T o start , there are more ways to justify investing in automation than just looking at labor costs . Yes , automation absolutely helps lower the cost of labor , but it goes further than that . Automation can also lower your insurance claims , make onboarding of new employees easier , allow for better work-life balance , use less energy and create growth opportunities using existing land and building infrastructure .
Here are the five key steps you should consider when justifying an AS / RS :
1 . Put Your Plan in Place and Build a Comparison Model .
To begin , you must use analytics and build a model that is defendable under scrutiny . This is done by building a comparison model to price out a conventional ( benchmark ) system vs . an automated system . In this step , both investment costs and equipment costs should be taken into consideration ( these two costs are also viewed separately due to the fact they each have different tax benefits ). Most of the time , an automated system has more upfront equipment / investment costs . The operating costs are supposed to off-set these higher investment costs . So defining them carefully is critical to the success of the justification model . As an example , it may cost you $ 8.0M to build a conventional system , but $ 12.0M for an automated system . That delta of $ 4.0M is the amount that needs to be justified . This comparison is the crux of your justification model .
2 . Make your Model Scalable as your Company Grows .
Your company is growing ; otherwise , you wouldn ’ t be investing . Business growth must be included in this analysis and will increase labor and other costs over time . Ideally , the labor cost value used in the analysis is correlated to annual case volume growth . You will also need to weigh inflation for both equipment ( if future acquisitions need to be included in the analysis ) and labor . These costs are subject to compound growth . So not only does labor increase annually per FTE ( Full Time Equivalent ), but the added volumes over time will also add labor costs because you need more labor to handle the extra volume . When compounded , these costs can be quite eye-opening . Building a model that is scalable allows you to build sensitivities by altering growth factors . These help in preparing what / if analyses .
3 . Define the operating cost for both systems .
Now that you ’ ve properly defined and calculated the upfront costs of a conventional system and an automated system , you must now define the actual operating costs of both systems . In addition to labor , maintenance , energy savings and damage costs , be sure to include the less tangible benefits such as safety , operational consistency , improved order accuracy and more . These are more difficult to quantify but using a generally conservative value that most C suite executives can buy into is a good approach . When complete , your numbers could look something like this : It may cost you $ 2.2M annually to operate the benchmark facility compared to only $ 850,000 to operate the automated system . That delta of $ 1.35M must justify the added cost of automating ($ 4.0M in the above example ).
4 . Project Investment and Operating Costs into the Future
Compare both conventional and automated systems and project your annual savings over 10 + years . Typically , an AS / RS has a lifespan of over 20 years , with some investments in upgrades needed at mid-life to keep controls hardware current . As previously mentioned , apply the appropriate growth factors for both volume and inflation , which will grow the operating costs of both scenarios appropriately .
5 . Take your projected long-term cash flow and bring them back to the present .
Take the differential cash flows between the automated and conventional systems and then calculate the net present value ( NPV ) and / or ( IRR ) by using the NPV / IRR functions in excel . This gives you the result of what you are looking for . If the NPV is greater than zero , it is a project that should be accepted . Why ? Because it exceeded the cost of capital or discount rate used to discount the cash flows . This discounted cash flow technique is preferable over “ payback ” methods because it captures the value of future cash flows instead of just showing the amount of time it will take to achieve your payback . It is not uncommon to see payback values in excess of 5 years , with very strong NPV / IRR values . Your organizations long-term strategy vs . desire for short term returns will come into play .
Implementing automation into your warehouse is a big decision . Understanding the long-term investment of an AS / RS is not simple . It is a significant capital outlay but has the possibility of yielding extraordinary returns . Contact us if you desire help in evaluating automation in your warehouse .
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