A simple yet important calculation
It’s time to dive into ROI, which in its entirety stands for Return on Investment. ROI is undoubtedly an important term in your business. Everything you, as a company, invest in is typically done with a hope and a belief that it will come back with a certain return.
In other words, ROI calculations create a picture of how effective your investments are – and efficiency is indeed something that we like.
Yes, efficiency is often a keyword for most corners of the business, including the warehouse. With a 25-40% increase in warehouse efficiency when implementing a warehouse management system, the WMS is in many contexts an investment with a positive ROI.
But let’s slow down for a moment. Instead of simply providing you with our solid arguments for ROI when investing in a WMS, let us guide you to make a useful ROI calculation yourself, as well as give you two concrete scenarios, where we have made the calculations.
The ROI calculation is extremely important when it comes to making the warehouse more efficient, because how should you approach an optimization of efficiency? As with most things, there are several options. So, what should you choose? An expansion of the ERP system? Or an investment in a dedicated WMS? Find the answer with a simple calculation.
Yes, we call the ROI calculation simple, but that does not mean that you should not be careful when doing it. It is often seen that such calculations become useless, as they are made with the wrong foundation with errors both in relation to ‘return’ and ‘investment’.
That is why we have put together 3 simple tips on how you can make a useful ROI calculation on a warehouse management project, so that you can proceed directly to increasing the efficiency in your warehouse!
Good advice for a useful ROI calculation
Make a fair comparison
Firstly, it is important to have a handle on how to compare. It is necessary to compare prices when calculating the ROI of different investment types from different suppliers. It cannot be guaranteed how different ERP or WMS providers have settled their pricing models. It is therefore important to assess whether the different suppliers’ price models can be compared for such a calculation.
Our clear recommendation is to always make a comparison based on a fixed price from the supplier. And we know that it can be difficult in practice to get fixed prices from suppliers, but it is not a useful ROI calculation without fixed prices. It goes without saying – if the price is not fixed, or at least roughly estimated, then the basis for the whole calculation disappears if the price were to change.
Therefore, we strongly advise to carry out the ROI calculation under the best possible conditions. This may mean that you must go a step further in the correspondence with your potential suppliers to ask for some detailed estimates – if not a fixed price.
Remember related expenses
Secondly, we would like to remind you to keep in mind the related expenses that come with any project. All projects have expenses that come in addition to the fixed price. These usually appear in the form of expenses for, for example, hardware and servers, or the more abstract expenses related to various integrations.
Yes, therefore, are the related expenses difficult to avoid, and this is precisely why they are important to bear in mind when calculating the ROI on such a project. In a warehouse management implementation project, you typically encounter the non-fixed item: integration to the ERP system. Unforeseen challenges often arise in this part of the project. Therefore, based on our own experience, we recommend including a buffer in the calculation.
The same applies if you lean mostly towards the choice to upgrade your ERP system to an extended warehouse management function. Here, one must be aware that it can affect the other functions in the ERP system, which can result in costs for adjustments necessary to make on other parts of the ERP system.
Define measurable gains
We have now moved down to the more exciting part of the calculation. When is the investment paid off? The investment is only one side of the story. The whole essence of ROI is precisely to look at the gain – the gain is what defines the ROI itself.
In this part of the ROI calculation, it is important to be precise by keeping the calculation as simple as possible. With that, we specifically advise you to select the most important prerequisites and focus on them. What’s good advice without a few examples? For example, a warehouse management implementation project could focus on:
- Number of hours spent on picking, receiving goods, etc.
- Salary costs for the warehouse employees, incl. social costs.
- Use of substitutes.
We dare to say that for such a project, the salary budget in itself should provide a positive ROI. The WMS creates versatile improvements in numerous areas of the company, but we still recommend that you choose to focus on what you can save in wages by implementing a WMS. Based on this calculation, it should be possible to assess whether there is a desired ROI on the project.
Investing in a WMS quickly pays off
With these 3 pieces of advice in mind, you can easily and effectively find the answer to whether it is worthwhile for your company to invest in the WMS or another solution. However, it is often the case that a simple ROI calculation show that a new WMS is paid for in between one and two years.
We would like to visualize this for you via two concrete ROI calculation examples that illustrate the payback time of an investment in better inventory management.
The two scenarios are based on a smaller web shop and a larger company. The examples are simplified a bit for the sake of clarity but are based on realistic cases and figures.
Two realistic scenarios for ROI of a WMS implementation
Now you have seen the two scenarios and ways to calculate the ROI of a WMS! And it is a fact that a simple ROI calculation often shows that a new WMS is paid for in between one and two years.
That is why it is still extremely important that you consider the ROI in your company when it comes to a WMS investment. We are not shy about recommending that if you do not find that the system pays for itself again in a few years, then it is better to wait investing in such a project.
To conclusion, we will return to the importance of making a useful ROI calculation, which it is more likely to be with our 3 tips in mind. It is relatively simple to calculate the ROI on a new investment, so there is not much else to say other than gather some information about your current logistics set up and get started!
We are happy to help! Let us calculate the ROI on your WMS investment. Contact us and find out more about the possibilities!
Shall we calculate the ROI on your WMS investment?
Are you interested in learning more about Warehouse Management and how it can benefit your warehouse? Let me know if you need any help or have any questions.