Following our last blog post, How to Drive ASN Process Automation Improvement, you went to work to envision, design and document a new automated approach to pick, pack, and ship operations. With your new approach you will meet your customers’ demands for information and advanced shipment notification. And you will improve internal operations, cutting costs and increasing accuracy. Now you need to get funding.
By now you’ve accomplished the following:
- Documented the old and new processes
- Noted the changes required to affect the desired process, e.g., modifications to your ERP system
- Documented tasks and additional resources required including:
- ERP system modifications
- New software, e.g., an automated data capture system, warehouse management software, a shipping solution
- Technology such as bar code scanners for warehouse personnel
- Staff training
- Determined costs of the resources required
- Itemized the benefits, both quantitative and qualitative, that the new process will bring to the firm
So now it’s time to put some teeth into your case for change by developing an ROI analysis that quantifies why the company should move forward with your plan.
Cranking the numbers for your ROI analysis will be the easy part. The formulas are just math – black and white. The “art” in ROI is in turning assumptions and projections into the numbers to plug into the formulas. The hardest part is that there are usually people impacted by the assumptions – real people, people you know and like.
Here’s a simple example of how ROI calculations work. Create a spreadsheet similar to the one below that includes the benefits you itemized already.
Here are definitions for the terms used in the example:
Cost Savings – Reductions in actual, out-of-pocket expenses as a result of the Investment.
Productivity Gains – Labor savings attributable to use of the Investment.
Benefit of Investment – Cost Savings plus Productivity Gains.
Cost of Investment – Actual cost of the Investment in the period when the cost is incurred.
Net Cash Flow – Benefit of Investment minus Cost of Investment.
Interest Rate – Bank interest rate or Internal Rate of Return.
Net Present Value (NPV) – Current value of future cash flows discounted for time value of money at the given Interest Rate.
Payback Period – The breakeven point where net benefits of an investment equal initial costs.
Return on Investment (ROI) – Expected return calculated in percentage terms by dividing Net Benefits by Net Costs (NPV of Net Cash Flow/NPV of Cost of Investment).
In this example, productivity gains—labor savings—contribute the majority of benefits. The challenge is that to realize the actual cash benefits of labor reductions, one of two things must happen:
- The labor is reduced via attrition, a reduction in hours, or layoffs.
- The staff is retained, and the newly available time is used by the affected personnel to perform other tasks that deliver value equal to or great than the labor savings.
Now comes the real test—are you an Enthusiast or a Champion. An Enthusiast will present an ROI analysis, but when questioned about reducing headcount or delivering additional revenue or production with the hours they wilt and back away from commitment to action.
A Champion is ready to take action—to reduce headcount or step up to new goals using the hours freed up for their team. The good news is that there is plenty of room for champions to recommend work reassignments. Most companies have more to do on important tasks—the core mission work that defines success—than they have time to accomplish. Re-focused labor may result in top-line benefits, like increased sales, that do not fit the simplistic ROI in the example. With a few tweaks to the math, managers should have little difficulty assigning the net of top line increases to the benefits of investment.
Let us know if you’d like to discuss more about the theory or application of ROI analyses. We work with them all the time and would be glad to trade notes.