Cost Justification

Cost Justification

Assuming an automated warehouse is deemed to be a good fit, it is time to justify its cost, by looking at the following elements:

  1. Site Conditions: Consider site conditions of the warehouse. If the site is landlocked, the automated system is advantageous because the building (assuming new construction) can be as high as 90 to 100 feet (although, 40 to 80 feet is more typical). This reduces the slab size, and can allow the storage facility to remain on an existing property. If an existing building is to be retrofitted with automation, increases in density can often achieve 30% to 50% more storage.
  2. Labor Requirements: Calculate the labor required to operate the facility. Worker productivity in environments with automation technology is often significantly higher.
  3. Inventory Accuracy & Control: Look at inventory accuracy and the level of control needed to manage it. Do employees requiring inventory management information know what is on hand and where it is located at all times? An automated system ensures accurate inventory control on a real-time basis.
  4. Equipment Shifts: Lastly, assess the number of shifts the equipment is running per day. Typically, automated systems require a 2-shift operating period. This is logical, as any machinery must be properly utilized to be justifiable.

Perform the justification of an automated system using discounted cash flow capital budgeting techniques. When using straight payback methods, the time value of money is rarely taken into account. To compound the problem, the benefit of having the automated system operate for its anticipated life of more than 25 years is ignored. Fortunately, determining the Net Present Value (NPV) and the Internal Rate of Return (IRR) is easy with today’s spreadsheet programs. These figures should indicate if there is an appreciable justification for the initial cost difference associated with installing an AS/RS versus building a conventional system. Compare both of these by establishing cash flow differentials, and then apply the cost differential to the cash flow benefits.

by Dan Labell, president, Westfalia Technologies, Inc.

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