Investments and the bottom line
Written by: James K. Allred

Stanley Marcus, a founder of the Neiman-Marcus department stores, was a wily businessman known for his no-non-sense philosophy. "Count the day as lost, when you've sold a million at cost," was one of his favorite sayings.

The fact is, we're all in business to make a profit. And profit -- that all-important bottom line -- is the ultimate test of your new material handling system.

In the previous installment, we looked at the mythical ABC Corporation. Management wanted to increase sales a minimum of 30%, improve their net profits, and improve their return on assets (ROA).We saw how investing in a new material handling system, one designed to take advantage of numerous benefits, would lift their ROA by 85%. The question is, "What effect will all of this have on the bottom line?"

To find out, we have prepared an income statement that compares the results of increasing the capacity of an existing system with the results of investing in a well-designed new system.

If we use the existing system and increase sales by 30%, the cost of sales grows 30%.While we do increase our net profit dollars, the net profit percentage remains at 12%. If ABC is satisfied with a 12% profit, then merely expanding the old system is a viable option.

But if ABC IS planning to make an investment anyway, why not expand sales by something like 40% while holding the cost of sales growth to 25%.The net result, of course, is a respectable increase in net profits.

If a company invests in the new system, it can enjoy significantly higher returns for two reasons. First, the system will dramatically cut cycle time and increase accuracy, which in turn will improve service and attract more cus-tomers. Thus, the percentage increase in sales will be higher.

Second, a well-designed system that produces a streamlined material flow allows a company to save labor as well as cut inventories of raw material, work-in-process, and finished goods. This combination of increased sales with reduced operating costs can swell the profit per-centage dramatically.

Just like ABC Company, you can jump start your company's profits. That is, presuming you design your material handling systems using the axioms of investment justification listed here.

I hope these tips will help you on your next material handling project!

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