Have you ever had difficulty obtaining approval of capital investments for your warehouse? Many warehouse managers find themselves competing with people from manufacturing, marketing or other departments who are all looking for capital investments to improve their operations.
Some managers are more persuasive than others, and senior management may be more impressed by a piece of new machinery for the plant than a new lift truck for the warehouse. This article will give you new ideas and new tools to sell the financial officer on the wisdom of investing capital to improve a warehouse.
As you consider this challenge, remember that warehousing is nothing more or less than the effective utilization of space and time. Every capital investment must base saving space or saving time as its ultimate payback.
Improving storage productivity
The payback for improved storage density is avoidance of new construction or elimination of outside warehousing. However, the justification is not quite as simple as looking at the cost of new equipment and its payback through reduction of space. In many cases, improved storage density causes an increase in labor.
Storage productivity is measured by the number of units that can be stored in each square foot of space. There are a number of ways in which storage density is typically increased:
- Narrow-aisle lift trucks
- Higher or different types of storage rack
- Improved packaging to allow higher free stacking
- Better inventory management
Narrow-aisle lift trucks might allow the present aisle width to be reduced from 12 feet to 8 feet. However, the narrow-aisle trucks are not designed for the loading and unloading of highway trailers.
A different crew (or at least different trucks) would be needed for that. In a separate operation, the narrow-aisle vehicle would then be used to move between the staging area and the storage aisle. More labor would be expended in the new operation than in the present one. which allows one lift truck to do every task in the warehouse.
A vital step in improving storage productivity is to determine how storage rack might improve storage density. In some cases, more than one type of rack should be used. Changes in rack usually mean changes in layout.
As you justify the improvement, consider the cost of moving product in the warehouse to accommodate a change in layout. If your current storage layout includes in-rack sprinklers, the cost of change must include reinstallation of this system. In some cases, storage improvement is made simply by purchase of higher storage rack uprights and reuse of the same rack bars.
Even if you have little control over packaging, you need to understand how improved packaging can increase storage density. For example, manufacturers of bulk plastic have long used a unit load box called a Gaylord. Most of these containers do not have sufficient strength to allow the product to be free stacked to the normal ceiling height of 20-30 feet since stack height is limited by the packaging.
In contrast, other chemical products are stored in drums, a stronger package that has a higher free stacking capability. If the Gaylord container could be re-engineered to have the same stacking strength as a drum, storage costs would be reduced.
Ironically, one of the most effective ways to improve storage productivity may not involve any investment in capital equipment. Better inventory management can reduce the amount of product kept in storage and at the same time will facilitate a layout that is more effective.
Every warehouse manager should identify and kill off the FISH (first in, still here), or the dead items that exist in nearly every inventory. If your warehouse has become an attic rather than a distribution center, one of the best ways to gain improvement is to liquidate product that is simply gathering dust.
Furthermore, when your inventory management system identifies which items move fastest, you can create a storage layout that reduces travel time by placing fast-moving items close to the floor and close to the door. Improved inventory management certainly has a cost, but compared to the cost of new rack or narrow-aisle lift trucks, the expenditure is modest.
Calculating a storage payback
If improved storage productivity will prevent new construction, consider the proposed square feet of new construction and price it at $40 per square foot. If the option is outside warehousing, you might use a projected cost of $9 per pallet per month. Obviously, these rough calculations would be refined by developing detailed pricing to fit your situation.
If you are considering the construction of a 10,000-square-foot addition on the end of your present warehouse, calculate the cost of new construction at $40 per square foot. You might avoid this $400,000 investment with the purchase of $150,000 in storage rack plus $40,000 in narrow-aisle trucks and $10,000 in labor to pay for rearranging the warehouse.
In this case, the capital cost is half that of new construction. The other option is to use outside warehousing, and this cost might be estimated at $9 per pallet per month. By calculating the number of additional pallets that can be stored in the revised layout, you can create a justification that can be approved by your financial officer.
Justifying handling improvement
Here are four ways to improve handling output:
- Scheduling longer service hours
- Improving order-picking procedures
- Reducing staging delay
- Using technology to replace the checker
Many warehouse operations use a 40-hour week, when there are actually 168 hours available during that same week. When facilities and equipment can be used for more hours, the cost per hour of this capital investment is reduced. Therefore, adding a late shift may allow you to avoid acquisition of additional lift trucks or dock doors.
Order picking is the most expensive procedure found in many warehouses. If the effectiveness of order picking is improved, the cost of handling each unit is reduced.
Staging is a process used in most warehouses. But when staging is eliminated, handling cost is usually lowered. If Company ABC allows a single worker to unload a pallet from a trailer and put it directly in a stack, the same process can be reversed on outbound. When merchandise is staged on the dock, the handling cost is always increased.
Checking is considered a necessity to reduce errors, but bar code scanning can replicate the checking function.
Increasing throughput without more labor
A growing number of operators today face a shortage of labor. Finding qualified people becomes a challenge in many communities where the unemployment rate has dropped to the point where a high percentage of unemployed people are also unemployable.
Therefore, an investment in technology to save labor may be driven by the labor market itself. If you cannot find qualified people, you may justify an investment in any tool that increases the number of units handled per labor hour expended.
For example, a palletizing machine that places individual cases in a specified pattern on a pallet might have a cost of $300,000, and replace the labor of four warehouse workers. The fully burdened cost of each of those workers might be $30,000 per year, or a total of $120,000 per year for the four workers.
This means that more than two years are needed to pay back the cost of the palletizer, but the investment decision is also influenced by the fact that you cannot find qualified people in the labor market today.
4 kinds of improvement tools
As you consider justification of investment, you should classify the tools into four categories:
- Tools that improve storage utilization
- Tools that improve material handling
- Tools to improve accuracy
- Tools to speed order picking and sortation
The tools that improve storage density have already been described. Material handling tools might include conveyors or guided vehicles as well as lift trucks. Accuracy is improved through the use of scanners, bar codes and the systems technology which warns people that they are selecting the wrong item. Order picking and sortation may be improved by moving the products to the picker with conveyors or carousels.
All of these tools have a cost, and they are justified by measuring that cost against the projected improvement.
Analysis tools
Many financial managers look at a three-year horizon in considering return on investment (ROI) for any capital expenditure. Some managers use discounted cash flow and net present value to consider whether the investment is justified.
At times, the decision to adopt new tools can be justified without these more complex calculations. If your customers demand a faster order cycle time than you now provide, a change may be necessary for survival. If the labor market makes it impossible to find qualified people, tools to improve handling productivity are not toys, they are a necessity. In essence, the marketplace and workplace may drive the justification decision.
You should review your operation to see whether there is anything in your warehouse that causes a waste of space or a waste of time. Look at the little things as well as the big ones.
For example, do you have people standing in line waiting to use a strapping tool? If so, are you paying for an extra tool because people are waiting to use the only one in the warehouse? What other steps can or should be taken to utilize available space and time as intelligently as possible?
Once you have developed the cost of each of these steps, you should be able to demonstrate to your financial officer that the cost of these changes will be justified through productivity and quality improvements.
