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Do the Math: Investing in Modern Material Handling Systems

By: DAK National Sales Manager, John Jiambalvo

 

No one has unlimited resources. So, companies should carefully consider their capital expenditures to ensure they achieve the best return for the dollars they invest. This applies to material handling systems as well. All too often, investment decisions are made quickly, without full consideration, to react to an immediate need. Improved efficiency and increased ROI are possible with just a little more consideration.  Here is how:

 

The present observations are offered to help managers think through the major issues of investing or not in an enhanced material handling system. While this piece simplifies the decision, it does so much more on the benefits side.

 

Assumptions:

  • Company A is investing $100,000 on new racking and ancillary products such as carton flow lanes and some gravity roller conveyor. The investment includes freight, installation, and taxes. Full investment: $100,000.

 

  • Five employees earning an average of $30,000 per year. $150,000 total labor

 

  • The improvements will drive a 5% improvement in labor productivity equaling $1,500.00 saving per person/per year. $142,500.00 total labor.

 

  • Company A ships $100,000 of goods per working day over the 255 regular working days in the year (52 times 5 working days, minus 5 major holidays) achieving $105,000 per day with the 5% productivity improvement.

 

  • Total operating costs are 60% of revenue

 

  • Other areas of savings are possible (employee turnover, damage inventory, seasonal temps, lift truck maintenance, etc.) but not included in this brief example.

 

The chart below, for the purposes of this example and using the above assumptions, demonstrates how a $100,000 investment drives a conservative 5% productivity improvement in a relatively short timeframe and potential revenue improvement at year 1, 3 and 5 versus the current situation.

 

Table: Investing in Modern Material Handling Systems

 

Furthermore, racking is now a depreciable asset. The company also benefits from better utilization of its fixed investment in space and in its ability to limit overtime and other extraneous expenses such as heat and light.

 

The benefits of this kind of thinking may be even greater for companies that face increased demand through a more expanded market or because of facility consolidation. Such companies will have reason to seek an even more productive (perhaps automated) system, one that increases productivity by much more than the factor used here as an example.

 

There is no debating investing in modern material handling systems will drive up efficiency and profits. But you must also consider the impact of not investing.  What will be the possible consequences on the viability and competitiveness of your business in today’s fast-paced economy and ever-increasing customer expectations?

 

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