Warehouse Management System ROI: How and What to Measure

How can do you conduct an effective ROI analysis of a warehouse management system (WMS)? Moreover,

  • Is it possible?
  • Is it warranted?
  • What are the benefits?

First of all, yes, you can conduct an effective ROI analysis. The cost spent on a warehouse management system can be calculated directly. The benefits it offers can also be computed and compared against the cost to arrive at the ROI.

Is it warranted? Also yes! A significant business expenditure like buying, setting up, and maintaining a warehouse management system definitely should be assessed with regard to its ROI.

What are the benefits? A warehouse management system can ramp up the overall supply chain productivity, by a few degrees at least. So understanding the ROI it delivers can help identify areas that work well and those that need to be improved.

ROI is not a singular concept. To begin with, there are several types of ROI which can be interpreted in several ways.

Tangible ROI - The ROI that can be pinpointed in absolute figures such as a 20% reduction in errors, a 15% increase in inventory turnover, etc.

Intangible ROI - ROI that you are receiving but that cannot be measured in absolute numbers. These are abstract benefitsemployees could be experiencing that have an indirect (but favorable) influence on the work quality.

Support ROI – ROI that helps you do certain critical things in a better fashion, or with relative ease. These are tasks that the WMS is handling that will have a long-term positive impact on the business.

What to consider when calculating Warehouse Management System ROI

Begin with determining the cost

Unlike IKEA furniture that comes with a printed price tag in black and white, the pricing of warehouse management software is not so straightforward. In fact, the pricing of a WMS is difficult to determine because there are several hidden costs that sneak into the final invoice.

The ideal way to determine the cost is to refer to the last paid invoice. If you are in the consideration stage, then you might want to ask the vendor to offer a pricing guide or a mockup invoice. It would help you determine the costs of owning the WMS with some accuracy.

If you are opting for a new-gen SaaS-based model, you will be asked to dole out the price in the form of agent licenses. If there are any additional features that you are opting for, the cost gets added to the final bill.

Next, determine the benefits

There are several benefits that warehouse management software offers. Tying these benefits back to the cost is what helps us identify whether the ROI is positive.

Before that, it is necessary to understand the benefits that the WMS offers. These benefits could take the form of intangible ROI that cannot be measured in absolute terms but have intrinsic value.

1. Space utilization

A warehouse is a giant sprawling space. It might seem never-ending, but there are only so many materials that it can hold. The business has to pay a significant amount of money for every square foot of space rented. Naturally, maximizing space utilization is necessary to keep rentals down and margins up.

A warehouse management system helps in the proper placement of materials to ensure optimal utilization of space. Modern WMS also offers the facility to create planograms based on material size, frequently picked, cost, etc.

2. Inventory management

Inventory is the next valuable asset in the balance sheet of a business after cash and bank balances. Without an inventory, the business cannot sell and earn profits. That makes inventory management a crucial component in running a business.

A warehouse management system does help with inventory management in several ways:

  • a. It prevents the occurrence of stock-outs by fixing stock levels and giving alerts when the stock levels breach the threshold.
  • b. Less expired goods. WMS can maintain track of perishable goods and their expiry dates. It can also send a periodic report that lists down goods nearing expiry or has expired since the last check. This helps in segregating fresh produce from expired produce.
  • c. Healthy inventory turnover - A warehouse management system helps maintain a healthy inventory turnover ratio through the diligent practice of FIFO or LIFO inventory accounting.

3. Equipment management

Any warehouse invariably uses a variety of equipment to keep the operations running smoothly. From forklifts for heavy lifting goods to machinery that capture sensors and record inventory levels, there is a long list of equipment that a warehouse manager must keep track of. All such equipment data is captured and maintained in the WMS. It facilitates easy equipment management and indirectly contributes to preventing downtimes. This is an intangible RoI that cannot be measured in absolute terms.

Read More:Need of the Hour: Warehouse Automation to Tackle COVID-19

Summary

A warehouse management system makes it easy to run an entire warehouse that is huge in size and complex in operations. However, unlike other software systems whose ROI can be measured directly with dashboards, evaluating a warehouse management system requires factoring in both tangible and intangible benefits to understand the actual ROI of the WMS and how it can be further optimized.

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