In today's business climate, two kinds of materials handling projects get approved. The first are those that must be done because an existing system is obsolete, an important customer has added a new requirement or the competition has raised the stakes. The rest are less dramatic but provide solid returns nonetheless. In any case, the only projects being approved today are those that produce a solid return on investment (ROI).

Just how important is ROI? "Almost all projects we work on are driven by ROI," says Bob Babel, vice president of engineering, Forte Industries (513-398-2800). "And the higher up you go in an organization, the more important it is."

And while companies once waited two years for a project to begin paying for itself, that is no longer the case. "Most of the executives we work with today expect to see a return in 12 to 18 months," says Babel.

To get those paybacks, companies are justifying their systems around three general areas.

• Improved business performance: "Companies should be looking for system solutions that enable improved customer service and provide a competitive advantage," says Ken Ruehrdanz, business development manager, Siemens Logistics and Assembly Systems (877-725-7500).
• Increased efficiencies and cost reductions: "Systems that can improve the cash to cash cycle time, reduce inventory, increase labor productivity or increase throughput rates create ROI," Ruehrdanz says.
• Improved supply chain synchronization: "Blending transportation management (TMS) software and the use of advanced shipment notifications (ASNs) with automated conveying and sortation systems enables processes like crossdocking that can speed delivery to customers, reduce order processing costs and reduce inventory," he adds.

Given that urgency, there are a few basic best practices that companies employ to make sure that the project they implement delivers the ROI promised in the presentation to management.

The first best practice is to select the right project. "There are many projects with a short payback time," says Forte's Babel. "But when you look closely, the long-term savings aren't enough to justify using your capital to address the problem. From our perspective, you want to prioritize your projects and look at where the most cost savings can be found."

Forte's approach: "When people tell us they have a problem, the first thing we look at is where the money is being spent in the building," Babel says. "They may be spending too much on labor; or they may be paying to expedite shipments because they can't get orders out of the building quick enough; or they may be paying fines because their accuracy is bad."

The question is, which area can deliver the most bang for the buck?

The starting point for making that determination is to benchmark the facility and define the key performance indicators (KPIs) in a way that they can be compared after the implementation. "Once you have benchmarked your facility and defined your benchmarks, you can prioritize between immediate, short-term and long-term improvements to the facility," says John Sidell, principal and co-founder, ESYNC (419-842-2210).

Benchmarking during the selection process is important for another reason. "If you don't establish KPIs, the measure of your success will be whether you were on time and on budget," Sidell says. "But if you have other metrics, you may realize that you got a 20% improvement in productivity when you were expecting 15%."

With measurable KPIs and a project in place, the next step is to design a solution. That involves three considerations: what's the process to be enabled; what's the technology that will provide the right cost-benefit; and what's the best layout for that process.

One key to ensuring an ROI, says Forte's Babel, is to drill deeper into the operational costs of the existing operation. "Facility managers normally understand their business according to how they're being measured by management," says Babel. "If their bonus is based on getting $5 million out the door, they know how well they're doing against that. But they may not know how much was full case, how much was pick and pack and how much went through value-added services."

Those numbers will come in handy as you choose the technology and layout to best enable a process that's going to be improved.

It's also important to make sure that the new process is in tune with a company's overall business objectives, says Ed Romaine, marketing director, Remstar International (800-639-5805). While that may sound obvious, too often materials handling professionals are the last to know about a new sales and marketing plan. "I have heard of many projects where operations learned three months into the implementation of a project designed to handle cases that sales and marketing had decided they want to ship pieces," says Romaine. "That means all the work was for naught."

Once the solution has been designed, it's necessary to identify the resources that are going to be needed in terms of time, money, people and equipment.

With the right project selection, planning and delegation of responsibilities, implementation should be a breeze. "During implementation you should only do what you said you're going to do," says Forte's Babel. "Nothing more and nothing less."

Still, this is an area where sticking to the plan and maintaining discipline can make or break the ROI of a project.

"Change orders add complexity and risk to the outcome of a project," says Remstar's Romaine. "In some instances, those changes are inevitable, but in many it goes back to whether or not you tied your project into your overall business objectives at the start."

That's why one of the most important best practices associated with the implementation is to avoid scope creep.

Just what is scope creep? "It's the inclination to add things that weren't initially part of the plan," says ESYNC's Sidell. "You started off with a plan, but now your customer requirements have changed and marketing wants you to change the project."

To avoid scope creep, Sidell says it's important to create a project steering committee that includes a project sponsor from the executive team, as well as representatives from a company's financial and IT communities."

"The steering committee's role is to weigh in on any changes in timeline, budget or scope," says Sidell. "They can decide whether to expand the scope of the project now or wait until the second phase to make changes."

The second important best practice associated with implementation is training of the operations, maintenance and IT groups that will work with the system.

"Operations people need to be familiar with the equipment they're going to use through small training stations where they can do a trial run in a work environment similar to the one they're going to use," says Babel. "The maintenance group needs to know how to perform proper maintenance and trouble shoot new equipment. There will be glitches in the early phase of a start up. And IT people need to be up to speed before the switch is turned on."

Finally, Babel adds, both the IT and mechanical systems need to be put through their paces before officially going live. "Generally, you want to do point testing of equipment and software solutions; an end-to-end test to make sure the solution operates the way it was designed to operate; and finally a performance test to make sure the system can handle projected volumes including peak rates," says Babel.

A system that's been properly planned and implemented should provide the return on investment projected at the start of the project. But how do you know how well the system is performing?

"If you're operating the system the way it was designed, the most important practice after the go live is an audit," says ESYNC's Sidell.

The audit is most often done with the system integrator sometime between one and four months after the go live. At that point, you're comparing your current operational metrics against the KPIs you identified as a measure of success during the planning stage.

What if the system isn't measuring up? Again, this is where the original metrics come in handy. "You're not only measuring how you're doing, but also looking to see whether your business has changed since you designed the system," says Babel. "Are you getting more and smaller orders? Are the percentages of orders that require value-added services increasing?"

Once you can identify and measure the reasons the business has changed, you can go back and adjust. "The best systems are designed with change as part of the plan," says Babel. "If you've implemented a flexible and scalable solution, you can adjust your solution to the new business environment."

Click the icon to read more about justifying automation. (Lift trucks and automation mix it up - March 2005)