ROI for WMS: assessing the value of your investment.
Deciding to implement a new Warehouse Management System (WMS) requires careful consideration. You want to ensure you are making a wise investment that will bring tangible business and financial benefits.
You want to understand the cost of your investment. Additionally, you want to know what financial benefits you can anticipate. Lastly, you want to know how long it will take to get a positive return on your investment (ROI).
You will have to justify the purchase of a new system to the board, so having concrete figures is vital. It is critical to be able to understand the ROI of a WMS for justifying the costs. But a WMS also benefits distribution performance, strategic decision-making and financial planning.
In calculating ROI, it is straightforward to measure the tangible returns. But a WMS also brings some intangible benefits that are more difficult to accurately measure or quantify. It is possible to analyse the returns and costs associated with your WMS. This will provide a clear understanding of its ROI.
ROI of a WMS: the returns.
Analyzing the returns from implementing a WMS can provide qualitative insights. These insights can be easily evaluated. But there are also benefits that are less tangible and less measurable.
The quantitative benefits of a WMS are:
- Improved warehouse space utilisation
- Reduced labour costs
- Optimised stock levels – reduced stockouts and lower stock holding
- Better stock accuracy
- Improved stock turn
- Increased worker productivity
- Reduced order processing and lead times
- Reduced picking errors
- Faster order fulfilment
- Increased order throughput
- Reduced return rates
- Faster shipping
- Improved on-time delivery performance
Some of these benefits bring tangible reductions in operational costs. For example, better space utilisation reduces your stock holding, so limiting the cash you have tied up in stock. With faster and more accurate picking, customers quickly receive the right orders, bolstering customer satisfaction.
Other efficiency gains come through demand forecasting, which ensures you have the right stock when it’s needed, limiting missed sales opportunities.
The less tangible and more qualitative benefits of a WMS are:
- Enhanced decision-making through data analytics
- Improved employee morale and engagement
- Strengthened supplier and customer relationships
- Streamlined regulatory compliance
- Improved supply chain visibility
Using the advanced reporting and KPI functionality of a WMS, you can make strategic, data-driven decisions that improve your financial planning and give you competitive advantage.
By reducing the physical demands and repetitive tasks associated with manual stock management, employees can focus on more valuable and rewarding tasks, bringing a greater sense of job satisfaction and a more positive work environment.
While some of these aspects can be measured – such as checking employee satisfaction – it is challenging to attribute a quantifiable, financial return to them.
ROI of a WMS: the costs.
There are a number of cost factors to be considered when conducting an ROI analysis.
There is an initial investment to be made. If you choose an on-premises WMS, then there will be hardware costs, such as servers and other related infrastructure.
Once the initial costs have been covered, ongoing expenses such as software subscriptions or licences will be required on an annual basis. While upgrades and maintenance costs for cloud-based software are generally included in the recurring subscription fee, on-premises software involves additional fees here. You will also need to budget for ongoing technical support, such as help desk services.
Next, there will be consultancy and development costs. These include costs for customisation of the system if you need to have it tailored to your specific needs or integrated with other systems.
You also need to calculate how much budget you need for training. You may want to have some upfront training as well as additional annual budget for training new employees.
Calculating the ROI of a WMS.
A cost-benefit analysis compares the costs and benefits of a WMS. Once you have estimated your costs and returns, you can apply a simple equation to determine the ROI of the WMS. You divide your projected returns by your estimated costs, which returns a figure. If it is less than one, the return is negative; anything more than one is a positive return.
That’s quite a simplistic approach that assumes that all the costs and returns are easy to determine. It is usually straightforward to determine the costs. But the returns are far harder to estimate. In particular, the intangible benefits may be entirely unquantifiable.
Some software companies provide ROI calculators for their customers based on the same sorts of calculations. These tools estimate the costs and benefits, taking into account the software and hardware costs, as well as the estimated savings in labour, stock holding, order accuracy, shipping and so on.
To estimate the costs of the software and hardware, a Total Cost of Ownership (TCO) calculator can also be useful. This determines how much it will cost to own the WMS over a given period, again assessing all the technology costs – consultancy, software, hardware, maintenance, training and support.
A business case analysis can help in evaluating the non-financial impacts of implementing a WMS and ascribing value to the less tangible aspects. This involves identifying and attempting to quantify the costs, benefits and risks associated with the system and then developing a business case that justifies the investment.
To input into a business case scenario, you can calculate productivity and efficiency by undertaking a time and motion study. This examines the steps you currently follow to undertake various processes in the warehouse and compares them with how they could be achieved using a WMS. The time savings in receiving, picking, replenishment, cycle counting and so on can be added up and applied to labour costs to generate the potential financial savings.
You can also use KPIs to measure the WMS’s impact on your important business metrics. By examining expected improvements in receipt accuracy, receipt performance, shipping on time in full, pick performance, cycle count accuracy, space utilisation, stock turn and more, you can calculate how much a WMS will contribute financially to improving your warehouse performance.
A WMS is a significant investment, so it’s important to evaluate its ROI to justify the expenditure, check that the investment is feasible and ensure that the benefits outweigh the costs.
For help with assessing the return on investment of a WMS, these resources may help:
- Conducting a time and motion study
- A closer look at the KPIs for measuring warehouse performance
Developing a business case for a WMS