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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
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!
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 3
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
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 4
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
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 5
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
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 6
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
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
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
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
Be sure to understand peak
item variety requirements
9
Determine Movement Volumes
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
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
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
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.:
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
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
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
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
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
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
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
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
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 16
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
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 17
DC Layout Examples
• Option: Expansion W/Automation
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
• Option: Greenfield W/Automation
18
DC Layout Examples
• Option: Greenfield With
Mechanization
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
• 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
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
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
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
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
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
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:
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
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
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 24
Example of Pro Forma Operating Expenses
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
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
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 26
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
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
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
282 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
-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
292 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
-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
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 30
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
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 31
Aging Populations > 65 Years for 10
Industrialized Countries
322 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
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
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 33
Conference Cloud
• Automation Articles
– http://www.mwpvl.com/html/automation_in_food_and_b
everage_distribution_part_1.html
– http://www.mwpvl.com/html/automation_in_food_and_b
everage_distribution_part_2.html
– http://www.mwpvl.com/html/automation_in_food_and_b
everage_distribution_part_3.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
342 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
Questions?