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Sponsored by: Presented by:

Thomas Coyne, System Logistics

Jerry Koch, Intelligrated

John Hill, St. Onge Company

Building the

Business Case

for Automation

MHI’s

Automation

Alliance

MHI’s Automation

Alliance

Your business is on the upswing, but customer demands

for shorter cycle times, capacity constraints and workforce

challenges are undermining productivity and throughput.

This is a potential sweet spot for automated material

handling! How do you build the business case and justify

the investment? In this session, you will learn how users

are profiling the value proposition and securing C-level

approval for moving ahead with the right level of

automation for your operations.

Building the Business Case for

Automation

MHI’s Automation

Alliance

Building the Business Case

Automation Alliance Background

Alliance Survey Highlights

Common Objections to

Automation

Building the Business Case

Fundamentals

Case Study

Wrap-Up

MHI’s Automation

Alliance

Who Are We?

MHI’s Automation

Alliance

The Automation Alliance Automatic Guided Vehicles

AIDC (Bar Code, RFID, Voice)

Automated Storage and Retrieval Systems

Conveyors and Sortation Systems

Mobile Tablets & Terminals

Order Picking and Fulfillment (A-Frames,

AS/RS, Carousels, Pick-to-Light)

Packaging & Unitizing Machinery

Palletizers

Robots

Software (WMS/WCS/ERP) & Controls

MHI’s Automation

Alliance

Alliance Survey Highlights

PRO CON

Easy to Justify 39% Tough to Justify 61%

Low Maintenance 43% High Maintenance 57%

Sufficiently Flexible 64% Inflexible 36%

High ROI 70% Too Costly 30%

Risk Worth Taking 85% Risky Undertaking 15%

Competitive Advantage 95% Competitive Disadvantage 6%

Career Enhancer 94% Career Killer 6%

Asset to Operation 95% A Mistake 5%

• Without automation, we would

have gone out of business

• We’ve reduced errors,

improved throughput & speed

• Facility too small

• Access to capital

• Justification hurdles

• Business still down

MHI’s Automation

Alliance

Not easily flexible or scalable

Not enough volume

Difficult to maintain

Implementation too disruptive

Must do “all or nothing”

Too expensive, cannot justify

Cannot acquire capital

Common Objections to Automation

MHI’s Automation

Alliance

Characterize current operations

Profile current & projected activity

Use metrics, set improved performance targets

Identify “gaps” between current & target performance

Look at process flows to determine what might be achieved

with modified layout, procedures & inventory slotting

Analyze potential impact of automation on throughput,

accuracy & productivity

Quantify potential gains & develop value proposition

Building the Business Case

MHI’s Automation

Alliance

Case Study: ROI Analysis

Executive summary

Key financial variables & assumptions

Operating cost variables

Productivity & labor savings

assumptions

Other cost savings

Financial analysis & results presentation

MHI’s Automation

Alliance

Characterize the opportunity

Define financial and operational assumptions

Identify alternative solutions

Quantify impact of each solution in terms of capital and

future operating costs

Analyze and compare the ROI’s for each solution

Assess non-financial considerations such as strategic

and cultural fit, environmental issues and risk

Select preferred solution

Prepare and present the business case and financial and

non-financial analyses to decision makers

Case Study: The ROI Analysis Process

MHI’s Automation

Alliance

Conservative assumptions

Detailed / rigorous modeling

Operational benefits in detail

Clear presentation of all project life-cycle costs

Structured financial analysis

Comprehensive supporting materials

ROI Analysis Process Keys

MHI’s Automation

Alliance

Develop a new fulfillment process that:

Eliminates bottlenecks that constrain current capacity

Reduces square footage requirements through better lay-out

Increases capacity to meet forecasts

Holds, stores, picks, packs and ships more product

Reduces labor costs on a per piece basis

Increases ability to pre-sort orders to reduce freight costs

Reduces demurrage costs

Includes a level of automation that can be supported by the

company’s operating personnel

Provides capacity for acquisitions & other new business initiatives

Can be implemented within capital budget constraints and

delivers an ROI that meets Company requirements

Executive Summary Content

MHI’s Automation

Alliance

23.2% growth in units in current year

17.4% growth in units next year

7% flagship same store increase

12% specialty same store increase

4% from new flagship stores

25% from new specialty stores

9% to 10% growth per year for next 5 years

New stores smaller % of total

Specialty slows to 7% for same stores

Business Case Assumptions

MHI’s Automation

Alliance

Financial, Operating Cost & Productivity

Assumptions

Variable Value Data Source

Wage Inflation 4.0% Company

Real Inflation 3.0% Company

Cost of Capital 8.0% Company

Corporate Tax Rate 30% Company

Labor /OH Rate $17.11 / Hour Company

Space Cost $7.65 / Sq. Ft. Company

Error Cost $50 / Error Published Study

Carousel Pick Rate 300 Lines / Hour Simulation

Pick-to-Light Pick Rate 200 Lines / Hour Simulation

RF Pick Rate (Current) 92 Lines / Hour Company Records

MHI’s Automation

Alliance

Alternative #1: Re-layout existing facility to enable

more efficient order processing and provide added

storage capacity

Alternative #2: Move to new facility and implement

manual order processing system similar to the one

currently used

Alternative #3: Re-engineer the complete supply

chain to eliminate the need for a centralized DC

and move towards pool point / cross dock facilities

in the sub-markets served by company

Alternatives Considered

MHI’s Automation

Alliance

Alternative #1: Re-lay-out existing facility

More expensive

Disruptive to operations

Does little to eliminate capacity constraints

Does not reduce per piece distribution costs

May actually increase costs as volumes increase

Alternative # 2: Move to new facility

Less expensive

Less disruptive to current operations

Better eliminates capacity constraints

Allows for greater expansion in volume & revenue

Alternatives Compared

MHI’s Automation

Alliance

PROJECT COST COMPONENTS

Conveyor Sub-System

Rack / Mezzanines

Warehouse Control System

Pick to Light

Carousel System

Installation

Computer Hardware

Project Services

Project Contingency

GRAND TOTAL $ 4,485,000

Proposed Project Budget

MHI’s Automation

Alliance

Picking Labor Savings $ 517,605

All Other Labor Savings $ 371,410

Order Accuracy $ not incl.

Freight Savings $ not incl.

Space Savings $ 217,208

Miscellaneous Other $ 16,000

(Reduced lease costs offset by maintenance, spare

parts and software licenses)

Total Major Category Savings $ 1,122,223

First Year Savings Summary

MHI’s Automation

Alliance

Productivity Improvement Detail

Current Year Design Year New System

Units Picked/Year 5,827,406 8,430,409 8,430,409

Units per Line (Task) 1.68 1.69 1.69

Tasks/Lines/Year 3,461,032 4,981,678 4,981,678

% Increase in Lines 44%

Overall Average Pick Rate 94 92 172

STAFFING Current Year % Increase Design Year New System Difference Rate/Hour Savings

Picking 21 47% 30.9 16.4 14.49 $17.79 $517,605

Receiving 6 25% 7.5 7.0 0.48 $17.79 $17,009

Replenishment 3 50% 4.5 4.0 0.49 $17.79 $17,352

Quality Control 1 50% 1.5 1.5 – $17.79 –

De-Nesting 4 25% 5.0 4.0 0.98 $17.79 $35,046

Cleaning 2 75% 3.5 1.0 2.49 $17.79 $88,985

Returns & Repairs 2 0% 2.0 2.0 – $17.79 –

Supervisors 2 50% 3.0 2.0 0.99 $17.79 $35,389

Shipping 6 33% 8.0 3.0 4.97 $17.79 $177,628

TOTAL $889,014

MHI’s Automation

Alliance

Freight savings were not included in our modeling.

Possible savings also exist in the following areas:

Reduced demurrage due to higher storage and

receiving capacity in newly designed system.

Reduction in product damage due to reduced

demurrage

Reduction in order sortation charges by carriers due to

pre-palletizing by location at the DC

Reduction in purchase costs by having more block

storage in the new system

Other Savings Considered

MHI’s Automation

Alliance

ROI results were within normal bounds for a project of

this size

Labor savings were conservatively calculated

Many real savings were not included in the calculations

Budgets were conservatively established, which when

combined with the impact of the “optimal design” could

have reduced the project budget by up to 10% and:

Increase the IRR by 6%

Cut the payback period by 8 months

The results?

Qualitative Analysis

MHI’s Automation

Alliance

Actual ROI Analysis Results

NPV of Cash Flows (7% CoC) $13,102,843

Simple ROI 306%

Internal Rate of Return 40%

Payback Period 35.8 Months

MHI’s Automation

Alliance

Compare likely costs with projected benefits in a structured fashion.

Multiple approaches

Simple: Payback analysis – How long will it take for the benefits of

the project to exceed the initial investment & operating costs?

Medium: Return on Investment – Convert future cash flows to

today’s dollars using the discounted cash flow (DCF) method.

Compare benefits to project expenditures on a percentage basis.

Advanced: Internal Rate of Return (IRR) – Calculate the rate of

return it would take an investment of the project budget in another

project, a bank or the stock market to achieve the same benefit as

the project, itself. All calculations are done using discounted cash

flows. IRR is the most commonly used with larger projects.

Return on Investment Analysis

MHI’s Automation

Alliance

22333

123456

Polling Instructions

Use “22333” as the

phone number for text

message

Enter code you would

like to vote for and select

“Send”

MHI’s Automation

Alliance Return On Investment = Benefit of an Investment

Cost of the Investment

MHI’s Automation

Alliance

< 12 Months

< 18 Months

< 24 Months

< 36 Months

< 48 Months

< 72 Months

Longer

What payback period will create a successful ROI?

Audience Question

Return On Investment = Benefit of an Investment

Cost of the Investment

MHI’s Automation

Alliance

Internal Rate Of Return = The discount rate used in

capital budgeting that makes the net present value of

all cash flows from a particular project equal to zero.

MHI’s Automation

Alliance

Audience Question What's an acceptable internal rate of return

(IRR) for an automation project?

0% - 15%

15% - 25%

25% - 35%

35% - 45%

<45%

NOT SURE

Internal Rate Of Return = The discount rate used in

capital budgeting that makes the net present value of

all cash flows from a particular project equal to zero.

MHI’s Automation

Alliance

Return on Investment Analysis

TYPICAL RETURNS EXPECTED PAYBACK PERIOD SIZE PERIOD

Small Investment < $ 100,000 > 2 Years

Medium Investment < $3,000,000 2 to 4 Years

Large Investment > $3,000,000 4 to 7 Years

IRR SIZE RATE OF RETURN

Small Investment < $ 100,000 40% +

Medium Investment < $3,000,000 25% to 30%

Large Investment > $3,000,000 15% to 25%

MHI’s Automation

Alliance

Care to share those “others”?

Text:22333 Message: 770036 Your Message

MHI’s Automation

Alliance

22333

770036

Your Message

ROI Justifiers – The Others:

MHI’s Automation

Alliance

Audience Question Which of the following have you successfully used

in developing an ROI justification?

• Deferred facility expansion

• Energy savings

• Improved throughput

• Increased order accuracy

• Improved ergonomics/safety

• Space savings

• Reduced product damage

• Reduced shipping costs

• Other

MHI’s Automation

Alliance

www.mhi.org/agvs

/asrs

/css

/isc

/ofs

/sce

Building the Business Case for

Automation Wrap-Up

MHI’s Automation

Alliance

gforger@mhi.org

www.mhi.org/isc

GARY FORGER

FOR MORE INFORMATION