracy of 99 percent plus. This high level ofinventory accuracy is the foundation for many bene-fits that can be realized with a WMS.

Inventory. While increased accuracy and effi-ciencies in material handling activities may reducethe level of safety stock requirements, the impact ofthis reduction on overall inventory levels should becautiously evaluated. It is unlikely that the WMSwill have a significant impact on the predominantfactors controlling inventory levels, such as lot siz-ing, lead times, and demand variability. However, aWMS can help reduce excess safety stock and “justin case” inventory that is stocked to ensure customerorders can be filled. Because a WMS improvesinventory accuracy and provides credible inventoryinformation, inventory levels can generally bereduced without affecting customer service fulfill-ment levels. Additionally, a WMS provides betterinventory visibility, and may allow you to implementa consignment program that essentially shifts thebook value of the inventory to suppliers.

Improved inventory management results infewer raw material and in-process inventories need-ed for a given level of output. For companies claim-ing this benefit, inventory reductions can range fromfive to 20 percent or more. This savings can be ratio-nalized in several ways. The most obvious is thelowering of interest payments on the inventory sit-ting on the shelves. Additionally, reducing invento-ries will typically reduce the warehouse spacerequired to store it (the exception being when thereduction in inventory value is primarily due to achange in the mix of items). Lower inventory levelsnaturally lead to reduced obsolescence and storagefacility expenses. These cost savings are directlyassociated to savings in carrying cost reductions.

When attempting to quantify savings in invento-ry reductions, keep in mind whether recent invento-ry-related projects have been implemented. If therehave been recent initiatives, the potential for claim-ing inventory reductions again may be viewed asdouble dipping. For example, a team at one compa-ny developed a business case for a WMS that includ-


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ed inventory reduction as a benefit. The companyhad just finished implementing an EnterpriseResource Planning (ERP) solution. A large part ofthe ERP implementation justification included a sig-nificant reduction in inventory. Because of that, theWMS business case was not allowed to claim anyadditional inventory reduction benefit. Keep in mindthat claiming inventory reductions with a WMS pro-ject that is on the back end of an ERP implementa-tion can be both a financial and political risk. If theWMS team identifies inventory benefits, someonefrom the ERP team may have some explaining to do.

When calculating inventory savings, considerhow the inventory reduction will occur. Reduction ininventory is typically accomplished by purchasing ormanufacturing at a rate lower than demand. This cre-ates a one-time cash flow benefit to the business.The one-time cash flow benefit typically occurs overtime as inventory is reduced. Operating with reducedinventory levels in the future leads to reductions inassociated “carrying costs.” Inventory reductionstypically follow a similar curve to that shown inFigure 4.

Any business case including a one-time cashflow benefit for inventory reduction should addressthe question of how inventory will be reduced andthus when cash flows will actually occur. Inventoryreduction can be achieved through a number ofmethods, each with different cash flow implications:

Use Up. Using up inventory enables purchasingor producing product at a rate less than demand forsome period of time. This is the most desirable

option as it generates a one-time cash savings in theamount of the inventory reduction.

Discount, Return, or Resale. This is similar to theuse up option except that inventory is sold below costor some other penalty is accrued. Cash flows includethose from the sale as well as income tax effects.

Scrap. Inventory is reduced by disposing of it forlittle or no cash value. In this case, there may be somecash generated by any residual value, but the domi-nant source of cash is due to the increase in expensedue to this transaction (a write-off) and the resultingdecrease in taxable income, and thus taxes paid.

If an inventory reduction benefit is being consid-ered in the business case, consider spreading the sav-ings over the NPV planning horizon.

Carrying Cost. Inventory carrying costs rangefrom 25 to 35 percent of the overall inventory value.Figure 5 highlights various components comprisingthe carrying cost factor.

A WMS will reduce carrying costs by improvingaspects of each carrying cost component:

Capital costs. Inventory investment can bereduced if effective planning and corporate-widebuy-in is obtained due to buyers’ and planners’ con-fidence in more accurate inventory records.

Inventory service costs. If the overall inventoryvalue is lowered, insurance and taxes should lowerproportionally.

Storage space costs. Generally less inventoryand more efficient use of existing space will result ina reduction in storage space requirements. If you canfind alternative uses for the extra space, this may


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Figure 4. Inventory Reduction Cash Flow Scenarios

classify as a cost savings (or additional revenuedepending on the space use).

Inventory risk costs. Overall obsolescence, dam-age and pilferage can be minimized. Essentially, cor-relating WMS benefits into improved inventoryturns results in an associated dollar reduction in theinventory carrying cost factor. Figure 6 shows thegeneral inverse relationship between inventory turnsand inventory carrying cost. As inventory turnsincrease, carrying cost is lowered.

Inventory Write-Off. Inventory write-off general-ly results from inventory that cannot be located dur-ing a physical inventory or during a cycle counting.To maintain operational efficiencies and followingstandard accounting procedures, the “lost” inventoryis removed from the system and the associated valueis written off the financial books. With improvedinventory accuracy and real time accountability,inventory tends to get lost less frequently in a sys-tem-controlled environment. The Accounting orFinance representative on the business case develop-ment team should be able to identify the annualinventory write-off.

Physical Inventory Count. The inherent inven-tory accuracy and cycle counting capabilities

enabled by a WMS can eliminate the need for aphysical count. Cycle counting combined with peri-odic accounting evaluations enables an organizationto spot short-term and/or seasonal fluctuations, todiscern long-term trends early, and to avoid end-of-year inventory surprises.

Improvements in inventory control can result ina 50 to 100 percent saving if the number of times aphysical inventory is taken can be reduced or elimi-nated. Generally this cost savings is phased in overseveral periods after a WMS is implemented. Mostorganizations prefer taking several trial “proof ofconcept” inventories before they begin to reduce orcompletely eliminate physical counts. The ability todiscontinue the count process may also be subject tothe judgment of your auditing partner. Remember, ifyou do replace a physical inventory process with acycle counting program, you may have to factor inthe additional cost of the cycle counter(s) and theassociated support requirements.

Example. A WMS enabled a consumer goodscompany to increase finished goods inventory accu-racy from 98 percent to 99.7 percent. With thisincrease in inventory accuracy, the company was ableto implement a cycle counting program and eliminate


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Figure 5. Carrying Cost Components

the semi-annual physical inventory process, resultingin a net savings of $150,000 annually.

Demurrage. Delays in the shipping and/orreceiving processes can create detention charges andeat into the company’s profitability. With a WMSthese costs can be minimized as the activities inthese areas are better managed and firm commit-ments can be made to carriers.

Expediting. Rush and expedited order costsshould be reduced by as much as 50 to 75 percentwith the WMS. This savings is directly associated toshipping the correct order the first time. This alsoreduces the costs associated with managing thereturns process, as the volume of orders beingreturned due to incorrect shipments is reduced. Inaddition to realizing the hard savings of reducedexpedited freight charges and reduced re-stockinglabor, you will gain customer service credibility.

Sales. Can the overall profitability of the compa-ny be improved by maintaining better fill rates?Most businesses are in a position to generate a profitfrom each item sold. If the item is not sold the profitwill be foregone, if only temporarily. If you can

quantify sales improvements resulting from betterfill rates, this may classify as a benefit for the busi-ness case.

Income improvements are typically intangible,but they can still be quite significant. For example,two areas potentially affecting sales are increasedcustomer satisfaction and improved cost data forbidding or pricing:

Increased customer satisfaction is a major sidebenefit of the numerous other benefits a WMSoffers: faster response time, more accurate billings,higher quality products, etc. Increased customer sat-isfaction, in turn, means more repeat business andmore word-of-mouth sales.

Improved cost data for bidding is a less obviousbut still significant benefit of a real time WMS. Theability to make bids based upon accurate, up-to-the-minute data at all times, enables you to minimizeoverbidding and underbidding. The result is not justmore successful bids, but more profitable ones.

Paperwork. Carrying paperwork around forpicking and stocking in a warehouse drasticallyhampers productivity. Pickers using paper pick lists


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Figure 6. Carrying Cost and Inventory Turns Relationship

may spend as much as 65 percent of their timesearching for product, rectifying discrepancies andmoving from point-to-point, with the remaining 35percent actually picking. The use of paper increasesthe likelihood of errors resulting from misreading oroverlooking a line on a pick list. Paperless WMSapplications provide real-time information, reducethe possibility of data entry errors and informationdelays, and improve productivity overall. Whilemost of the savings components from a paperlessenvironment fall under labor productivity improve-ments, there are other related areas to consider forpotential cost avoidance:

• Cost to handle: How much time do you spendmoving, storing and retrieving paperwork? Do youneed to store paperwork? Is there a cost associatedwith this storage?

• Paper cost: What is the actual cost of the paperyou use? How much will you save in reducing yourneed for paper?

• Printer supplies/maintenance cost: How muchmoney is spent on printer supplies and maintenancecosts? Can any of this cost be avoided? Any savingshere should be net of any new costs incurred for barcode and label printer supplies.

Shipping Accuracy. One company discoveredthrough research that up to two percent of its out-bound shipments were in error. Further researchfound it cost on average of $200 to correct the typi-cal shipping error. This may seem like a smallamount, but when it’s multiplied by the number ofshipments handled each year, the hidden costs canbe high. A typical business may discover it is spend-ing as much as $30,000 or more just to correct inac-curate shipments. A WMS can virtually eliminateshipping errors by providing order complete verifi-cations, automated order consolidations, and ship-

ment loading conformations.

Space. Can you eliminate or minimize the needfor outside storage, thus reducing lease cost (normal-ly on a dollar per sq. ft. basis), insurance, and possi-bly transportation costs? Depending on the size,complexity and activity of the off-site storage, youmay even be able to save labor costs associated withmanaging and transporting the inventory back andforth. Improvements in space utilization generallyrange from five to 15 percent.

Example. A high-tech manufacturer was experi-encing significant growth in demand for its product.When considering the implementation of a WMS tohelp it manage its raw materials storage operations itincluded a potential operating expense reduction ineliminating the need for outside storage. Table 5summarizes the annual dollar cost avoidance identi-fied in the exercise.

Space utilization improvements are generallystep functions. In a typical situation where the distri-bution infrastructure is owned, the creation of emptyspace in the warehouse produces no real benefit. Tobe considered as a benefit, the amount of spacemade available must be enough to provide for otheractivities. For instance, if 500 sq. ft. is freed up, thiswill provide very little benefit. If, however, 5,000 sq.ft. becomes available, several alternatives can bepresented for the new space.

For internal space savings, if enough space ismade available to avoid new construction expansionor a greenfield site, this can be directly quantified asa cost avoidance. For example, if enough new spaceis available to be used for light manufacturing, valueadded services, offices, etc., this can be classified asa savings. If the new space can be subleased, thiscan also be classified as an incremental cash inflow.However, you must also consider the potential cost


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Table 5. Dollar Costs AvoidedCategory Annual Dollars Comments

Off-site Storage $57,000 20,000 ft2 @ $2.85 per ft2 per year

Couriers $48,000 300 days per year @ 16 hours per day @ $10 per hr

Van Lease $6,000 $500 per month @ 12 months

Van Fuel $10,000

Fork Truck $6,000 1 off-site truck @ $500 per month @ 12 month lease

Fork Truck Maint. $300 5% of lease cost

1 Employee $30,000 1 person dedicated to off-site storage facility

Total $151,300 Annual cost savings/avoidance

of refurbishing the facility as required by the poten-tial tenant. Additionally, location utilization isimproved by using a WMS. A non-automated opera-tion is generally considered at capacity when 80 per-cent of the locations are being used at any giventime. With a WMS, operating capacity can beincreased to 90+ percent. This improvement is dueprimarily to the system’s ability to continually man-age inventory consolidations, re-warehousing activi-ties, and mixed item locations.

Example. Prior to implementing a WMS, a bookpublishing company was able to effectively managethe warehouse with 80 percent of the locations uti-lized. When the system was implemented, the ware-house was able to operate at 90 percent locationutilization. The additional locations “created” by theWMS allowed the company to avoid leasing off-sitestorage and an annual expense of $175,000. Thecompany also saw incremental labor productivityimprovements and damaged product reductions asproduct was handled less frequently and not storedin “non-storage” locations (aisles).

Equipment. Like space, equipment utilization isconsidered a non-linear cost. True equipment utiliza-tion improvements can be realized if equipment isleased. In this instance, capital is freed to invest inother opportunities. If the equipment is owned itmay be a one-time savings (cash inflow) from thesale of the equipment. Also consider the potentialsavings from lowering the overall equipment mainte-nance costs if you have less equipment on hand tomaintain. Less equipment (and less maintenance)may even improve space utilization if reducedequipment requirements translate into a reduction in

associated equipment staging and repair arearequirements. Improvements in equipment utilizationcan range from five to 20 percent. Note: Be conserv-ative when considering this benefit.

Employee Satisfaction. A benefit often over-looked with any new technology investment is theimpact on employee satisfaction and retention. Ifwarehouse associates are struggling with an anti-quated and cumbersome system, implementing anew system can improve morale and job satisfactionand potentially reduce employee turnover (whichleads to reduced new employee orientation costs,one of the most hidden and difficult to quantifycosts/savings). The other side of this benefit ispotentially increased labor costs that may result inan effort to retain a more skilled and qualified workforce. This is especially significant in areas of newtechnology where skilled labor resources may be inshort supply. However, it is better to train employeesand lose them than not train them and keep them.This intangible benefit will be difficult to quantify.

Start-up Time. Training new material handlers,due to turnover or peak period operations, can becostly and time consuming. By automating processesusing a WMS, new employees have less to learn andcan become efficient more quickly by simply follow-ing instructions provided by the WMS on wirelessterminal screens.

Also in this category is the potential to run mul-tiple facilities from one computer. Depending on thesize and activity of off-site facilities, they may beable to be remotely managed using the same WMSbeing used in a larger main facility. While larger dis-


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Figure 7. Customer Service Measurements

tribution networks will require separate systems foreach facility, if each operation is using the same basesystem, sharing resources between facilities becomesmuch easier. The learning curve is shortened foroperators moving between facilities. This intangiblebenefit will be difficult to quantify.

Cycle Time. With improved inventory visibility,order cycle times can be improved from 10 to 50percent. Improved cycle times generally result froma combination of several other factors including con-firmed inventory availability, timely replenishmentactivities, improved labor planning, etc. With shorterorder processing cycle times, you may be able toextend your order placement deadline, potentiallyproviding you with a competitive advantage.

Customer Service. Automated warehouse opera-tions enable customers to access real time order statusinformation on demand. Additionally, specific eventnotifications can be pushed to interested parties tokeep key personnel notified of critical activities. Forcompanies shipping directly to consumers, same dayshipment has become the minimum expectation. AWMS can allow orders to be efficiently managed andmay allow you to extend your order cutoff time. AWMS can also impact customer service levels bymore effectively managing inventory availability,order processing activities and shipment management.Figure 7 highlights the alternative ways customer ser-vice levels can be measured and the potential impact aWMS can have on each measurement.

Visibility. Production management, customerservice and even customers can have instant accessto order status and can monitor performance.Knowing what materials went into what product, andwhat product went to which customer is criticalinformation. Much of the information required in theSupply Chain Event Management applications isderived from WMS-type execution systems.

Misplaced Orders. Have you ever lost an order in the warehouse? What is the cost to find orre-pick the order? Also factor in the cost to un-pick(put-away) the order once it is (hopefully) found.Misplaced orders may also have a negative impacton customer service, labor costs, and order deliverycycle times.

Performance Measurement. Being able to mon-itor and provide real-time performance feedback canprovide motivation to the work force. WMS applica-tions possess vast reporting capabilities because

every transaction is recorded with “who, what, when,and where.” In a paper-based environment, the onlymethod available for tracking productivity and per-formance is manual logs. Logs are time-consumingand susceptible to error, and they are only as good asthe information each operator provides. An effectiveperformance measurement system should allow youto incorporate specific Key Performance Indicators(KPI) relevant to your business.

Workload Management. Most paper-basedbatch business systems typically “dump” orders tothe warehouse. These orders generally generatepaper-pick tickets that need to need to be sorted,batched and prioritized before being released to thefloor for picking, an error-prone and labor-intensivepractice. More importantly, the warehouse does notknow the size of tomorrow’s batch until that morn-ing, which prevents efficient manpower scheduling.A WMS gives the warehouse control of the work-load and gives a view of what is coming. The sorta-tion, batching, and prioritization are accomplishedby the WMS.

WMS reporting functions will provide estimatesof personnel hours necessary to complete the day’sscheduled activities. With the estimates, manage-ment can make planning decisions to balance opera-tional capabilities with customer commitments.

Management Information. A WMS will pro-vide management with information needed to proac-tively manage daily operations and can open up newcategories of information that were never beforeaccessible. Management can gain a better under-standing of the warehouse personality through vari-ous measures including order profiles, locationutilization, dock utilization, weekly shipping his-tograms, etc. This information will provide a strongfoundation for continuous improvement and allowwarehouse personnel to better respond to a rapidlychanging business environment.

EDI Requirements. Some companies are forcedinto WMS applications because of their customers’electronic data interchange (EDI) requirements. Endcustomers want an EDI Advanced Ship Notice(ASN) detailing the shipment they will receive at thepiece, carton and pallet level. Attempting to providethis detail manually could potentially add significantlabor requirements to your operation. A WMS canprovide this detailed information automatically when


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Labor Benefit Data RequirementsCategory Measure Comments

Direct Head Count FTE Full Time Equivalent

In-direct Head Count FTE Full Time Equivalent

Administrative Head Count FTE Full Time Equivalent

Hours worked per week Hours

Weeks worked per year Weeks

Average direct labor wage $

Average in-direct labor wage $

Average administrative labor wage $

Annual warehouse transactions # Number of receipts, putaways, picks, shipments,moves, counts, etc.

Average annual wage increase $ Used to project future labor costs

Direct labor productivity impact %

In-direct labor productivity impact %

Administrative labor productivity impact %

Inventory Reduction Benefit Data RequirementsCategory Measure Comments

Current Inventory Level $

Annual Business Growth %

Cost of Capital % Corporate Interest Rate

Expected Inventory Reduction %

Unless otherwise noted, for planning cash flows, assume the inventory reduction is taken in the first year of systemuse. For a more sophisticated business case, actual inventory reductions may be spread across multiple years depend-ing on the reduction approach used.

Carrying Cost Benefit Data RequirementsCategory Measure Comments


Current Carrying Cost % Corporate Interest Rate


Expected Inventory Reduction %

Expected Carrying Cost Improvement %

Inventory Write-off Benefit Data RequirementsCategory Measure Comments


Current Annual Inventory Write-off $


Expected Inventory Write-off Reduction %

Figure 8. Benefit Data Requirements


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Physical Inventory Count Benefit Data RequirementsCategory Measure Comments

Current number of annual counts #

Average cost per count $ Labor, materials, services, etc.

Future number of annual counts #

Average annual labor wage increase %

Unless otherwise noted, assume the “Future number of annual counts” is attained in the first year of system use.However, reducing and/or eliminating the number of physical counts performed annually is generally accomplishedover several years. For a more thorough cash flow analysis, reduced annual inventory counts should be phased inover several periods.

Demurrage Reduction Benefit Data RequirementsCategory Measure Comments

Current Annual Demurrage Costs $

Expected Demurrage Reduction %


Expediting Reduction Benefit Data RequirementsCategory Measure Comments

Current Annual Expediting Costs $

Expected Expediting Reduction %


Sales/Margin Improvement Benefit Data RequirementsCategory Measure Comments

Current Annual Revenues $

Current Gross Margin %

Expected Business Growth Improvement %


Note, only the gross margin of the business growth improvement is included in future cash flows.

Expediting Reduction Benefit Data RequirementsCategory Measure Comments

Current Paperwork Management Costs $

Expected Paperwork Cost Reduction %

Expected Cost Increase for New Supplies $


Shipping Error Reduction Benefit Data RequirementsCategory Measure Comments

Current Annual Shipping Errors #

Cost Per Shipping Error $

Expected Shipping Error Reduction %


the order is shipped. The information can be eithersent directly from the WMS or, to keep all relatedsystems in sync, the information would be sent tothe host business system where electronic informa-tion is generated and sent to trading partners. Ineither case, the WMS is critical to tracking, record-ing and providing the detail required for EDI typetransactions.

Value Added Services. As with EDI, warehous-es are often forced to provide special labeling andpackaging for customers. A WMS can facilitate suchthings as special bar coding, specific license platelabels, and carton content information. To assess acost/benefit in this category, consider the additionallabor required to manage value added processesagainst the potential revenue impact of losing keycustomer accounts if your warehouse is unable tomatch your customer’s shipping requirements. Thisoften becomes a cost versus cost comparison: thecost of buying the new system to enable your organi-zation versus the cost of losing customers.

Upgrade Paths. Packaged WMS solutions pro-vide future assurance of continuous improvementfrom the on-going system upgrades and revisionsfrequently performed by vendors. Most vendors havemultiple customers across various industries. As spe-cific modifications are made for various customers,these “mods” are often included in future releases ofthe base product. Many times, these “mods” repre-sent best practices you should consider implement-ing in your facility if you elect to upgrade yoursystem to the most current version.

System Availability. The technology availabletoday is much more dependable than systems of thepast. Historically, systems required down-time to runbatches and perform general system maintenance.

With a new system, it is reasonable to expect 99 per-cent plus up-time. Even if the host business systemis out of commission, the WMS will still operate toprocess orders.

User Group Networking. If your WMS solutionis from a third party vendor, chances are the vendorwill have an existing installation base and a usergroup. Many vendors offer regular user group confer-ences at least once every other year. Some vendorseven support smaller regional conferences. Thesemeetings offer good opportunities for the systemusers to meet and discuss various uses of the system.Quite frequently best practices from one industry caneasily be applied across multiple industries using thesame system. On-line communities are another, morecost effective way that user group participants canshare practices and questions with others in thegroup. Either way, this chance to meet and shareideas with colleagues using the same vendor systemmay lead to better ways of running your business.

ConclusionIn summary, there are many compelling reasons

to invest in a system providing an 18- to 24-monthpayback. Whether the benefits are cost reductions orsimply staying in business, you run a better chanceof a successful implementation if all of the benefitsare identified up front and leadership’s expectationsare proactively managed. Developing a thoroughbusiness case for a new system can be exciting. Whoknows? You may even learn something about yourbusiness along the way.

This supplement is by Christopher R. Barnes, an independent supply chain/systems consultant. Chris can be reached at 770-331-3908; e-mail, [email protected].

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Warehouse Management and Control Systems is published monthly by Alexander Communications Group, Inc., which provides news, data and informationon key distribution and warehousing topics though newsletters, books and looseleaf services.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding thatthe publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services ofa competent professional person should be sought. — From a Declaration of Principles jointly adopted by a committee of the American Bar Associationand a Committee of Publishers.

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