24 October 2021

Calculation of ROI with the Implementation of a WMS

24 October 2021

The Warehouse Management System (WMS) ensures a quick return on investment by automating tasks, speeding up operations, reducing errors, and increasing accuracy.

When you want to make an investment in your field, the most common request from your superiors is to justify the cost. And to get a “yes,” the best way is to thoroughly understand the ROI (Return on Investment) of what will be acquired and/or implemented. When you can see the gains, it’s much easier to defend your idea to the leadership.

This also happens when deploying a WMS. To help you visualize all the return possibilities the system offers, in this article we will address the ROI offered by the software, covering the following topics:

• Why it’s important to understand the potential WMS ROI
• What research you need to do to understand the cost
• Main areas of WMS gain
• How to justify your investment

The WMS will play an essential role in your warehouse, and through the KPIs offered by the system, you can quantify exactly the leap made by your operation when it transitioned from manual (without WMS) to automatic (with WMS).

But it’s also important to consider that there are intangible gains. For example, with the WMS metrics, you can measure the increase in your employees’ productivity. Their satisfaction in having the tool’s help is a bit harder to calculate, even though it happens. And we all know that this makes a difference in a company; after all, taking care of people is as important as taking care of partners or inventory. So let’s start by expanding the concept of ROI.

Understanding the Value of a WMS ROI

About 99% of the time you spend discussing an ROI involves monetary analysis. The same goes for WMS in many aspects, but there are others to consider. Defining the real ROI of implementing a warehouse tool must include three types of returns:

Tangible Returns

These are benefits that are easily measurable and verifiable. Your most common ROI elements will be:

– Reduction in direct costs, whether related to labor (with automation, efforts are reduced, and with this, the company can reduce the workforce); space (better use of storage area and, consequently, reduced need for free spots); equipment (begin to be used intelligently, reducing maintenance); picking (with the Kanban offered by WMS, picking areas are always supplied, avoiding unnecessary movements or delays in picking that end up generating costs for the operation), among other aspects.

– Reduction in overhead costs, greater order accuracy, and consequently, a satisfied customer, productivity gains, increased inventory accuracy, etc.

These gains can be measured through the KPIs offered by the system.

Intangible Returns

Here are its benefits that will seem obvious but make a difference in the warehouse routine. Your employees can get the most out of their workday when they receive notifications on what to do, what to prioritize, where to move a product, what to count on that day, etc. The fact is that the system will be an important ally in your team’s work, preventing errors from occurring and greatly reducing the effort to memorize addresses, storage rules, orders, among other details.

It’s important to remember that the WMS system is based on the efficient and complete use of all valuable resources involved in your warehouse: stock, people, equipment, and area. Therefore, it generates more organization and flow. Employees benefit from the guidance offered by the software, and you, the manager, also have significant advantages in your work by using the Visual Management solution, which offers real-time operational data, allowing you to self-manage.

Support

Some of the WMS benefits are measurable, but they can vary widely and need to be placed in a particular category. With the system and the gains generated in the operation, you will be able to serve new and more markets or segments, follow the rules of inspection agencies more simply and standardized, as well as have information that will keep you updated. Another point is the ease of integration with ERP systems or third-party systems, allowing, for example, logistic operators’ clients to track stock and orders.

Considering these three levels of ROI, you will see even more value in every feature offered by the system. And when it comes to tangible gains, when you start quantifying them, you find you have more budget to invest elsewhere, making your business increasingly stronger.

So, before discussing WMS acquisition with your superior, take the time to define and understand the ROI you expect and what you can achieve. All this must be discussed with the software provider so that you can be sure to convey your vision to your leaders.

 

Estimated Costs for WMS

Working with vendors through a request for proposal (RFP) process that includes demonstrations and data sharing is the best way to ensure you have a legitimate understanding of the true cost of the services your warehouse needs.

Talk to vendors about prices that cover all steps. This includes installation and integration with current systems, implementation and activation, training, annual costs, and ongoing costs. Ask about their direct pricing and any upgrades you might need, such as new hardware or infrastructure upgrades.

Always keep in mind that the most important thing is the return you will get. For example: it might be advantageous to invest more to have a greater number of features in the system, as they could mean lower costs for your operation. Analyze what you will get in the short, medium, and long term and balance everything is the best way to choose the perfect setup for your business.

 

Forecasting the ROI of a WMS

The specifics of your operation and the WMS you choose will determine which returns will come. To maximize the gains you can achieve, try to control your budget and aim to choose an option that meets most of your needs for the next 3-5 years.

Here are some of the key areas where you can see a positive ROI:

Warehouse Space and Facilities

Making better use of your space can save you time and money. Among the WMS essentials is the ability to define the best locations for each product, aiming to respect their rules and turnover and, most importantly, reduce employee movements.

Additionally, with the stock defragmentation solution, you can organize the storage area to make the most of the available space. And we know that every square meter of warehouse costs a lot. The arrangement of products on CDs must always follow a strategy aimed at optimizing work and reducing costs.

And that’s what WMS does for you.

 

Inventory

Storage costs are high. That’s why it’s necessary to have good inventory management for each product; after all, both stockouts and excess stock are harmful. The first situation leads to lost sales opportunities, the second generates unnecessary storage costs, as well as the risk of losses due to expiration, spoilage, etc.

With WMS, you can maintain optimal inventory levels. If an item reaches the minimum stock, the system automatically generates a replenishment wave, which prevents stockouts from occurring. At the same time, with WMS, you control the amount of warehouses incoming and outgoing, avoiding excess stock.

You will also be able to better control perishable items, ensure proper rotation, and track refrigeration or other product requirements. In the case of logistic operators, the WMS brings even more benefits when this data is shared with clients for greater trust.

 

Equipment

When you optimize space and inventory, you also optimize equipment usage. Limit the amount of use of your forklifts and other equipment, and they will last longer.

 

Sales and Services

Timely and accurate orders are always a good business. They make your customers happy, as well as your suppliers and partners. It’s easier to do business when you know your stock and always have the product available for sale. With WMS, you can match the big players in the market, delivering the perfect order to your customers (On Time In Full).

Moreover, if you add more speed to your operations, you will be able to fulfill more orders/day, which means your company is ready to increase sales and, consequently, make more profits.

 

Labor

Labor is another significant cost of a warehouse. Therefore, the savings generated by WMS in this regard are a clear way to visualize a positive ROI.

You can see the value of a WMS in your workforce when you increase productivity, reduce picking errors, reduce training, improve shipping accuracy, and minimize product damage or loss. As your employees pick and pack more efficiently, rework hours are reduced.

It’s worth noting that the process automation offered by the system allows you to have a lean and extremely productive team. Often, when the warehouse needs to fulfill more orders, increasing daily productivity, managers tend to hire more people, believing it’s the ideal solution. But this can become a problem.

More people working in the same area can lead to disorganization, competition for space and equipment, loss of quality, and even an increase in errors. Therefore, the key is to optimize your team with the ideal number of employees working with high productivity and relying on the help of the right tools, like WMS.

 

Guidance on Functions

Requirements and Compliance

A WMS can help you meet the various standards/requirements of your customers. A robust platform can integrate with a variety of ERP and other planning tools, facilitating data sharing, which greatly benefits communication with customers/partners. The benefits are also seen when it becomes easier to comply with SLA (Service Level Agreement) agreements and inspection agency regulations, such as batch control.

Inventory Accuracy

If a system provides inventory information that doesn’t match the physical inventory, we say it’s not accurate. And this can lead to losses from various orders, such as selling a product that is not available, which generates great customer dissatisfaction. With the new consumer and omnichannel market configuration, it’s crucial for products to be in the right place, at the right time, and in the right quantity. With WMS, you have high product traceability, as well as performing cyclical inventories that ensure a significant increase in accuracy and, consequently, a reduction in costs.

 

Analyze Your Final ROI

The way you structure your warehouse and adapt the WMS to it will impact the ROI you can achieve. Variables, adjustments, and integrations change the ROI equation.

Strictly speaking, you are comparing all costs with the gains you have achieved. For many companies, a WMS pays for itself when it starts reducing errors and leads to repeat sales due to increased customer satisfaction. You can also save on training and hiring labor or limit raw material waste.

The calculation is complicated, but it deserves a thorough review. Think about how your WMS will earn you in five years, and you will be on your way to understanding the value of that purchase. And remember to be very judicious when choosing your system provider. Evaluate their Project Management experience and post-Go Live support.

With the right partner, solid technology, and efficient support, your warehouse will have everything to achieve a ROI in less time than expected.


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