Building the Business Case for Automation

Transcription

1 Building the Business Case for Automation Presented by: Thomas Coyne, System Logistics Jerry Koch, Intelligrated John Hill, St. Onge Company Sponsored by: MHI s Automation 2014 MHI Copyright claimed as to audiovisual works of seminar sessions and sound recordings of seminar sessions. All rights reserved.

2 Building the Business Case for Automation Your business is on the upswing, but customer demands for shorter cycle times, capacity constraints and workforce challenges are undermining productivity and throughput. This is a potential sweet spot for automated material handling! How do you build the business case and justify the investment? In this session, you will learn how users are profiling the value proposition and securing C-level approval for moving ahead with the right level of automation for your operations.

3 Building the Business Case Automation Background Survey Highlights Common Objections to Automation Building the Business Case Fundamentals Case Study Wrap-Up

4 Who Are We?

5 Automatic Guided Vehicles AIDC (Bar Code, RFID, Voice) The Automation Automated Storage and Retrieval Systems Conveyors and Sortation Systems Mobile Tablets & Terminals Order Picking and Fulfillment (A-Frames, AS/RS, Carousels, Pick-to-Light) Packaging & Unitizing Machinery Palletizers Robots Software (WMS/WCS/ERP) & Controls

6 Survey Highlights PRO CON Easy to Justify 39% Tough to Justify 61% Low Maintenance 43% High Maintenance 57% Sufficiently Flexible 64% Inflexible 36% High ROI 70% Too Costly 30% Risk Worth Taking 85% Risky Undertaking 15% Competitive Advantage 95% Competitive Disadvantage 6% Career Enhancer 94% Career Killer 6% Asset to Operation 95% A Mistake 5% Without automation, we would have gone out of business We ve reduced errors, improved throughput & speed Facility too small Access to capital Justification hurdles Business still down

7 Common Objections to Automation Not easily flexible or scalable Not enough volume Difficult to maintain Implementation too disruptive Must do all or nothing Too expensive, cannot justify Cannot acquire capital

8 Building the Business Case Characterize current operations Profile current & projected activity Use metrics, set improved performance targets Identify gaps between current & target performance Look at process flows to determine what might be achieved with modified layout, procedures & inventory slotting Analyze potential impact of automation on throughput, accuracy & productivity Quantify potential gains & develop value proposition

9 Case Study: ROI Analysis Executive summary Key financial variables & assumptions Operating cost variables Productivity & labor savings assumptions Other cost savings Financial analysis & results presentation

10 Case Study: The ROI Analysis Process Characterize the opportunity Define financial and operational assumptions Identify alternative solutions Quantify impact of each solution in terms of capital and future operating costs Analyze and compare the ROI s for each solution Assess non-financial considerations such as strategic and cultural fit, environmental issues and risk Select preferred solution Prepare and present the business case and financial and non-financial analyses to decision makers

11 ROI Analysis Process Keys Conservative assumptions Detailed / rigorous modeling Operational benefits in detail Clear presentation of all project life-cycle costs Structured financial analysis Comprehensive supporting materials

12 Executive Summary Content Develop a new fulfillment process that: Eliminates bottlenecks that constrain current capacity Reduces square footage requirements through better lay-out Increases capacity to meet forecasts Holds, stores, picks, packs and ships more product Reduces labor costs on a per piece basis Increases ability to pre-sort orders to reduce freight costs Reduces demurrage costs Includes a level of automation that can be supported by the company s operating personnel Provides capacity for acquisitions & other new business initiatives Can be implemented within capital budget constraints and delivers an ROI that meets Company requirements

13 Business Case Assumptions 23.2% growth in units in current year 17.4% growth in units next year 7% flagship same store increase 12% specialty same store increase 4% from new flagship stores 25% from new specialty stores 9% to 10% growth per year for next 5 years New stores smaller % of total Specialty slows to 7% for same stores

14 Financial, Operating Cost & Productivity Assumptions Variable Value Data Source Wage Inflation 4.0% Company Real Inflation 3.0% Company Cost of Capital 8.0% Company Corporate Tax Rate 30% Company Labor /OH Rate $17.11 / Hour Company Space Cost $7.65 / Sq. Ft. Company Error Cost $50 / Error Published Study Carousel Pick Rate 300 Lines / Hour Simulation Pick-to-Light Pick Rate 200 Lines / Hour Simulation RF Pick Rate (Current) 92 Lines / Hour Company Records

15 Alternatives Considered Alternative #1: Re-layout existing facility to enable more efficient order processing and provide added storage capacity Alternative #2: Move to new facility and implement manual order processing system similar to the one currently used Alternative #3: Re-engineer the complete supply chain to eliminate the need for a centralized DC and move towards pool point / cross dock facilities in the sub-markets served by company

16 Alternatives Compared Alternative #1: Re-lay-out existing facility More expensive Disruptive to operations Does little to eliminate capacity constraints Does not reduce per piece distribution costs May actually increase costs as volumes increase Alternative # 2: Move to new facility Less expensive Less disruptive to current operations Better eliminates capacity constraints Allows for greater expansion in volume & revenue

17 Proposed Project Budget PROJECT COST COMPONENTS Conveyor Sub-System Rack / Mezzanines Warehouse Control System Pick to Light Carousel System Installation Computer Hardware Project Services Project Contingency GRAND TOTAL $ 4,485,000

18 First Year Savings Summary Picking Labor Savings $ 517,605 All Other Labor Savings $ 371,410 Order Accuracy Freight Savings $ not incl. $ not incl. Space Savings $ 217,208 Miscellaneous Other $ 16,000 (Reduced lease costs offset by maintenance, spare parts and software licenses) Total Major Category Savings $ 1,122,223

19 Productivity Improvement Detail Current Year Design Year New System Units Picked/Year 5,827,406 8,430,409 8,430,409 Units per Line (Task) Tasks/Lines/Year 3,461,032 4,981,678 4,981,678 % Increase in Lines 44% Overall Average Pick Rate STAFFING Current Year % Increase Design Year New System Difference Rate/Hour Savings Picking 21 47% $17.79 $517,605 Receiving 6 25% $17.79 $17,009 Replenishment 3 50% $17.79 $17,352 Quality Control 1 50% $17.79 De-Nesting 4 25% $17.79 $35,046 Cleaning 2 75% $17.79 $88,985 Returns & Repairs 2 0% $17.79 Supervisors 2 50% $17.79 $35,389 Shipping 6 33% $17.79 $177,628 TOTAL $889,014

20 Other Savings Considered Freight savings were not included in our modeling. Possible savings also exist in the following areas: Reduced demurrage due to higher storage and receiving capacity in newly designed system. Reduction in product damage due to reduced demurrage Reduction in order sortation charges by carriers due to pre-palletizing by location at the DC Reduction in purchase costs by having more block storage in the new system

21 ROI results were within normal bounds for a project of this size Labor savings were conservatively calculated Many real savings were not included in the calculations Budgets were conservatively established, which when combined with the impact of the optimal design could have reduced the project budget by up to 10% and: Increase the IRR by 6% Cut the payback period by 8 months The results? Qualitative Analysis

22 Actual ROI Analysis Results NPV of Cash Flows (7% CoC) $13,102,843 Simple ROI 306% Internal Rate of Return 40% Payback Period 35.8 Months

23 Return on Investment Analysis Compare likely costs with projected benefits in a structured fashion. Multiple approaches Simple: Payback analysis How long will it take for the benefits of the project to exceed the initial investment & operating costs? Medium: Return on Investment Convert future cash flows to today s dollars using the discounted cash flow (DCF) method. Compare benefits to project expenditures on a percentage basis. Advanced: Internal Rate of Return (IRR) Calculate the rate of return it would take an investment of the project budget in another project, a bank or the stock market to achieve the same benefit as the project, itself. All calculations are done using discounted cash flows. IRR is the most commonly used with larger projects.

24 Polling Instructions Use as the phone number for text message Enter code you would like to vote for and select Send

25 Return On Investment = Benefit of an Investment Cost of the Investment

26 Audience Question What payback period will create a successful ROI? < 12 Months < 18 Months < 24 Months < 36 Months < 48 Months < 72 Months Longer Return On Investment = Benefit of an Investment Cost of the Investment

27 Internal Rate Of Return = The discount rate used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero.

28 Audience Question What's an acceptable internal rate of return (IRR) for an automation project? 0% - 15% 15% - 25% 25% - 35% 35% - 45% <45% NOT SURE Internal Rate Of Return = The discount rate used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero.

29 Return on Investment Analysis TYPICAL RETURNS EXPECTED PAYBACK PERIOD SIZE PERIOD Small Investment < $ 100,000 > 2 Years Medium Investment < $3,000,000 2 to 4 Years Large Investment > $3,000,000 4 to 7 Years IRR SIZE RATE OF RETURN Small Investment < $ 100,000 40% + Medium Investment < $3,000,000 25% to 30% Large Investment > $3,000,000 15% to 25%

30 Care to share those others? Text:22333 Message: Your Message

31 ROI Justifiers The Others: Your Message

32 Audience Question Which of the following have you successfully used in developing an ROI justification? Deferred facility expansion Energy savings Improved throughput Increased order accuracy Improved ergonomics/safety Space savings Reduced product damage Reduced shipping costs Other

33 Building the Business Case for Automation Wrap-Up /asrs /css /isc /ofs /sce

34 FOR MORE INFORMATION GARY FORGER