MHI Solutions Improving Supply Chain Performance
Every year, MHI’s Annual Industry Report queries supply chain leaders on a multitude of topics surrounding their adoption and deployment of innovative technologies—including automation. Survey questions ascertain budgets, operational challenges, investment plans, obstacles to technology adoption and more.
Among the biggest barriers to implementing automation? The lack of a clear business case.
MHI Solutions has assembled the following guide to help supply chain leaders outline and define a business case for automation in their operations. For help, we reached out to the experts at three MHI member companies: Designed Conveyor Systems (DCS), FORTNA and KPI Solutions. As automated systems integrators, they’re all well versed in how to build a compelling business case for an investment in warehouse automation.
It should be noted, however, that the experts at all three firms believe low unemployment and the continued difficulties in staffing warehouses and distribution centers (DCs) make an investment in automation a foregone conclusion. As KPI’s Chief Commercial Officer Jim Kuecker put it, “Automation has become the only way to fill open supply chain jobs—of which there are far more unfilled positions than there are people who want them.”
“How much lost revenue is the lack of available labor costing your business?” he continued. “The crux of this business case is, if you don’t have enough employees to fill your customers’ orders on time and in full, your customers will quickly become your competitors’ customers.”
Not compelling enough? The following illustrates nine critical components to include when developing a business case for automation.
1. Outline Problems and Objectives
The first step in building an automation business case is to identify and define the current challenges and inefficiencies in warehouse operations that automation can address. Detail the objectives that automation is expected to meet, such as increased throughput, accuracy improvement or scalability.
For example, time-intensive walking to manually pick inventory for order fulfillment is both an ineffective use of associates’ time and a limiting factor for increasing throughput. It has even been estimated that picking associates spend up to 70% of their time walking through a facility from location to location, explained DCS’ John Knudsen, project director of consulting.
“With a fleet of autonomous mobile robots (AMRs), pickers can instead be stationed within certain inventory zones. When items are needed to fill orders, tote-carrying AMRs travel to each picker, who places the picks into the tote,” Knudsen said. “By eliminating walking between picks, associates can focus solely on order fulfillment, thereby increasing their throughput.”
Mis-picks and high order fulfillment error rates routinely occur in manual picking processes. Deploying automated picking solutions—including goods-to-person systems—improves accuracy by reducing human involvement in inventory management and order fulfillment operations. “In a typical warehouse, the error rate can be between 1% and 3% of orders and can reduce profitability by 11% to 13%,” observed Ron Egan, VP of sales at FORTNA.
“However, in a warehouse that does not use automation or warehouse management software, the number can be much higher,” Egan continued. “The higher the order error rate, the higher the rate of return, which leads to customer dissatisfaction, higher costs in handling the returns and, in many cases, product loss.”
Manual fulfillment operations also frequently struggles to handle seasonal peaks in demand. That leads to bottlenecks and order processing delays. Today’s automation technologies—such as AMRs and cube-based automated storage—enable greater flexibility, noted Matt Smoker, VP of consulting services at KPI.
“These types of automation accommodate seasonal volume fluctuations, business changes and even relocation to a larger facility,” he said. Smoker added that the increasing availability of “as a service” pricing models also contributes to higher flexibility. “Companies can initially test an automated solution (like a fleet of AMRs) in a limited fashion with a small investment—then add or subtract vehicles as needed.”
2. Identify and Quantify Benefits
Typically, companies seek automation to attain specific operational benefits. When crafting the business case, here’s the place to identify and quantify those expected returns. Curt Kincaid, executive VP of solutions and growth at DCS, offered three common examples:
- Reduction of labor costs. “It’s getting harder and harder to staff a warehouse as the current labor pool is aging and younger workers are less interested in these types of jobs. Adding automation allows an operation to do the same amount of work (or more) with fewer people,” he said. Additionally, automation never gets sick or injured, takes lunch breaks, or requires benefits such as healthcare and vacation time—all costs associated with staffing.
- Increased accuracy, efficiency, throughput and/or capacity in the same space. “Building a new facility or expanding a current one is expensive and time consuming. Implementing automation maximizes existing floorspace while improving handling speed at higher volumes with significantly fewer errors than manual operations,” explained Kincaid.
There are different approaches to quantifying each of these benefits. Many automated solutions make better use of a building’s cubic volume by storing and retrieving inventory at higher elevations that previously stood empty. Improved accuracy can be quantified by comparing current error rates to those projected by the automated solution. To calculate potential efficiency improvements, measure the amount of time it takes to pick an order and compare it to the expected time required with automation. Likewise, if automation increases the order fulfillment rate from 100 orders per hour to 150 orders per hour, a 50% throughput improvement will be achieved.
- Support for additional revenue generation and growth. “If your company plans to expand product lines, add more inventory, or serve new customers, automation is likely the key to achieving the anticipated boost to the bottom line,” said Kincaid. Quantifying that outcome involves assessing the potential impact of automation on sales volume, market reach and customer satisfaction.
3. Analyze Return on Investment
Return on Investment (ROI) calculations provide stakeholders with clear financial justification for proceeding with the automation project, based on projected cost savings and productivity gains over a specific timeframe. There are, however, a variety of different financial metrics that could be considered when assessing a potential automation investment, said FORTNA’s Egan.
“The core component of a financial justification is the anticipated positive and negative cash flow associated with an investment. Net Cash Flow is the cumulative sum of positive and negative cash flows over the life span of the investment. A favorable investment must obviously have positive net cash flow,” he explained.
A pre-tax net cash flow analysis allows for a “quick and dirty” analysis of an investment to determine Net Cash Flow, Simple ROI—the ratio of net cash flow divided by the initial investment—and Simple Payback, Egan continued. “Simple Payback is perhaps the most popular ‘quick and dirty’ method of evaluating a potential investment. Simple Payback is the period of time, usually measured in years, required to recover the original project investment.”
4. Assess Risks and Propose Remediations
This section of the business case recognizes potential risks associated with warehouse automation. It also offers suggestions and strategies that address these risks.
Installing, testing and commissioning a new automated system in an existing facility will impact the rest of the operation, noted DCS’ Kincaid. “Downtime will be necessary in certain areas as the new components are added. That operational disruption will need to be accommodated and timed to have the least amount of impact on overall productivity,” he said, noting that experienced project management and positive rapport between the integrator and the operation can ease this process significantly.
Another risk, added FORTNA’s Egan, is current employees’ potential reluctance to accept automation. Among the most cited concerns are diminished job security, a steep learning curve and unwillingness to change. There are, however, ways to address these concerns.
“Emphasize that the intent [of an automation investment]is not to reduce headcount but to augment and improve current employees’ jobs,” he advised. “Highlight the important role workers play in the operation’s success and how automation can make daily tasks easier to perform.”
Acknowledging that technology can be intimidating, especially when it is replacing processes with which employees have an established comfort level, Egan recommended building in training time during the operational design phase.
“Processes and tasks can be developed to make transitions from manual to automated easy to learn, leading to confident and empowered workers,” he said, adding that gaining the support of warehouse floor-level leaders is critical to a successful automation deployment. “Every operation has one or two workers that others respect and will follow. Identifying these workers and gaining their trust can ease the transition and integration of new equipment and processes.”
5. Implementation Planning
Setting realistic expectations for the design and implementation timeline of the new automated solution is also important, advised Seth Taylor, executive VP of operations at DCS. He noted that it can take three to six months alone to simply get through building a business case for an automation investment.
“After the optimal solution has been determined, the system integrator maps out a formal design and implementation plan,” he explained. “This typically takes between three to six months. Within this step, the applications engineering is performed, equipment, systems and controls are designed, and an installation timeframe is mapped out. At the conclusion of this phase, a functional specification document and budget is produced and approved.”
Next steps include contracting (up to three months), team formation and project kick-off (two weeks), lead time verifications and ordering equipment (two weeks). Depending on the complexity of the project—and on those equipment lead times—Taylor said installation could take anywhere from three to 18 months. Then, finally, it’s time for testing, commissioning and training.
“To ensure the new systems will ultimately perform as expected, it’s critical to allot adequate time for testing of all functional and safety components, as well as for adequate training of operations and maintenance employees. This can take anywhere from a week to a month,” he added.
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