Throughput: How to determine ROI in Materials Handling, Part 2

The first part of our ROI blog focused on costs and cost reduction: labor, product damage, cost of space and ancillary products (pallets for example).  All of those items bear mentioning and scrutinizing when trying to establish a credible conclusion on return on investment of capital equipment.

There are other areas that need to be considered as well.  Throughput is a major player in the ROI discussion.  Let’s say you’re looking at two warehouses; both have the same size footprint, the same dock facilities, number of staff etc.  One of the warehouses has mechanized much of their material handling function, allowing for a 20% greater use of space, a damage quotient reduction of more than 5% and overhead savings of 10% in fuel, utilities and other costs associated with keeping the warehouse running.  We’ll call this warehouse A.

The other warehouse moves the same goods, but in a more rudimentary fashion. Everything is palletized, there is little or no mechanization, no cubic storage capacity and only minimal storage and retrieval equipment in the forms of standard forklift trucks.  We’ll call this Warehouse B.

A review of the two warehouses would seem to indicate that “A” performs better than “B” simply because their costs are lower.  This may be true, but very possibly only represents half of the story.  “A” can also receive, store and ship substantially more goods than “B” in a comparable period of time.  This is called “turnover”, and is a basic principle of ROI calculation.  If you can turn your inventory 3, 4, or 5 times faster than a competitor, you’re averaging your costs out over far more product, bringing the per-product costs down substantially and increasing cash flow at the same time.  Ask any accounting professional if they would like to take a facility from 5x inventory turns to 8x inventory turns and see how they react – we bet they’ll buy you lunch!

Product throughput is a vital element in the establishment of ROI calculation.  In the final installment of the ROI blog, we’ll review the human factor and “soft calculations” that will round out our argument that “The quality is remembered long after the prices is forgotten”.