Automation’s Impact on Costs

By Gary Forger

It seems that so many conversations about automated material handling start with, “Oh, but it’s so expensive. I’m not sure we can justify it.”  And sometimes, that’s where the conversation ends. But it doesn’t have to.

So, the real question is – where do you start to determine if automation can cut costs in your facility? Last week’s blog gave a hint of that. Start with processes. Most people start with head count and cost of the proposed automation. Both are surely part of the final answer, but aren’t the best place to start.

Someone who has given this a lot of thought is Troy VanWormer, Director of Warehouse Automation at OPEX. He has a unique perspective. Before joining the automation supplier, he was at iHerb when it installed Perfect Pick from OPEX. Before that, VanWormer was at one of the top material handling consultancies. In other words, he’s seen automation from all the angles.

Read on to see how you can effectively present the true cost savings possible with automation.

“Evaluating current processes,” he says, “establishes a base line for current costs. Some are hard. Some are soft. And all too often, many managers and executives look at all current costs as just the cost of doing business. They aren’t, especially when automation enters the conversation.”

Hard costs range from the cost to fulfill an order to the cost of floor space occupied. By adding automation, it is not uncommon to cut both order fulfillment costs and floor space requirements.

But VanWormer points out that the space issue isn’t just about the floor. What if five-foot shelves are in a 30-ft clear building? There are additional costs to the unused 20-plus feet of ceiling height. Overhead space is not free.  

Some other notable costs include labor, time to fill orders, accuracy of shipments and damage levels. Eventually, a thorough review of processes will expose the cost of all key metrics in your operations.

“Don’t stop there,” says VanWormer. “Soft costs are typically overlooked if not completely excluded from the cost analysis. Don’t let that happen in your assessment. Soft costs are just as much a part of the cost of current processes as traditional hard costs.”

The list here includes training of people, turnover rates and hiring expenses as well as worker insurance, compensation claims and disability costs. There’s also the matter of reliability of the workforce. That ranges from attendance rates to reliability to do the job right the first time.

At this point in your review, you should have a pretty good picture of exactly what your true hard and soft costs are. The next step is to determine which of these costs automation can reduce or altogether eliminate.

“This is where,” says VanWormer, “you start to determine potential cash flows from introducing automation of any scale.”

What is the potential increased revenue from adding automation? What’s the value of shrinking the current space used, both horizontally and vertically? What’s the reduced labor risk?

Interestingly enough, the number of heads reassigned to more productive activities in the facility hasn’t even come up until just now. Neither has the cost of the automation equipment. This is the time to introduce those and other details needed as part of the cost justification you are preparing for your friendly, smiling CFO.

Next week, VanWormer offers some thoughts on how to impress your CFO.

Our team of project managers, engineers, and analysts can assist and support you through your DC automation evaluation and implementation process from start to finish. Contact us today via phone (+1 856.727.1100) or online to learn more.

Gary Forger is the former editor of Modern Materials Handling magazine and the Material Handling & Logistics U.S. Roadmap to 2030

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