Don’t forget the revenue!
Written by: James K. Allred

In the last few installments, we've looked at many of the factors involved in justifying your investment in a well-designed material handling system, including direct and indirect labor savings, a reduction in inventory costs, space savings, and the resulting conservation in working capital.

As you put together your justification, make sure you look closely at all the possible savings in these areas. But while you're at it, don't forget that there are two sides to every issue.

The huge savings you can realize from re-engineering your processes are what we might think of as the expense side. These significant expense reductions fall right to the bottom line.And there is an income side to examine as well, which is the increased capacity and sales revenue that a good system design will bring your company. For many organizations, it can be a very substantial benefit.

To find out just how substantial, talk to your sales and marketing departments. Depending on the type of business you're in, some of the questions you want to ask them are: How many more widgets could you sell if we could make or deliver 40% more products? What would it mean to your sales volume if we could cut lead time from weeks to days? How much would it increase our market share? If your company is like most, you may find that you have made a whole circle of new friends.

This "positive" approach to justification is possible, of course, only if your new process is designed to do more than just automate your old system. In an earlier series of articles, Breaking the Time Barrier, we looked at the relative value of doing the same thing faster as compared to the break-through gains you can make through a total reengineering of material flow logistics.

In fact, a good rule to follow is “the fewer ways in which your new system resembles your old system, the easier it will be to justify. ”This is most true with regard to capacity and production increases.A nice paint job and new tires on an old car may improve its appearance but won't make it go any faster. A good rule of thumb for any new system is that it should squeeze 40 to 50% more output from the same facility.

If you've designed your system right, quantifying the potential rise in revenue through increased sales volume will give you a powerful tool to use in calculating the return on your investment.And that should make the justification process all that much easier.

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