A system’s impact on assets
Written by: James K. Allred

While buying a house, planning our retirement, getting ready to send the kids to college, or just wondering where all the money went, we've all spent a week-end or evening calculating our net worth.You know the drill. Add up your assets, subtract the liabilities, and hope the number comes out positive.

In the business world, as we know, assets are a very different sort of animal. Assets are the economic resources of a company — what it uses to generate profit.

How much profit depends not only on the amount of a company's assets, but also on how well they are used by decision makers in the company.

Understanding how the investment in a new system will impact those assets is a critical part of the justification process. That may sound simple, but it's a step that is often over-looked.

Perhaps the biggest impact of any new system will be on the asset called inventory. It's not hard, when you consider that the carrying costs of bloated inventories can run as high as 20 to 25%. By streamlining the flow, many new materials handling systems can slash raw material, work-in-process, and finished goods inventory levels by 50% or more. Those reductions free up working capital that can be put to better use.

Then there is the factory or warehouse itself — certainly an important but expensive asset. In fact, a number of companies have justified entire materials handling projects on the space savings alone! Others have avoided the cost of building a bigger facility, simply by improving productivity and processes in the existing facility.

A well-designed material handling system can impact some of a company's smaller assets as well. Some companies have successfully eliminated product shelf-life expiration costs. Often, the investment in additional, conventional materials handling equipment is avoided. Also affected are shrinkage, product damage, absenteeism, workers' compensation claims, the costs associated with correcting errors — the list of potential savings goes on and on.

Later on, in another column, I'll discuss how the process works in practice, how you can translate these kinds of savings into a language that senior management at your firm will understand. Because if they understand just exactly how a new material handling system will impact the bottom line, they are that much more apt to approve the funding for your proposed project.

But for now, do your homework. Be sure you analyze your proposed materials handling system carefully so that you can take advantage of and communicate those asset savings.

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