Putting time, money, and effort into a new WMS requires a way to calculate ROI on a WMS system. Updating or replacing the warehouse management system (WMS) is an arduous process. It grows in complexity as you add in complex processes, products, multiple warehouses, and fleets.
The decision to look at a new WMS solution can come from a variety of reasons. These reasons may vary from limited capacity with the current system to overall dissatisfaction from the employees using the system. Whatever the reasons, these should all be written down and discussed across the board and key people involved. Set out with a clear objective of what you’d like to improve, cut, or advance. Keeping these in mind will help determine the right mix of WMS features and benefits to look for.
The take here will be to cover the areas you will come across when making the decision to go with a new WMS. From the unknows to the ones you can track with precision. You’ll go through considerations to make internally and externally so you can calculate ROI on a WMS specific to your organization.
- Knowing what is needed to calculate ROI.
- Places to find and research WMS
- Where your biggest gains will come from.
- Opportunities to grow with your WMS
What goes into calculating ROI on a WMS?
Coming to a true conclusion on what ROI you can get from any piece of software involves at least three critical components:
- Profit and Loss: this refers to the raw costs of the system, saved costs by replaced software, added expenses due to new hardware, racks, and shelves, or streamlined employees. To quote Explore WMS these are the tangible benefits you can calculate with numbers over time.
- Unrecognized Gains: these are things that may not be apparent at first, but that has some sort of impact whether good or bad on the business. It could be that the WMS provided salesmen an easier, more accurate way to sell and this improved sales. It could be something as simple as not having to duplicate data entry so it saves time, but was not initially considered.
- New Opportunities: this may be something like a new business line opening up because of new capability or capacity from your WMS. They are new opportunities that could not have been determined at the start of the WMS implementation.
These categories could certainly be broken down further, but in general, they will fit the various considerations to calculate ROI on a WMS. Before entering into a project like this, it is definitely worth the mental exercise of listing out your desires and outcomes from this system. This will from going in blind, and making sure the future considerations are accounted for. Not to mention, it helps the WMS vendor understand you more so that everyone is aligned on the goals.
Profit & Loss Items to Calculate
The major items to account for when purchasing a WMS system come from raw costs, efficiency improvements, hardware replacements, and people. These will be the major factors that go into understanding and allocating budget requests to the board or other directors. Many of these items will require some sort of projection into the future. You may not be able to know exactly how many more picks an employee can make, but you could look at 3 different levels of productivity to see where you’d have to be to justify it.
For example, at a 15% improvement, this would save $X, at 20% it would save $XX, and at 30% it would help us save $XXX.
You should look at many of these items from the best to worst case, and give judgment in between. You’ll utilize this in planning and to understand what is at stake going through the project as a whole.
Software License and Running Costs
Software and License Fees
These fees will typically be a mix of license and implementation costs. The current WMS may have only charged this one time, and you’ve depreciated it over time. In your ROI calculation, Factor in the initial costs and license costs (if any) then subtract what you are having to pay for this on a yearly basis currently
Ongoing Support Costs
Things like paying extra for 24/7 support, or having extra seats during peak seasons. All these costs which you are currently paying with the existing WMS should be calculated over a one year period.
Monthly Allocation for Other Systems
You likely have other systems running operations. Perhaps your order management is separate from the WMS. Or perhaps the fleet routing and delivery software is separate. In either of these cases consider what the new software will replace. Our Distribution Hub clients typically replace 2-3 systems and thus receive a return almost immediately.
Upgrades in Functionality
Are you paying internal staff or external vendors to help with the maintenance, upkeep, and updates? If this is a factor, certainly understand what sorts of costs may be cut, or added to with the new WMS.
If you have hardware for scanning barcodes or printing labels you may be surprised when you no longer need it. The new WMS may already have that functionality included within it. In the case of Distribution Hub, we do not require anything besides an iOS or Android phone. So, here you do not need to purchase, and can perhaps sell the old devices.
ROI from Efficiencies Gained due to Changes and Upgrades
Calculate ROI on a WMS’ Impact in the Warehouse
You’re going to either adapt the warehouse to the new system, or try to match the current way with the new system. Each method may have different trade-offs to consider.
A new WMS may require bins to be labeled, but increases the efficiency of the picking process by allowing bins to be moved around accordingly. You could reduce the space needed for the same amount of goods, and keep less space empty for restocking. These things will come up, even though it’s hard to account directly you should see what different percentages would help with.
Inventory and Picking
With a new WMS, you may have the ability to pick in different methods which means less time spent here. It may also mean you have better ways of ordering, with more accurate lead timing and demand forecasting. Enabling automated cycle counts, with expiration date and refrigeration times could do a lot to improve how quickly you see a return, just from the savings alone.
Picking is a different area, which may have advantages ranging from more efficient cycles to wave/batch mixes or beyond. For further innovation, modern WMS may have the capability to handle robotic warehouse management. This is a topic of another discussion, but these are things to consider for 3-5 years down the line.
Shipping, Routing & Delivery
This is an area often overlooked. When you look across all the costs of moving the goods, certainly shipping is a large one. Take a minute to cover the costs of:
- Shipping calculation
- Box sizing
- Capacity planning
- Fleet routing efficiencies
- Delivery time saved
- Time value of money on earlier payment and less returns
A good WMS at some point should allow you to free up employees for a higher-level task. Realizing a new WMS, with various improvements over an existing system or methods will make this easier to do with less work. You may need less warehouse pickers, or it may be you need on less data entry person because the task is automated. Be prepared, and plan for these adjustments.
With these items, it can be more difficult to measure. Yet, it may have some of the more profound effects on your business. Things like sales improvements, margin growth, employee morale and beyond make an impact.
The areas improved throughout the business can lead to new opportunities. Even enabling EDI transactions could help you tap into some of the largest retailers and wholesalers out there.
Your sales process may change. The changes may come more on the client-side with a new portal to purchase through. Or, it could be in the form of a field sales app that has products, last orders, and recommended products for your customers while they are there. These can add up. If you extrapolate out the difference if your salespeople do 10% better, you’ll see how this makes sense.
Sometimes, when you allow and try new things, better things come out of it. For calculating ROI on a WMS, innovation may be a big one. If the new WMS you aim to implement can enable new technologies, you can likely over time dramatically improve your ROI. This may enable technologies such as the ones outlined in the new-age warehouse write up.
Operationally speaking you can make a large amount of incremental improvement looking at reduced tasks, paper and walking time. One of the biggest factors to operational efficiency is reducing the number of movements by a person, or even a robot. If they can travel less, they are more efficient. With smarter WMS technologies, you’ll be leveraging machine learning and AI in everything from purchase planning to lead timing, space planning, and routing. Fewer steps = more profit.
New Opportunities to Calculate ROI on a WMS
Of course, there are other ways to look at the ROI. For larger businesses, you may find it’s time to start handling 3PL requests. Or perhaps you have a new business line which will require different facilities. Whatever the scenario, consider your position over 3-10 years. The implementation of a WMS system is not easy. Keeping this in mind will help you understand where you want to be, not where you are. Below are some considerations, but by all means, this is to be considered with your own situation.
Your new WMS may be able to handle new storage requirements for clients. Perhaps it can meet the needs of same-day shipping or carry out multi-step orders. Whatever the advantages of the WMS, you can extend these options to your clients to help grow your business.
Certainly one of the biggest potential opportunities with a new WMS is to automate tasks with robotic process automation (RPA). While this has already been touched on here, you may not realize the extent to which processes can be automated. It is no doubt an investment. When considering automation outside of the software scope, you’ll realize robotic pickers, sortation equipment, racking systems to support these, etc. gets quite expensive. The ROI may be longer here, 12-18+ months, but can have serious long term benefits.
At the end of the day, the benefits and true ROI will come when it is easier to deliver satisfaction. When your clients are winning because you are efficiently able to deliver products faster, better, and cheaper — you won. Providing satisfaction to a paying client is one of the best opportunities for your business. Famously said by Jeff Bezos of Amazon “The most important single thing is to focus obsessively on the customer” and by that statement, so should you and the innovations will follow.
In large part, this is simply to help you organize the thoughts about what should be factored into your decision to buy a new WMS. The ROI you are able to calculate after implementation will be much more precise. Below is a link to an ROI calculator put together for the considerations you should make.
To get the ROI calculator simply make a copy of the Google Spreadsheet (or download to Excel) and go ahead. You can change many of the variables to have your own estimation put together for the project you are considering.
Enter your email below and we’ll send over the ROI calculator for your own use