developing a robust business case for automation · • a robust business case for automation is...

Developing a Robust Business Case for

Automation

TRACK 3: SESSION 3

– Email: [email protected]

– Phone: (514) 482-3572 x 100

– Website: www.mwpvl.com

– Linkedin:Marcwulfraat

Speaker

Marc WulfraatMWPVL International Inc.

Supply Chain and Logistics Consultants

President

2 0 1 7 M a t e r i a l H a n d l i n g & L o g i s t i c s C o n f e r e n c e S p o n s o r e d b y D e m a t i c ● P a r k C i t y , U T 2

mailto:[email protected]

http://www.mwpvl.com/

Abstract

An automated facility requires a concerted approach that starts with

defining your capital investment requirements, support and maintenance

costs. For example, the design and construction cost of the building may

vary due to differences in building height and shape, while the amount

and expense of direct and indirect labor resources flex due to the

automation of some tasks and the introduction of new work that's not

currently performed. This presentation gets right into the weeds with real

numbers based on a case study to enable a robust comparison of multiple

automation options to satisfy even the most demanding financial

accountant!


Agenda

• Overview of the Business Case Development Process

• Develop the Future Design Year Profile Requirements

• Establish the Options to Evaluate

• Develop the Financial Model

• SWOT Analysis & Qualitative Issues

• Summary / Key Takeaways


Opening Statements

• Financial Executives protect shareholder interests by ensuring that the

returns on investment capital provide sufficient rewards relative to all

other demands for capital from competing projects

• A robust business case for automation is critical to ensure that

executives fully understand their options when it comes to supply chain

investments

• This presentation describes a bottom-up approach that has been

successfully deployed to ensure automation investment decisions are

made based on fair and sound economic analytics

• All numbers in this business case have been modified from reality but

are based on real business cases


3-Step Business Case Development Process

Develop Business Profile

• Gather historical operational & financial data

• Cleanse, validate and analyze data

• Develop future profile of business operations for the next decade

• Obtain executive approval of key assumptions and framework

DevelopMultipleOptions

• Baseline Scenario: Do Nothing

• Scenario 1: Develop conventional (i.e. manual) distribution center to handle future growth

• Scenario 2: Develop Automation solution

• Scenario3+: Other Options

DevelopBusiness Case for

Options

• 10-Year projected forecast of ALL cash flows by scenario

• CapEx & Depreciation Schedule

• Operating Expenses

• Automation Support Costs

• One-time Expenses (e.g. write-offs/ asset disposal)

• SWOT analysis


Data Gathering Requirements for a Business Case

• Data Gathering:

– 12 Months of operational data

history (SKU variety,

Movement, Inventory)

– Detailed labor crewing & cost

data / KPI / Production Rates

– General Ledger of all

operating expenses

– Projected growth rates

2 0 1 7 M a t e r i a l H a n d l i n g & L o g i s t i c s C o n f e r e n c e S p o n s o r e d b y D e m a t i c ● P a r k C i t y , U T

Create a 10-year operating profile of warehouse storage

and handling requirements by

facility

7

Develop a 10-Year Profile of DC Operations


Development of Growth Rate Projections (2017 -2026)Sample Company

Division 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

#REF!

SKU VARIETY

DIVISION A

Frozen Food 3,746 3,746 3,746 3,746 3,746 3,746 3,746 3,746 3,746 3,746 3,746 3,746

Refrigerated 2,991 2,991 2,991 2,991 2,991 2,991 2,991 2,991 2,991 2,991 2,991 2,991

Dry Grocery 5,816 5,816 5,816 5,816 5,816 5,816 5,816 5,816 5,816 5,816 5,816 5,816

SubTotal DIVISION A SKU Variety 12,553 12,553 12,553 12,553 12,553 12,553 12,553 12,553 12,553 12,553 12,553 12,553

DIVISION B

Frozen Food 343 343 343 343 343 343 343 343 343 343 343 343

Refrigerated 267 267 267 267 267 267 267 267 267 267 267 267

Dry Grocery 1,512 1,512 1,512 1,512 1,512 1,512 1,512 1,512 1,512 1,512 1,512 1,512

SubTotal DIVISION B SKU Variety 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122 2,122

Grand Total SKU Variety 14,675 14,675 14,675 14,675 14,675 14,675 14,675 14,675 14,675 14,675 14,675 14,675 #REF!

AVERAGE WEEKLY SALES (FULL CASE EQUIVILENTS)

DIVISION A

Frozen Food 92,247 97,782 103,649 109,868 116,460 123,447 130,854 138,705 147,028 155,849 165,200 175,112

Refrigerated 167,650 177,709 188,372 199,674 211,655 224,354 237,815 252,084 267,209 283,241 300,236 318,250

Dry Grocery 130,384 138,207 146,499 155,289 164,607 174,483 184,952 196,049 207,812 220,281 233,498 247,507

SubTotal DIVISION A Weekly Cases Shipped 390,281 413,698 438,520 464,831 492,721 522,284 553,621 586,838 622,049 659,372 698,934 740,870

DIVISION B

Frozen Food 66,103 70,069 74,273 78,729 83,453 88,460 93,768 99,394 105,357 111,679 118,380 125,482

Refrigerated 33,397 35,401 37,525 39,777 42,163 44,693 47,375 50,217 53,230 56,424 59,809 63,398

Dry Grocery 57,616 61,073 64,737 68,622 72,739 77,103 81,730 86,633 91,831 97,341 103,182 109,373

SubTotal DIVISION B Weekly Cases Shipped 157,116 166,543 176,535 187,128 198,355 210,257 222,872 236,244 250,419 265,444 281,371 298,253

Grand Total Weekly Cases Shipped 547,397 580,241 615,055 651,959 691,076 732,541 776,493 823,083 872,468 924,816 980,305 1,039,123

Current Projected Operations

8

Determine SKU Variety Requirements


Be sure to understand peak

item variety requirements

9

Determine Movement Volumes


Be sure to understand

seasonality and peak movement

requirements

187,015

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

190,000

200,000

20

15

-04

-26

20

15

-05

-10

20

15

-05

-24

20

15

-06-0

7

20

15

-06

-21

20

15

-07

-05

20

15

-07

-19

20

15

-08

-02

20

15

-08-1

6

20

15

-08

-30

20

15

-09

-13

20

15

-09

-27

20

15

-10

-11

20

15

-10-2

5

20

15

-11

-08

20

15

-11

-22

20

15

-12

-06

20

15

-12

-20

20

16

-01-0

3

20

16

-01

-17

20

16

-01

-31

20

16

-02

-14

20

16

-02

-28

20

16

-03-1

3

20

16

-03

-27

20

16

-04

-10

20

16

-04

-24

Refrigerated Movement Cases History in 2016

Total Refrigerated Movement Cases Linear (Total Refrigerated Movement Cases)

10

Determine Inventory Levels


586,400

300,000

350,000

400,000

450,000

500,000

550,000

600,000

650,000

20

16

-03

-06

20

16

-03

-20

20

16

-04

-03

20

16

-04

-17

20

16

-05

-01

20

16

-05

-15

20

16

-05

-29

20

16

-06

-12

20

16

-06

-26

20

16

-07

-10

20

16

-07

-24

20

16

-08

-07

20

16

-08

-21

20

16

-09

-04

20

16

-09

-18

20

16

-10

-02

20

16

-10

-16

20

16

-10

-30

20

16

-11

-13

20

16

-11

-27

20

16

-12

-11

20

16

-12

-25

20

17

-01

-08

20

17

-01

-22

20

17

-02

-05

20

17

-02

-19

Refrigerated Inventory Cube History in 2016

Total Refrigerated Inventory Cube Linear (Total Refrigerated Inventory Cube) Linear (Total Refrigerated Inventory Cube)

Be sure to understand

seasonality and peak inventory

storage requirements

11

Determine SKUs That Cannot be Automated

• Typically, not all SKUs qualify for automation due to their size, shape, or

weight. Establish rules to define which SKUs qualify for automation.

E.g.:


Case/Tote Attributes Value

Minimum case weight 2.0 Lbs

Maximum case weight 75.0 Lbs

Minimum case dimensions 6”W x 9”L

Maximum case dimensions 24”W x 36”L

Minimum Height 2”

Maximum Height 30”

Proposed Tote Dimensions 24”W x 36”L

12

Establish Current Automated & Conventional

Requirements


Summary of 2016 Warehouse Volumes Broken Down by Automation Vs Conventional Sample Company

Automation Vs ConventionalStorage

Temperature

Active

SKUs

Units/

Week

Cases/

Week

Cube/

Week

Pallets/

Week

Active

SKUs

Units

on Hand

Cases

on Hand

Cube

on Hand

Pallets

on Hand

Grand Total 15,471 645,840 640,421 649,161 27,324 16,361 1,315,812 1,305,281 1,294,906 57,614

Total Automation SKUs 6,664 514,884 514,884 511,789 18,083 6,156 852,568 852,568 811,927 22,501

Automation SKUs Dry 2,493 150,960 150,960 154,413 3,716 2,360 371,516 371,516 375,469 9,047

Automation SKUs Ripening - - - - - - - - - -

Automation SKUs 50 Degree 102 24,731 24,731 26,463 2,189 92 7,452 7,452 8,916 372

Automation SKUs 45 Degree 166 27,172 27,172 26,242 245 152 10,315 10,315 10,992 98

Automation SKUs 35 Degree 1,296 138,523 138,523 116,413 2,850 1,208 134,396 134,396 98,401 3,446

Automation SKUs 28 Degree 423 32,952 32,952 39,402 5,449 265 18,806 18,806 23,743 2,417

Automation SKUs Frozen 2,188 140,546 140,546 148,856 3,633 2,079 310,083 310,083 294,405 7,120

Automation SKUs Ice Cream - - - - - - - - - -

0Total Conventional SKUs 7,462 128,778 123,661 135,563 9,010 6,862 357,260 348,463 358,783 29,705

Conventional SKUs Dry 4,157 58,624 57,131 70,452 3,556 4,198 195,175 191,085 198,904 14,086

Conventional SKUs Ripening 5 - - - - 5 2,931 2,931 3,067 -

Conventional SKUs 50 Degree 38 1,895 1,895 1,827 139 27 1,457 1,457 1,550 54

Conventional SKUs 45 Degree 52 802 802 855 15 37 929 929 501 12

Conventional SKUs 35 Degree 713 24,402 21,249 13,550 2,005 637 35,622 31,618 26,451 6,175

Conventional SKUs 28 Degree 581 3,159 3,159 2,849 1,232 113 1,807 1,807 2,322 266

Conventional SKUs Frozen 1,825 35,568 35,096 43,961 2,010 1,724 105,681 104,979 118,181 8,972

Conventional SKUs Ice Cream 130 4,328 4,328 2,069 52 121 13,657 13,657 7,808 142

0

Peak Movement Volumes Peak Inventory Levels (Based on Cube)

13

Establish Design Year Automated/Conventional

Requirements


Automation Vs

Conventional

Storage

Temperature

SKU

Variety

Cases/

Week

Shipped

Cases/

Day

Shipped

Cases/

Hour

Shipped

% of

Cases

Shipped

Cube/

Week

Shipped

Pallets/

Week

Shipped

Inventory

Cases

on Hand

Inventory

Cube

on Hand

% of

Inventory

Cube

Inventory

Pallets On

Hand

Inventory

Days on

Hand 0.0%

Grand Total Total 14,205 1,284,878 282,673 12,563 100% 1,302,599 54,516 2,416,712 2,355,699 100% 105,049 13.2

Automation SKUs SubTotal 6,668 1,036,048 227,930 10,130 80.6% 1,029,820 36,387 1,715,535 1,633,756 69.4% 45,276 11.6

Automation SKUs Dry 2,493 303,761 66,827 2,970 23.6% 310,710 7,478 747,563 755,518 32.1% 18,205 17.2

Automation SKUs Cooler 1,987 449,481 98,886 4,395 35.0% 419,583 21,598 344,024 285,838 12.1% 12,745 5.4

Automation SKUs Frozen 2,188 282,806 62,217 2,765 22.0% 299,527 7,311 623,948 592,400 25.1% 14,326 15.4

Conventional Areas SubTotal 7,537 248,830 54,743 2,433 19.4% 272,779 18,129 701,177 721,943 30.6% 59,773 76.4

Conventional SKUs Dry 4,198 114,960 25,291 1,124 8.9% 141,763 7,155 384,501 400,234 17.0% 28,343 23.4

Conventional SKUs Cooler 1,384 54,541 11,999 533 4.2% 38,395 6,824 77,957 68,194 2.9% 13,091 10.0

Conventional SKUs Frozen 1,825 70,621 15,537 691 5.5% 88,458 4,045 211,239 237,803 10.1% 18,053 20.9

Conventional SKUs Ice Cream 130 8,709 1,916 85 0.7% 4,163 105 27,481 15,712 0.7% 286 22.1

2028 Peak Sales & Inventory Data

14

Key AssumptionsSample Company

Ref. Key Assumption 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

1 Growth Rate

2 Projected Sales Growth in Movement Volume 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%

3 Cumulative Sales Growth in Movement Volume 6.00% 12.36% 19.10% 26.25% 33.82% 41.85% 50.36% 59.38% 68.95% 79.08% 89.83% 101.22%

4 Projected Sales Growth in Inventory Volume 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%

5 Cumulative Sales Growth in Inventory Volume 6.00% 12.36% 19.10% 26.25% 33.82% 41.85% 50.36% 59.38% 68.95% 79.08% 89.83% 101.22%

6 Inflation Rate

7 Projected Inflation Rate for Labor 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

8 Projected Inflation Rate for Revenues / All Other Expenses 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%

9 Labor Cost Assumptions

10 Direct Labor Average Wage Rate 30.00$ 30.60$ 31.21$ 31.84$ 32.47$ 33.12$ 33.78$ 34.46$ 35.15$ 35.85$ 36.57$ 37.30$ 38.05$

11 Fringe Benefit Rate 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%

12 Fully Loaded Direct Labor Average Wage Rate 42.00$ 42.84$ 43.70$ 44.57$ 45.46$ 46.37$ 47.30$ 48.24$ 49.21$ 50.19$ 51.20$ 52.22$ 53.27$

13 Key Operating and Producitivity Metrics

14 Peak Day as a % of the Weekly Volume 22.0%

15 Hours per Day that the Automation System Runs 22.5

16 Cases/Hour for Conventional Selection 150

17 Cases/Hour for Mechanized Selection 300

19 Cases/Hour for Loading from Conveyor into Trailer 290

20 Hours Paid : Hours Worked Ratio 10%

22 Depreciation (Years) (Straight Line)

23 New Building Construction 30

24 Building Retrofit 30

25 Equipment - Racking/Fixtures 20

26 Equipment - Mobile 10

27 Equipment - Mechanical Conveyors 20

28 Equipment - I.T. 5

29 Corprate Tax Rates

30 Corporate Tax Rate 39%

31 Cost of Capital

32 Cost of Capital for NPV Calculation 7.5%

Obtain Executive Approval of Key Assumptions


Key Assumptions Examples• Growth Rates• Inflation Rates• Sq Ft Requirements• Productivity Rates• Depreciation Rates• Corporate Tax Rate• Cost of Capital

15

Examples of Options to Evaluate

Baseline Scenario

• Do Nothing at all

• Business as usual

• Existing DC cannot support growth therefore future sales growth will be flat

• Inflation continues into the future and cost per case gradually increases

Option 1Conventional

• Expand DC to enable support of future growth

• Design DC based on manual conventional processes

Option 2Automation

• Expand DC to enable support of future growth

• Design DC based on new automated processes


Distribution Center Design Process

• For each option being evaluated, a facility design should be developed

to enable a clear understanding of the option being evaluated

– Building height & shape

– Material handling systems

– Master site plan

– Truck door & employee parking requirements

• Based on the facility design for each option:

– Develop capital investment requirements

– Develop corresponding depreciation schedule


DC Layout Examples

• Option: Expansion W/Automation


• Option: Greenfield W/Automation

18

DC Layout Examples

• Option: Greenfield With

Mechanization


• Option: Greenfield With Goods to

Person Automation

19

Example of CapEx and Depreciation Schedule

• This is a high-level roll-up of a detailed capital expenditure budget that

has over 230 line items

• Early supplier involvement (ESI) will help to ensure that budgets are

developed accurately

• Ensure sufficient contingency is provided within the investment

requirements


Capital Expenditure ItemTotal

Investment

Depreciation

Years 1 2 3 4 5 6 7 8 9 10 11

Residual

Asset

Value

Grand Total Capital Investments 158,669,419$ 7,568,178$ 7,568,178$ 7,568,178$ 7,568,178$ 7,568,178$ 6,116,838$ 6,116,838$ 5,947,022$ 5,947,022$ 5,947,022$ 5,726,900$ 82,718,796$

Land 13,000,000$ 433,333$ 433,333$ 433,333$ 433,333$ 433,333$ 433,333$ 433,333$ 433,333$ 433,333$ 433,333$ 433,333$ 8,233,333$

Building Construction & Site Works 78,818,218$ 2,627,274$ 2,627,274$ 2,627,274$ 2,627,274$ 2,627,274$ 2,627,274$ 2,627,274$ 2,627,274$ 2,627,274$ 2,627,274$ 2,627,274$ 49,918,205$

Fixed Equipment & Pick Modules 19,179,653$ 925,427$ 925,427$ 925,427$ 925,427$ 925,427$ 925,427$ 925,427$ 925,427$ 925,427$ 925,427$ 925,427$ 8,999,952$

Mobile Equipment 2,753,968$ 297,177$ 297,177$ 297,177$ 297,177$ 297,177$ 231,287$ 231,287$ 231,287$ 231,287$ 231,287$ 11,165$ -$

Automation System 42,167,579$ 2,734,966$ 2,734,966$ 2,734,966$ 2,734,966$ 2,734,966$ 1,899,516$ 1,899,516$ 1,729,701$ 1,729,701$ 1,729,701$ 1,729,701$ 15,567,307$

Warehouse Management System 2,750,000$ 550,000$ 550,000$ 550,000$ 550,000$ 550,000$ -$ -$ -$ -$ -$ -$ -$

Land

20

Develop a Detailed Labor Crewing by Option

• Determine an annual labor requirements for each scenario and identify

the savings for the automation options being evaluated


StaffingArea /

Job Function

Fixed/

Variable2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Annual Labor Savings ($M)

Annual Labor Savings (FTEs)

GRAND TOTAL 826 851 877 904 934 965 998 1,032 1,069 1,109 1,150 1,194 1,241

Night Warehouse 112 118 125 132 139 147 156 164 174 184 194 205 217

Day Operations 51 53 55 58 60 63 66 69 72 76 79 83 87

Day - Inventory Will Call 17 17 17 18 18 18 18 19 19 19 19 20 20

Maintanence - Day/Night 12 13 13 14 15 15 16 17 18 19 20 21 22

GCA - Janitorial 15 16 16 17 18 19 20 21 22 23 24 26 27

Lumping 25 26 28 29 31 32 34 36 37 39 42 44 46

Transportation - Office 17 17 17 17 17 17 17 17 17 17 17 17 17

Fleet Maintenance 16 17 18 18 19 20 21 23 24 25 26 28 29

Bvg 5 5 6 6 6 7 7 8 8 8 9 9 10

Plant 49 51 54 57 59 63 66 69 73 77 81 85 89

Fish Department 17 18 19 20 21 22 23 24 25 27 28 30 31

Produce Buyers 3 3 3 3 3 3 3 3 3 3 3 3 3

Accounts Payable 6 6 6 6 6 6 6 6 6 6 6 6 6

Information DIVISION B 4 4 4 4 4 4 4 4 4 4 4 4 4

Co DIVISION A Office Staff 74 74 74 74 74 74 74 74 74 74 74 74 74

DIVISION B Div 81 81 81 81 81 81 81 81 81 81 81 81 81

Hourly Activity Transportation 118 125 133 141 149 158 167 177 188 199 211 224 237

Transportation - Resident Drivers 34 36 38 40 43 45 48 51 54 57 61 65 68

Co DIVISION A - Sales Dept 170 170 170 170 170 170 170 170 170 170 170 170 170

Baseline Scenario: Labor Crewing by Job Function by Year

Staffing 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Annual Labor Savings ($M) 2.76$ 2.92$ 3.10$ 3.29$ 3.48$ 3.69$ 3.91$ 4.15$ 4.40$ 4.66$ 4.94$

Annual Labor Savings (FTEs) 30 32 34 36 38 41 43 46 48 51 54

GRAND TOTAL 846 872 900 929 959 992 1,026 1,063 1,102 1,143 1,187

Night Warehouse 95 100 106 112 118 124 131 139 147 155 164

Day Operations 55 57 60 63 65 69 72 75 79 83 87

Day - Inventory Will Call 17 18 18 18 18 19 19 19 19 20 20

Maintanence - Day/Night 13 14 15 15 16 17 18 19 20 21 22

GCA - Janitorial 16 17 18 19 20 21 22 23 24 26 27

Lumping 28 29 31 32 34 36 37 39 42 44 46

Transportation - Office 17 17 17 17 17 17 17 17 17 17 17

Fleet Maintenance 18 18 19 20 21 23 24 25 26 28 29

Bvg 6 6 6 7 7 8 8 8 9 9 10

Plant 54 57 59 63 66 69 73 77 81 85 89

Fish Department 19 20 21 22 23 24 25 27 28 30 31

Produce Buyers 3 3 3 3 3 3 3 3 3 3 3

Accounts Payable 6 6 6 6 6 6 6 6 6 6 6

Information DIVISION B 4 4 4 4 4 4 4 4 4 4 4

Co DIVISION A Office Staff 74 74 74 74 74 74 74 74 74 74 74

DIVISION B Div 81 81 81 81 81 81 81 81 81 81 81

Hourly Activity Transportation 133 141 149 158 167 177 188 199 211 224 237

Transportation - Resident Drivers 38 40 43 45 48 51 54 57 61 65 68

Co DIVISION A - Sales Dept 170 170 170 170 170 170 170 170 170 170 170

Option 2: Labor Crewing by Job Function by Year

21

Document Labor Assumptions and Production

Rates


Option 2: Automation

Throughput

Rate/Hour

Used

Unit

Load 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Weekly Worked Hours - Automation System

Receiving: Unload pallets from trailers (Unloaders) 45 Pallets/Hr 16 16 17 17 18 18 19 19 20 21 21

Receiving: Lumping on the Dock 8 Pallets/Hr 86 89 92 95 97 100 103 106 109 112 116

Receiving: Lumping/Breakdown Inbound Pallets 54 Pallets/Hr 13 14 14 14 15 15 16 16 17 17 18

Receiving: Manual Putaway of Received Pallets 10 Pallets/Hr 36 37 38 39 40 41 43 44 45 46 48

Replenishment: Pick 100 Cases/Hr 445 456 468 479 491 503 516 527 542 551 569

Replenishment Area Pallet Shuttle 1 FTE 40 40 40 40 40 40 40 40 40 40 40

Replenishment: Stock 175 Cases/Hr 254 261 267 274 281 288 295 301 309 315 325

Picking 500 Picks/Hr 604 623 643 666 688 714 739 764 790 814 841

Palletizing (Assume Manual Transfer to Palletizer) 20 Pallets/Hr 35 36 37 38 39 40 41 42 44 45 46

Staging: Buffer pallets in shipping dock 45 Pallets/Hr 16 16 17 17 17 18 18 19 19 20 21

Shipping: Load pallets into truck 45 Pallets/Hr 16 16 17 17 17 18 18 19 19 20 21

Empty Handling: Load trailers with empty vendor pallet stacks 50 Pallets Stacks/Hr 1 1 2 2 2 2 2 2 2 2 2

Empty Handling: Unload pallets with empty tote stacks 50 Pallets/Hr 4 4 4 5 5 5 5 5 5 5 6

Empty Handling: Infeed tote stacks into system 180 Tote Stacks/Hr 28 15 15 16 16 17 17 18 18 19 19

Empty Handling: Unload empty plastic pallet stacks from stores 60 Pallets Stacks/Hr 1 1 1 1 1 1 1 1 1 1 1

SubTotal Direct Weekly Labor Hours for the Automation System 1,594 1,626 1,671 1,720 1,766 1,819 1,873 1,922 1,981 2,027 2,094

Weekly Direct Labor Hours

22

Develop Projected Operating Expenses by

Option

• Analyze each general ledger line

item and determine if changes

are anticipated due to an

automation system

• Examples of expenses impacted

by automation include:


Benefits

• Direct Labor Reduction Wages/FB

• Indirect Labor Reduction Salaries/FB

• Reduced Defectives

• Reduced Returns

• Reduced Space

Penalties

• Automation Support Cost (Vendor & Internal)

• I.T. Support cost

• Spare Parts / Maintenance

• Utilities Expense

• Depreciation Increase

• Asset Tax

23

Automation Support Costs

• Automation support costs are significant and need to be provided by

the vendor(s) involved in the process

– Vendors will provide cost estimates and assumptions for:

• Initial spare parts inventory investment requirement

• Annual spare parts consumption expense

• Annual on-site and remote support costs by year

• Lifespan of equipment and timing/cost of major overhaul

– These cost penalties are critical to capture to ensure a fair portrayal of the

economics of automation is determined


Example of Pro Forma Operating Expenses


2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

ACCT # Account Description

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

004 DAY WAREHOUSE 2,130,627$ 2,173,240$ 2,216,705$ 2,261,039$ 2,306,260$ 2,352,385$ 2,399,432$ 2,447,421$ 2,496,370$ 2,546,297$ 2,597,223$ 2,649,167$

005 NIGHT WAREHOUSE 6,889,419$ 7,027,207$ 7,167,751$ 7,311,106$ 7,457,329$ 7,606,475$ 7,758,605$ 7,913,777$ 8,072,052$ 8,233,493$ 8,398,163$ 8,566,126$

008 TEMP LABOR ON PR 5,724$ 5,838$ 5,955$ 6,074$ 6,195$ 6,319$ 6,446$ 6,575$ 6,706$ 6,840$ 6,977$ 7,117$

011 OVERTIME PREMIUM 1,121,081$ 1,143,502$ 1,166,372$ 1,189,700$ 1,213,494$ 1,237,764$ 1,262,519$ 1,287,769$ 1,313,525$ 1,339,795$ 1,366,591$ 1,393,923$

012 TEMPORARY LABOR 183,083$ 186,745$ 190,480$ 194,289$ 198,175$ 202,138$ 206,181$ 210,305$ 214,511$ 218,801$ 223,177$ 227,641$

012 EXCUSED ABSENCES 136,237$ 138,961$ 141,741$ 144,575$ 147,467$ 150,416$ 153,425$ 156,493$ 159,623$ 162,815$ 166,072$ 169,393$

014 ADVER-COMP MDSE -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

021 PRINTING -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

028 DEFECTIVES 264,710$ 268,680$ 272,711$ 276,801$ 280,953$ 285,168$ 289,445$ 293,787$ 298,194$ 302,666$ 307,206$ 311,815$

041 FREIGHT -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Baseline Scenario (Do Nothing) Projected Revenues & Expenses (Zero Growth; Inflation Applied)

Assumption 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

Projected

Annual

Amount

2,130,627$ 2,303,634$ 2,490,689$ 2,692,933$ 2,911,600$ 3,148,021$ 3,403,641$ 3,680,016$ 3,978,834$ 4,301,915$ 4,651,231$ 5,028,911$

30 FTE reduction as of 2018 6,889,419$ 7,190,956$ 7,774,862$ 8,406,180$ 9,088,762$ 9,826,770$ 10,624,703$ 11,487,429$ 12,420,208$ 13,428,729$ 14,519,142$ 15,698,097$

5,724$ 6,188$ 6,691$ 7,234$ 7,822$ 8,457$ 9,143$ 9,886$ 10,689$ 11,557$ 12,495$ 13,509$

30 FTE reduction as of 2018 1,121,081$ 1,170,148$ 1,265,164$ 1,367,896$ 1,478,969$ 1,599,061$ 1,728,905$ 1,869,292$ 2,021,078$ 2,185,190$ 2,362,627$ 2,554,473$

183,083$ 197,949$ 214,023$ 231,401$ 250,191$ 270,507$ 292,472$ 316,221$ 341,898$ 369,660$ 399,676$ 432,130$

30 FTE reduction as of 2018 136,237$ 142,199$ 153,746$ 166,230$ 179,728$ 194,322$ 210,101$ 227,161$ 245,607$ 265,550$ 287,113$ 310,426$

-$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

-$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

2.5% Reduction as of 2018 264,710$ 277,681$ 298,757$ 321,433$ 345,830$ 372,078$ 400,319$ 430,703$ 463,393$ 498,565$ 536,406$ 577,119$

-$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Option 2 Projected Revenues & Expenses (6% Growth; Inflation Applied)

Baseline Scenario

Automation Scenario

A Few Pointers When Developing Pro Formas

• Financial accountants need to audit cash flows and timing from the

initial investment year through to design year

– Avoid overloading the automation business case with savings that are

neutral (i.e. savings that can be achieved with or without automation)

• A good accountant is a devil’s advocate and will test each savings claim to identify if it

can be achieved if the operation is conventional versus automated

• The classic example is the declaration of transportation savings due to warehouse

consolidation which are achievable regardless of the automation investment

– Apply growth and inflation assumptions over the time period being

portrayed; whereby variable expenses grow with volume + inflation and

fixed expenses grow with inflation only

– Ensure that any step-wise expenses are portrayed accurately


Roll Up Results Into a Simplified Executive Summary

Automation / Conventional Options Versus Baseline

• 10-Year Cash Flow:– Capital Investments

– Pre-Tax Net Income

– OpEx Benefits

– OpEx Penalties

– Depreciation Impact

– Tax Impact

– Cumulative Cash Flows

– ROI

– NPV

– Payback


OPTION 2 (GREENFIELD DC) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Capital Investment ($M):

On-Going Capital Investment for Maintenance -2.0 -2.0 -2.1 -2.1 -2.2 -2.2 -2.3 -2.3 -2.3 -2.4

Cash Inflow due to Sale of Existing DC 24.1$

One-Time Write-off of Non-Depreciated Assets

Capital Investment for Option 2 157.1-$ 2.0-$ 2.0-$ 22.0$ 2.1-$ 2.2-$ 2.2-$ 2.3-$ 2.3-$ 2.3-$ 2.4-$

One-Time Write-off of Non-Depreciated Assets -19.5

Sales / Gross Profits / Operating Expenses / Net Income ($M):

Total Pre-Tax Net Income 34.8$ 40.5$ 51.6$ 56.3$ 63.8$ 73.5$ 82.4$ 92.1$ 102.5$ 113.6$

Total Cases Shipped 28.9 30.6 32.5 34.4 36.5 38.7 41.0 43.5 46.1 48.8

Operating Expense Benefits ($M):

Warehouse Direct Labor Savings 0.2-$ 0.8-$ 1.5-$ 2.3-$ 3.2-$ 4.1-$ 5.2-$ 6.3-$ 7.6-$ 9.0-$

Warehouse Defectives Savings 0.0-$ 0.0-$ 0.1-$ 0.1-$ 0.2-$ 0.2-$ 0.2-$ 0.3-$ 0.4-$ 0.4-$

Warehouse Maint. Savings 0.3$ 0.3$ 0.3$ 0.3$ 0.3$ 0.3$ 0.4$ 0.4$ 0.4$ 0.4$

Warehouse Occupancy Savings 2.1$ 2.1$ 2.1$ 2.1$ 2.2$ 2.2$ 2.2$ 2.3$ 2.3$ 2.3$

Transportation Variable Labor Savings 0.6-$ 1.5-$ 2.4-$ 3.5-$ 4.7-$ 6.0-$ 7.4-$ 8.9-$ 10.6-$ 12.4-$

1.5$ 0.1$ 1.6-$ 3.5-$ 5.5-$ 7.7-$ 10.2-$ 12.9-$ 15.9-$ 19.1-$

Operating Expense Penalties ($M):

Warehouse Outside Services 2.2-$ 2.2-$ 2.3-$ 2.4-$ 2.5-$ 2.6-$ 2.7-$ 2.7-$ 2.8-$ 2.9-$

Warehouse MHE Equipment Maint 0.4$ 0.0-$ 0.0-$ 0.0-$ 0.0-$ 0.0-$ 0.0-$ 0.0-$ 0.0-$ 0.0-$

Warehouse Occupancy Expenses 1.5-$ 1.5-$ 1.6-$ 1.6-$ 1.6-$ 1.6-$ 1.7-$ 1.7-$ 1.7-$ 1.7-$

Net Operating Expense Savings 3.3-$ 3.8-$ 3.9-$ 4.0-$ 4.2-$ 4.3-$ 4.4-$ 4.5-$ 4.6-$ 4.7-$

Deprecation Impact ($M):

Warehouse Building Depreciation 2.6-$ 2.6-$ 2.6-$ 1.5-$ 1.5-$ 1.4-$ 1.4-$ 1.4-$ 1.4-$ 1.4-$

Warehouse MHE Equipment Depreciation 4.5-$ 4.5-$ 4.5-$ 3.5-$ 3.5-$ 2.0-$ 2.0-$ 1.8-$ 1.8-$ 1.8-$

Net Change in Depreciation Expense 7.1-$ 7.1-$ 7.0-$ 5.0-$ 4.9-$ 3.5-$ 3.4-$ 3.2-$ 3.2-$ 3.2-$

-$ -$ 24.1$ -$ -$ -$ -$ -$ -$ -$

Tax Impact 13.6-$ 15.8-$ 20.1-$ 22.0-$ 24.9-$ 28.7-$ 32.1-$ 35.9-$ 40.0-$ 44.3-$

Sum of Cash Flows 157.1-$ 32.3$ 35.9$ 66.8$ 43.6$ 48.2$ 52.7$ 58.2$ 64.0$ 70.4$ 77.2$

Cumulative Cash Flows 157.1-$ 124.7-$ 88.9-$ 22.1-$ 21.5$ 69.7$ 122.4$ 180.6$ 244.6$ 315.0$ 392.2$

Cost per Case Baseline Scenario 2.31$ 2.36$ 2.40$ 2.44$ 2.49$ 2.53$ 2.58$ 2.62$ 2.67$ 2.72$

Cost per Case Option 2 2.53$ 2.52$ 2.51$ 2.43$ 2.43$ 2.39$ 2.39$ 2.39$ 2.40$ 2.41$

Impact on Cost per Case for Option 2 0.21$ 0.17$ 0.11$ 0.01-$ 0.05-$ 0.14-$ 0.18-$ 0.23-$ 0.27-$ 0.31-$

ROI to 2028 27.5%

NPV (@7.5%) to 2028 203$

Payback (Years) 3.51

Total Cash In/Outflow (2018 - 2028) 392$

Difference Compared to Baseline 44$

27

Actual Warehouse Automation Business Case Warehouse Labor is $25/Hour Loaded


-100.0%

-90.0%

-80.0%

-70.0%

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10

Year

11

Year

12

Year

13

Year

14

Year

15

Year

16

Year

17

Year

18

Warehouse Automation ROI @ $25/HR

Goal = 10%

Full Case AutomationApproaches Goal After 20 Years

RETURN COMPARISON

Semi-AutomationHits Goal After 10 Years

Actual Warehouse Automation Business Case Warehouse Labor is $45/Hour Loaded


-90.0%

-80.0%

-70.0%

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10

Year

11

Year

12

Year

13

Year

14

Year

15

Year

16

Year

17

Year

18

Warehouse Automation ROI @ $45/HR

Goal = 10%

Full Case AutomationApproaches Goal After 9 Years

RETURN COMPARISON

Semi-AutomationHits Goal After 6 Years

This cumulative IRR curve does a

great job at visualizing when the automation

investment starts to pass the company’s

internal hurdle rate

Develop SWOT Analysis by Option

• SWOT identifies the

qualitative issues that go

beyond the economic

analytics

• E.g. Difficulty recruiting

labor is a threat that is

increasingly impacting

distribution operations


Reminder: Blue Collar Labor Shortage

• Unemployment levels are at historical lows

• E-commerce growth causing unprecedented labor demand

• Baby boomers retiring at fastest rate ever

• Single biggest issue for distributors is ability to attract, recruit and retain

labor resources that work without interruption at reasonable wage rates

• Pressure on minimum wage rates to rise to $15/hour

• U.S. labor pool anticipated to decrease ~7% by 2030 based on age

demographic forecasts

• This labor situation is only going to get worse and your CEO needs to

know these facts when presenting the business case for automation

• If automation fits then it’s better to get there first before your competitors


Aging Populations > 65 Years for 10

Industrialized Countries


This data shows that the U.S. labor pool is projected to

shrink by 5.8% between now

and 2030

Country

Population 65+

(Millions)

Total

Population

(Millions)

% of

Population

Population 65+

(Millions

Total

Population

(Millions)

% of

Population

Population 65+

(Millions

Total

Population

(Millions)

% of

Population

Japan 32.9 127.2 25.9% 37.5 116.6 32.2% 4.6 -10.6 6.3%

Germany 17.0 80.6 21.1% 21.8 79.8 27.3% 4.8 -0.8 6.2%

Italy 13.1 62.4 21.0% 15.9 62.3 25.5% 2.8 -0.1 4.5%

France 12.0 65.6 18.3% 15.9 67.9 23.4% 3.9 2.3 5.1%

Spain 8.4 47.7 17.6% 9.7 44.3 22.0% 1.3 -3.4 4.4%

United Kingdom 11.0 62.9 17.5% 15.2 71.4 21.3% 4.2 8.5 3.8%

Canada 6.0 34.7 17.3% 9.6 38.6 24.9% 3.6 3.9 7.6%

Ukraine 7.0 44.0 15.9% 9.3 42.2 22.0% 2.3 -1.8 6.1%

Poland 5.7 38.0 15.0% 8.7 37.7 23.1% 3.0 -0.3 8.1%

United States 46.0 317.2 14.5% 73.6 362.6 20.3% 27.6 45.4 5.8%

10 Countries 159.1 880.3 18.1% 217.3 923.4 23.5% 58.1 43.1 5.5%

2014 2030 Difference

Key Takeaways

• Early supplier involvement is important when developing complex

automation solutions for your business

• A robust business case should be developed to enable your company’s

CFO to fully audit all cash flows associated with each option being

evaluated over a multi-year time period

• Avoid loading financial benefits into an automation business case that

can be achieved within a conventional operation

• Be thorough - provide quantitative documentation behind the source of

all expense reductions & increases

• A good SWOT analysis should document key qualitative issues to

consider in addition to the economic business case


Conference Cloud

• Automation Articles

– http://www.mwpvl.com/html/automation_in_food_and_b

everage_distribution_part_1.html





– http://www.mwpvl.com/html/grocery_automation.html

– http://www.mwpvl.com/html/dematic_multishuttle_revie

w.html

• Investment ROI Tools

– I was unable to find

anything on-line that I

liked so if you want an

example of an ROI

Calculator for a

warehouse automation

mandate then just call

or email me and I will

send you a sample from

our toolkit.

Additional Resources


http://www.mwpvl.com/html/automation_in_food_and_beverage_distribution_part_1.html



http://www.mwpvl.com/html/grocery_automation.html

http://www.mwpvl.com/html/dematic_multishuttle_review.html

Questions?

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