Three Simple Steps to Calculate ROI for Your WMS
When talking to a distributor for the first time, I often hear about trade-offs and workarounds that are devised to deal with a myriad of warehouse challenges or limitations. Many are looking to eliminate receiving errors, increase inventory accuracy, and streamline picking and packing efficiencies. At the same time, it’s not uncommon to hear from distributors dealing with other issues such as product obsolescence, monitoring employee performance, theft in the warehouse, or even dealing with the fallout from recently losing one of their largest customers.
The common thread between their concerns is how best to justify the return on investment (ROI) of a purchase such as a warehouse management system (WMS) to tackle these challenges. Unsurprisingly, digging into the finer ROI details of any significant purchase is typically put on the back burner. Unless you’re a finance wizard or your job involves analyzing the merits of a capital investment, it’s a lot to ask of your warehouse or operations manager to research and develop a plausible ROI calculation and then defend it in front of the company’s leadership.
We use a tool to help distributors easily calculate the ROI of a WMS purchase. This exercise is usually simplified by breaking down the components including productivity, accuracy and labor. Here are three simple steps distributors can take to calculate the ROI from a WMS.
A. Start with a plan
One misconception about calculating ROI is that it requires an MBA degree and cumbersome Excel spreadsheets. That’s certainly possible – and we can provide a sample calculator spreadsheet, if you dare – but it’s not required. At its most basic, you should start with an ROI plan that includes strategic growth goals and an analysis of your practices to identify the areas that need improvement the most. As Douglas Hunter, director of operations at Mechanix Wear, shares: “Far too often, the larger issues are obvious because they are triggers for your organization’s search for a WMS in the first place. You should know what your company wants to achieve by adding a WMS to your operations. Examples of some areas to focus on are inventory accuracy, measuring productivity, pick path sequencing, and paper picking.”
B. Focus on the low-hanging fruit
Douglas’ advice on first starting by creating an ROI plan is on the money. From our experience, distributors generally focus first on receiving because they’re able to get inventory checked in and processed with 100% accuracy. By getting product identified and received accurately and efficiently, there’ll be a ripple effect on other processes throughout the warehouse. It is also the area that, if done poorly, introduces inventory errors right when product comes in the door. For multi-location distributors, I recommend beginning with either the location that handles the most volume or the one that you’ve identified as having the most efficient warehouse operation.
By focusing the ROI plan on your warehouse’s biggest pain points and showcasing the potential for success at other locations, you’re likely to see significant returns – even within your first year of deployment. In most cases, distributors implementing a WMS for the first time will likely recoup their investment within 12 to 18 months, though some have recognized a positive ROI in as little as three to six months.
C. Don’t get mired in an “assumption driven mess.”
Hercules Industries, like many distributors, conducted their own ROI analysis prior to their WMS implement. Ultimately, however, the company found the process to be an “assumption-driven mess.” All too often, distributors get stuck wading through ROI calculators, models, and projections. For Hercules, the results pointed to tangible ROI. The company’s year-over-year holding costs decreased from around 8.2% to about 6.4%. Instead of postponing their WMS implementation project because the ROI analysis created just as many questions as it did answers, Hercules is now more efficient – even though they grew sales and moved more product through their warehouses.
If you’d like to discuss these and other ways to measure the ROI of a WMS implementation, please contact us for a free, customized calculation of how a WMS can help your distribution business succeed.