In general, a company interested in a new WMS will need to develop a business case to receive approval and funding for the investment, as with any other purchase of technology.
I say “in general” because there are some modest exceptions. One is that when fulfillment issues are so great that they are impacting customer satisfaction—and hence revenue—in a meaningful way. In those scenarios, a new WMS project will be launched, directed from C-suite, often with the cost justification later put down on paper for formality’s sake.
A similar scenario occurs when the business model or supply chain strategy changes are so significant that they are simply not supported in the current distribution system, and a new WMS is required to meet new business requirements. In an Omnichannel world, this is an increasingly common scenario.
Finally, if the WMS is just one piece in a major implementation of a new automated warehouse system or supporting a new greenfield DC, usually there will not be a separate justification for the WMS itself.
But in most cases, a business case or ROI analysis is required. There is no magic bullet here: it often involves a tedious estimation of costs and savings over some time horizon, generally 3 to 7 years.
Before a full cost justification is performed, it is wise to do a quick “smell test,” perhaps using a consultant, to observe current operations and staffing and gauge whether an acceptable ROI looks promising with a new WMS.
If the answer from that “quick and dirty” analysis is “Yes,” a more detailed business case can then be developed.
This business case development process is a key exercise beyond getting the WMS project funded. It will force a detailed analysis of the current operation and opportunities for improvement, and help clarify for all stakeholders where the value will be found – and what changes to operations can be expected to realize that value.
Most companies use outside help for the creation of the business case. Expertise and experience are key to doing the business case well, and most companies “don’t know what they don’t know” in terms of this kind of analysis, unless there is staff that has been through the process at least a couple of times. Even then, some outside help is often advisable.
But do not make the mistake of assuming that all distribution consultants are equally skilled, even within a single firm. Vet the specific consultant(s) that will be involved in your analysis—and ask to see (anonymous as needed) samples of business case work they have done for other companies.
Without going into too much detail, typical areas of savings from a new WMS - measured by expected improvements in operating cash flow - include the following:
Labor Savings: By process area (receiving, picking, etc.), achieved from system-directed task management, use of task interleaving, optimally releasing orders for the most efficient picking and least travel distance, etc.
Vehicle Savings: The increased labor efficiency may reduce the number of fork trucks and other equipment required to be in use.
Inventory Reduction: This can be a sensitive area – there are many factors that go into inventory levels – but certainly high levels of inventory accuracy and real-time control and visibility can reduce inventories in several ways. These include reduced write-offs for “lost” and/or obsolete inventories at a minimum – which in some companies can account for millions of dollars annually.
Reduced Shipping Expense: This one may not be obvious, but a WMS with an advanced cartonization function can drive meaningful reductions in shipping expenses by picking the right sized carton and filling those cartons with the most efficiency. The same can also be true in some cases for pallet builds.
Lower Customer Chargebacks: So-called “chargebacks” are common to vendors in the retail sector, for “violations” ranging from missing defined delivery windows to labeling issues. Rather than declining over time as many expected, such chargebacks appear to be rising, perhaps to shore up the bottom lines of struggling retailers. What’s more, other sectors, such as wholesalers, are dipping their toes in the chargeback waters. WMS can reduce or even nearly eliminate these customer fines, and many WMS projects have been justified on these savings alone.
Reduced Outside Storage Costs: Improved inventory accuracy and visibility, as well as better management of “honeycombing,” can create more space in DCs and thus reduce the need for external storage. At a minimum, inbound loads can be directed to the offsite storage site from the start, not sent to storage after it was received into the main DC and the determination on lack of space is made.
The cost side of the business case should be fairly straightforward, with one exception: the rise of Cloud-based WMS that uses subscription-based pricing models, rather than traditionally upfront software license pricing.
The subscription pricing can change the dynamic from one centered around ROI from a major investment to a comparison of monthly costs versus the resulting cash flow savings from the new WMS.
So, for example, if the monthly subscription cost is $35,000, and the expected savings will be $50,000, do you really need to calculate an ROI? (Note: there may be significant implementation costs even in a Cloud model that need to be considered.) You certainly will still need to do the work needed to be able to estimate the savings expected from the new WMS, but subscription pricing does change the analysis approach versus a large upfront license cost model.
One final point: functionality drives ROI, which has two important impacts.
First, functionality differs across vendors. Look at those functionality differences not only in terms of meeting your detailed process requirements, but also with a view towards how those differences might impact ROI.
Second, the ROI will, in part, be determined by what functionality a given company chooses to turn on. Many companies, for a variety of reasons, decide not to use advanced WMS capabilities such as crossdocking and task interleaving. That’s OK - but recognize it could reduce the potential ROI.
Another approach is to start without making use of some of the advanced capabilities, but plan to do so at some future point in time.
That can be an excellent strategy – but those added savings should be reflected in the multi-year cost savings detail. Unfortunately, our experience is many companies never actually get around to adding those capabilities as originally intended, missing significant ROI opportunities.
