Calculating the True Cost of Your Operationcdn.modexshow.com/seminars/assets-2018/1271.pdfReclaimed Floor Space • Reclaim Up To 85% Of Previously Occupied Floor Space • Implement

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Presented by:

Tony Arsenault, Regional Business Director

Calculating the True Cost of Your Operation

Horizontal Carousels Vertical Carousels

Vertical Lift Modules

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• Understanding Terminology

• Identifying Cost Justification Factors in your Operation

• Discussing the “Tools”

• Real World Examples

Agenda

First… Understanding Terminology What is R.O.I.?

➢ Return on Investment is simply a generic term used to describe financial justifications for investing in something

Initial Capital Investment…➢ Is the total cost of equipment including freight, installation, implementation & training.

Cost of Capital…➢ Whether it comes from bank borrowed money, selling stocks or bonds, or some other

form, is the same interest rate used for the Discount Rate.

What is Discount Rate?➢ This is the % rate used to discount future monthly free cash flows to Net Present Value

What is Payback?➢ The length of time before the money you save with new equipment will equal your original

investment

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• What is I.R.R.?

– Internal Rate Of Return is the Percentage Of Return where value of the Initial Capital Investment equals the sum of The Present Value Of Future Cash Flows

Initial Capital Investment – (C1+C2+…C60) = 0

Initial Capital Investment $250K

Future Free Cash FlowsMonth 1: $12KMonth 2: $15K

Month 60: $17K

Future Free Cash FlowsDiscounted @ IRR

C1

C2

C60

Understanding Terminology

• What is N.P.V.?

– Net Present Value is the difference between the Initial Capital Investment and the Present Value Of Future Cash Inflows Applying the Discounted Interest Rate

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Initial Capital Investment $300K

Future Free Cash FlowsMonth 1: $25KMonth 2: $27K

Month 60: $17K

Future Free Cash FlowsDiscounted @ Discount Rate

C1

C2

C60

(C1+C2+…C60) - Initial Capital Investment = NPV


• I.R.R.– Your I.R.R. Must Be Above Your Company’s Minimum Benchmark Rate

– I.R.R. Does Not Consider Project Size

• A Percentage Rate Alone Doesn’t Tell Us Much When Comparing Two Different Capital Projects

• N.P.V.– Any N.P.V. Above Zero Is Attractive

– Can Compare Projects Of Different Size because NPV is measured in terms of real $$

• Payback– Used To Assess Long Term Risk

– Shorter Paybacks Are Preferred

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• Recovered Floor Space

– Reduce Costs (Utilities, Lease, etc…)

– Utilize Space Recovered For Add’l Revenue Generation

• Eliminate or Reduce Off-Site Storage Costs

• Reduce downtime due to picking errors

• Security / Better Protection of product(s) stored

• Employee Turnover

o Increasing Employee Satisfaction

• Avoid Ergonomic Related Injuries (Safety Personnel)

Common Justification Factors in Manufacturing…

Reclaimed Floor Space

• Reclaim Up To 85% Of Previously Occupied Floor Space

• Implement Value Added Activities

– Increased Manufacturing

– Add Kitting Operations

– Expand or Implement Quality Control

+add

increase

expand

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• Reduce Labor Costs

o Do more with less

• Increase Throughput (Batching Orders)

• Reduce Picking Errors

o 3 Touches v.s. 1 Touch

o Cost of Returns (Shipping, etc…)

o Customer Retention & Satisfaction

• Employee Turnover & Training Costs

• Reduce Shrinkage & damaged goods

• Annual Auditing Costs & Cycle Counting

Common Justification Factors in Warehousing and Distribution…

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• Avoid Need for New Construction

o Additional Utility Costs, Higher Taxes, Permitting, etc…

• Avoid Moving Costs, Loss of Production, etc…

• Avoid Need for Off-Site Storage (Lease, Transport, Labor)

• Avoid Ergonomic Related Claims

• Avoid Need for Additional Labor to meet Growth demands

• Avoid or Reduce Shrinkage & damaged goods

• Avoid or Reduce Annual Auditing Costs & Cycle Counting

Cost Avoidance…

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• Competitive Advantage?

• Reduced Environmental Impact?

• Reduced Workplace Ergonomic Related Injuries?

• Employee Retention & Satisfaction?

• Enhanced Image & Reputation?

• Accountability & Tracking – Who took what & when?

• Improved Inventory Accuracy helps Avoid…

o Overstocking

o Missed Orders

o Rush Charges

o Expired Inventory

o Production Delays & Shutdowns

Other Considerations….

Finally, know your “Tools”…

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• In its most simplest form, % ROI can be calculated as follows:

(Savings & Gains from Investment – Cost of Investment)

--------------------------------------------------------------

(Cost of Investment)

Example:

($190K - $100K) / $100K = 90% ROI


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• Some Simple Project Justification Tools include:

• Manufacturing

• Distribution

Cost_Justification_DistributionOrderPicking_3-4-14.xlsx

Finally, know your “Tools”… Manufacturing

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Will Dynamic Storage Increase Your Profits?

Quick Cost Justification for Manufacturing & MRO Type OperationsManually managing parts inventory on rack and shelving can result in manufacturing downtime - wasting both time and money. Complete this quick cost justification worksheet by filling in the blue shaded cells and consider the impact of dynamic storage in your manufacturing operations.

Consider the Cost of Labor…

Sample Manufacturing Figures Compare Your Own Numbers!

Standard Shelving or Rack

Dynamic Storage SolutionYOUR

Current SystemDynamic Storage Solution

Cost of Employee per Year (Fully Burdened)

$50,000 $50,000 $0$0

Same As Current

Number of Employees Picking & Stocking(in Parts, Stockroom, Warehouse or Toolcrib Area)

6 2 00

Reduce by 66%

Total Labor Cost per Year $300,000 $100,000 $0 $0

Multiply Above Multiply Above

Cost Savings per Year None $200,000 None$0

Subtract Totals Above

Finally, know your “Tools”… Manufacturing

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Consider the Value of Floor Space…Sample Manufacturing Figures Compare Your Own Numbers!


Dynamic Storage Solution

YOUR Current System


Revenue Generated in Manufacturing Area

$10,000,000 $10,000,000 $0$0

Same As Current

Total Square Foot of Manufacturing Area 100,000 100,000 00

Same As Current

Revenue per Square Foot $100 $100 #DIV/0! #DIV/0!

Divide Above Divide Above

Square Feet of Parts, Stockroom, Warehouse, or Toolcrib Area

2,500 500 00

Reduce by 80%

Recovered Floor Space (Sq. Ft.) None 2,000 None0

Subtract Above

Additional Revenue Opportunity per Year

None $200,000 None #DIV/0!

Finally, know your “Tools”… Distribution

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Will Dynamic Storage Increase Your Profits?

Quick Cost Justification for Order Picking OperationsWhen done with a manual sheiving or racking system order fulfillment can be a labor intensive effort - often wasting both time and money. Complete this quick cost justification worksheet by filling in the blue shaded cells and consider the impact of dynamic storage in your order fulfillment operations.

Consider the Cost of Labor…

Sample Distribution Figures Compare Your Own Numbers!


Dynamic Storage SolutionYOUR

Current SystemDynamic Storage Solution

Cost of Employee per Year (Fully Burdened)

$40,000 $40,000 $0$0

Same As Current

Number of Employees Order Picking 6 2 00

Reduce by 66%

Total Labor Cost per Year $240,000 $80,000 $0 $0

Multiply Above Multiply Above

Cost Savings per Year None $160,000 None$0

Subtract Totals Above


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Consider the Value of Throughput…

Sample Distribution Figures Compare Your Own Numbers!



YOUR Current System


Revenue Generated $2,500,000 $7,500,000 $0 #DIV/0!

Number of People Order Picking 6 6 0 0

Sustained Number of Line Items Picked Per Person Per Hour*

30 120 00

Increase up to 400% or more

Sustained Number of Line Items Picked as a Company Total Per Year**

345,600 1,382,400 00

Increase up to 400% or more

Average Revenue per Line Item Picked $7.23 $7.23 #DIV/0! #DIV/0!

Additional Revenue Opportunity per Year**

None $5,000,000 None #DIV/0!

*assumes standard rack and shelving without software, picklights or batching, assumes dynamic solution includes multiple machines in a workstation with software, picklights and batching

**assumes 240 single shift working days per year


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Consider the Value of Floor Space…Sample Distribution Figures Compare Your Own Numbers!



YOUR Current System


Revenue Generated $2,500,000 $2,500,000 $0$0

Same As Current

Square Feet of Warehouse or Distribution Facility

100,000 100,000 00

Same As Current

Revenue per Square Foot $25 $25 #DIV/0! #DIV/0!

Divide Above Divide Above

Square Feet of B & C Movers in Warehouse or Distribution Area

50,000 12,500 00

Reduce by 75%

Recovered Floor Space None 37,500 None0

Subtract Above

Additional Revenue Opportunity per Year

None $937,500 None #DIV/0!


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• Another option is to use a more thorough tool that calculates all pertinent information:

– Financial Justification Tool

• Others can be found on the internet or, possibly, within your own organization

2014 Sales Convention/2009 KardexRemstar Financial Justification.xls

Financial Justification Tool…

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And…..Do Your Research

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• How many transactions performed per person daily?

• Your company’s annual sales for your location only?

• Annual turnover of employees?

• Cost to recruit, hire, and train new employees?

• Who are the decision makers & how does this affect them?

• Find out the annual costs for shrinkage?

Real World Exercise #1

Customer: East Coast Distributor of Door & Window Hardware

Application: Order Picking

Scenario: Parts inventory stored takes up 1,353 sq.ft. In this area, (7) people pick orders and replenish inventory each day. Average daily picks for orders is 524 picks in one 8 hour shift. Average hourly wage for pickers is $10.95 / hour. This customer has several locations but their annual sales revenue in this location is $11M. The cost of this warehouse space, including utilities, insurance, etc…is $4.75 / sq.ft.

Their attrition rate is a problem. They lose and hire a new employee each month. Estimated recruiting, hiring, and training cost is $1656 per person.

Cycle Counting costs them $15K annually and they wrote off $84K in damaged, lost, etc…. product last year.

Picking accuracy is excellent @ 99.5% keeping cost of misspicks down to $17K annually.

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Real World Exercise #1 continued…

Customer: East Coast Distributor of Door & Window Hardware

Application: Order Picking

This customer received a proposal for (4) Horizontal Carousels, software, batch lights, lift table, and installation for $300K.

Using a throughput simulation tool, it was estimated that one (1) person could pick 900 lines in an 8 hour shift allowing them to redirect the other (6) individuals to other useful tasks.

Let’s take a look at the ROI

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ROI Exercise 1 for Strybuc Project.xls


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Customer: $40M Manufacturer of High End Automated Stone Cutting Equipment

Application: Repair parts depot

Scenario: The customer is currently storing & distributing repair parts for equipment sold to customers on shelving that occupies 6,844 sq. ft. They have (4) people picking and replenishing 700 parts total on one 8 hour shift each day. The burden rate (fully loaded) for the employees is $23.50 / hour. The customer has told you their operating costs for space is $30 per sq. ft. and they estimate the profit per transaction is $5.00. Total plant size is 325,000 sq.ft.

You are proposing (2) 26’ Tall VLMs & Software for $236,638.60 delivered and installed.

Throughput will increase to 850 Transactions with half the people. Picking accuracy is 97% currently & shipping costs are $4 per transaction on average.

Calculate the ROI using 25% Corp. Tax Rate & 8% Discount Rate

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ROI Exercise 2 for Stone Cutting Machine Mfr.xls


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Now…..let’s look at the same thing with the “Simple Cost Justification Worksheet”…..

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Simple Cost Justification for Exercise 2 Automated Stone Cutting Machine.xlsx


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Ask Yourself These Three Questions

What are the financial consequences of inaction?

Is the cost of doing nothing at all far more expensive than the price to implement a solution?

What is the risk versus the reward?

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Thank You!

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For More Information:

[email protected]

www.kardexremstar.com

Or visit MODEX Booth B4735

Documents

Calculating the True Cost of Your Operationcdn.modexshow.com/seminars/assets-2018/1271.pdfReclaimed Floor Space • Reclaim Up To 85% Of Previously Occupied Floor Space • Implement