3 Steps to Financially Driven Warehouse & DC Process Improvement
With durable goods rocketing up a record 22.6% in July 2014, keeping pace in the warehouse can often be a challenge. Too often, the “only choice” is to throw labor at it and “sneaker power” becomes the best solution at the time.
Throwing labor at a problem is inefficient and costly on many levels. The key to corporate health and growth is being able to handle business fluctuations quickly and efficiently.
A “sometimes easier said than done” strategy is to reduce the cost of goods (COGs) to improve bottom line profitability.
An effective approach to reducing the cost of goods sold is through material handling equipment implementation and process improvement.
Why improve the materials handling process? It’s the fastest way to reduce the cost of goods sold. Improvements come from many benefits including:
- 600% increase in throughput
- 2/3 improvement in productivity
- 99.99%+ accuracy
- 85% floor space savings
- 9 to 18 month return on investment
So what type of material handling products and processes make sense for your organization and applications? The proper level can be determined by implementing a three-step analysis plan.
The three steps include:
- Understand your organization and your customers wants, needs and desires.
- Create a criteria matrix to see the numeric value of your options and decisions.
- Test the financial wisdom with a return on investment analysis.
- Looking in the mirror
Understanding your organization and its customers’ requirements is the first step. Understanding its core principles and value proposition to its customers helps determine the warehouse and distribution systems that will be required to meet these objectives.
If your organization is a retailer who’s known for never running out of stock, then likely having pallet load deliveries to stores is a competency which needs to be focused on.
Manufacturing customized products in lots of one will require a totally different manufacturing and distribution type system. Omnichannel or ecommerce retail sales each have their own challenges and special requirements.
So understanding who and what you are is a vital starting point. Some questions include:
- Company business objectives
- Strengths and weaknesses
- Marketplace challenges
- Customer definition
- Customer expectations
- How do customers expect to receive products?
- In what time frame do they expect products?
- Is there a better way to deliver your goods to meet business objectives?
- Create a decision criteria matrix
By creating a decision criteria matrix, you can analytically measure and evaluate your options to be assured of making the right decisions.
A decision matrix is a list of values in rows and columns that help identify, analyze, and rate the performance of relationships between sets of values and information. Options are scored and totaled to gain a score that can be ranked. The matrix will help you zero in on a system, or combination of systems, that can significantly reduce costs, improve efficiency and influence bottom line profitability.
The critical consideration is to utilize the type of processes, equipment and systems that meets your facility’s specific needs and objectives.
As an initial step in creating a decision matrix, do some homework. Determine the strengths of your company and also areas where your company may need to improve. Is your company known for innovative product design, just-in-time manufacturing, on-time delivery, or fast order turnaround? In what areas would your company like to improve? Better throughput, more efficient operation, faster deliveries, or fewer returns?
- Financial Justification
Once you have selected a system, it’s good practice to get a rough idea if it is realistically possible for your organization to purchase it. There are three major factors that influence price: throughput, space and budget.
Each factor has a direct influence on the other. As the system purchaser, you can usually control two out of the three points.
Sit down with system vendors and use the three-choice approach to see if the type of system you have in mind will work for you. This process will help you refine the parameters of your choice and zero in on the system that fits your exact needs.
In all cases, it’s a must-do to compare the efficiency and operating costs of any material handling process improvement project and determine their ROI/IRR (Return on Investment/Internal Rate of Return). This should always be one of your primary criteria. General accounting practices say any investment with an internal rate of return over five provides immediate value back to the organization.
- Amount of floor space occupied by current equipment
- Cost per square foot
- Number of employees handling transactions
- Number of daily transactions
- Average labor costs
- Value added opportunities. With the space and labor you save what revenue generating activities will be created.
Rigorous ROI/IRR analysis can financially “prove in” your system choice, assuring you that you have made the correct system selection to improve materials flow and meet business objectives.
By building and examining your direct matrix analysis, material handling process improvement offers a valuable solution to reducing operating costs while enhancing quality and customer service. As always, business is about profit, selling, competition and market share, but today, these factors are even more challenging in a shifting global economy.