A new approach to cost justification
Written by: James K. Allred

We’ve all heard it said that "The more things change, the more they stay the same."

In the nearly 40 years I’ve been working with companies to help them achieve materials handling efficiency, I’ve seen tremendous improvements in the technology. Systems of every type are certainly faster, more reliable, and more flexible.

Just as significant, many companies have embraced strategies such as process reengineering, total quality management, and continuous improvement.A number have even discovered the importance of an efficient material flow process through their facilities. But when it comes to justifying an investment in the material handling system that makes these new processes possible, many companies seem to be stuck in the 1950s.

Why? Because they’re trying to justify these investments as though they are merely automating the old process.

Traditionally, this approach boils down to the question of “how much labor will we save?”To be sure, labor savings are an important consideration when making a system purchase.

But often, the most dramatic operational improvements, the improvements that will have a real impact on the bottom line, are overlooked. Improvements like reduced work-in-process, lower inventories, conservation of capital, improved customer service, and more.

Capturing and quantifying these improvements calls for a whole new approach to investment justification. I call it the “Total Impact” approach.

Put simply, the Total Impact approach to justification compares the operating results of the entire company under its current processes with the expected results under the proposed process. To get the real picture of how the system will benefit from the investment, we must go beyond cost savings and include the expected expense reductions, increases in sales revenue, and balance sheet improvements. In other words, what’s the Total Impact on profit and loss? On corporate assets? Return on assets?

In the next few issues, I’ll look at how to identify all the benefits of a proposed flow process and demonstrate how to put together a proforma financial statement that will show your senior management the Total Impact their investment will have on the com-pany’s future. That’s the real test.

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