Building a Better Business Case and ROI

"Realizable ROI"
Much has been written about ROI. Books, trade publications, websites, and entire companies are dedicated to discussing ROI. There are loud cries of support for, and equally loud cries of criticism against, the use and effectiveness of ROI. What seems to be ignored is that, like any tool, ROI is subject to misapplication and misuse.

There are two chief defects with most "average" ROI calculations. First, they assume best outcome scenarios, and second, most average calculations lack comprehensive treatment needed to accurately predict ROI.

The problem with best outcome scenarios is that they predict a financial return which will be realized only under the most favorable of circumstances. The probability of a best outcome scenario is indeed possible, but it is low. There are risks inherent in every project, and it is neither realistic nor prudent to give casual treatment to such risks. Risk exists, and it is incumbent on all members of the project team to surface, analyze, and develop risk reduction strategies that improve the probability of financial and technical success.

Comprehensive treatment means that the manifold factors that affect performance in the company are well understood, and are computed into the expected results. Among these factors are the thoroughness and quality with which the business case was analyzed and considered, selection of the proposed solution v. other choices, and the quality and thoroughness with which the deployment strategy and tactics were considered.

Most CFO's will quickly discount - or outright reject - business cases and ROI calculations that do not reflect realistic projections. The greater the complexity, in terms of size and values of time duration, talent requirements, technical change, and treasury (cost) the project, the more likely the CFO will significantly discount the returns and inflate the costs. Unless these items are properly discussed, the CFO's adjustment process may result in the project not being approved.

So what should be included in this "Realizable ROI" (or perhaps "Risk Adjusted ROI") set of calculations? The short answer is every factor that could prevent the project from being successful. The combination of a business case that discusses factors - risks - that could affect the performance of the investments, along with how those risk factors relate and change the ROI calculations significantly improve the accuracy of projected ROI. This builds credibility into the case, the ROI, and its sponsors with the CFO and approval team.

Cultural Acceptance

Consideration should be given to organizational readiness and commitment of the new project. Cultural factors can include resisting change, as well as an inability to understand how to successfully transition to a new style of operations. Whether deliberate or unintentional, complete or partial failures cost the organization time and money, and can be significant contributors to technology project failures.

So how does the CFO decide which projects/investments should receive funding approval? This will be addressed in next month’s article on “Understanding and Comparing”.

You Do That? - Facility Assessments

Objective Observation Turns up Operational Efficiencies
Ever notice something “new” about an office building you’ve seen thousands of times on your commute in? Was it the new car in the parking lot, a different sign on the building, or the way folks access the property from the Interstate?

Want to bet how many times you walk by what may appear to be an obvious aspect of your warehousing or manufacturing operation without even noticing that “one-thing” that may mean a big change? The change may be a safety issue, a way to cut cost or improve efficiencies. Why not invite a storage and material handling expert to conduct an objective facility assessment? If you do here’s what you can expect.

Before we step into your back room we’ll conduct a client interview. We will listen as you describe your present system: how product is received, processed for storage, pulled for use within the facility and finally shipped.

Next we’ll address your goals. What is causing your distress? What would you like to accomplish but don’t know how to accomplish it? What ideas do you have that you are considering or have seen elsewhere? What if anything is management forecasting as far as growth, product mix, new processes or eliminating processes? Armed with this information we’ll venture out.

The on-site assessment consists of two elements:

Information Collection

1. Understand the storage medium (pallets, gaylords, supersacks, cartons, bags, drums, etc.)
   
   
2. Determine what equipment if any is being used to move product through the facility (fork lift, conveyor, pallet jack, etc.).
   
   
3. Know how many trucks, people, hours per shift, and number of shifts that are presently required to accomplish the daily, weekly, monthly tasks.
   
   
4. Understand the frequency of product changes that occur in a given period.
   
   
5. Determine causes of product changes: seasonal or market fluctuations, customer demands, and supplier restrictions.
   
   
6. Determine frequency and type of work-related accidents.
   
   

   On-site Observation.

   We’ll spend time observing the operation at different times of the work-day to see how things are handled presently.

   After determining a number of recommendations we usually will ask for a meeting with you along with building operational managers. Many times this process identifies management priorities not yet realized or verbalized. Contact us for a complimentary facility assessment.

Warehouse Fire Safety Best Practices

Beyond Compliance
As previously mentioned, compliance is only intended to provide a certain minimum level of safety. When working with a fire protection engineer you will likely want to incorporate additional safety measures. When designing a new system it is also recommended to investigate installing a design capable of handling a higher hazard classification. Should your product line or storage needs change in the future it can be very expensive to change your existing system to accommodate the higher hazard classification. There are also a lot of operational issues that relate to fire safety that should be considered. Like everything else in your operation, the level of fire safety will be greatly impacted by the procedures and training provided to the employees.

1. Evacuation Plans. It is extremely important to make it absolutely clear to employees what they are expected to do in the event of a fire or the sounding of the fire alarm. The most common reaction by employees to the fire alarm sounding is to look to their supervisor to see if they should leave the building, or look to other employees to see what they are doing. Employees should be informed that whenever they hear the fire alarm they should immediately leave the building unless they have been given previous notification of an alarm test. It should also be made clear that they should leave through the nearest exit. Warehouse workers are usually not stationary so assigning a specific exit rarely applies. I recall an employee during a drill walking across the entire warehouse, passing several fire exits on his way to his “assigned” exit. Now I would certainly hope that had the employee seen an actual fire, he would not have walked into it to get to his assigned exit, but “you never know”. Also, if employees are required to perform certain tasks prior to leaving the building, such as shutting down a piece of equipment, they should be given specific instructions on the task and also under what conditions they should perform the task and under what conditions they should immediately evacuate.
   
   
2. Fire Extinguisher Training. Employees should be trained on the use and locations of fire extinguishers. This is especially true of employees working in areas where there are known ignition sources.
   
   
3. Trash Accumulation. Large accumulations of trash and debris can be a potential fire hazard as well as a hindrance to evacuation. Adequate containers should be provided and specific duties assigned for removing the trash as containers fill. There should also be designated areas for storage of pallets, crates, etc. It’s also a good idea to limit the stack height of loose pallets to six feet.
   
   
4. Designate floor storage and staging areas. Using tape or paint to designate floor areas approved for storage or staging of materials will make it easier to enforce safety issues related to blocked aisles etc.
   
   
5. Incorporate safety training into your regular operational procedures and training. Safety procedures and training are often handled as a separate issue. You’ll find it more effective to incorporate safety procedures into your specific task procedures and training. Issues related to clear flue spaces, sprinkler clearance, aisle clearances, evacuation plans, battery charging and propane cylinder handling should be part of the employee's regular training program.
   
   
6. Maintain open communication with your local fire department. Make sure the fire department is aware of the additions of high hazard materials to your warehouse or changes in storage configurations. If you do have a fire it’s extremely important that the fire fighters know what they are walking into.
   
   
7. Make sure additional precautions are taken during construction and maintenance projects. If you have contractors working in or around your building, make sure additional measures such as additional fire extinguishers are used, especially if work is being done on a roof or other area where fire extinguishers are not present. Also make special plans if you have to shut down the sprinkler system for any reason. You may need to shut down certain operations, provide supplemental fire protection, or provide physical 24 hr monitoring of the building during this period.
   
   Maintaining an environment that provides safety to occupants and reduces the risk of property loss requires not only the initial system engineering, but also attention to safety in day-to-day operational practices and the knowledge of when operational changes may require re-evaluation of your fire protection systems.

Continuous Improvement Best Practices

Identifying the Right Things to Do

As a continuation of last month’s article this issue looks at continuous improvement model and how it addresses prioritization.

Before companies focus on "doing things well," they need to make sure they are doing "well" on the key drivers for their business strategy—that is, the right things. Doing well in areas not related to the company's core strategy may add little to profitability or competitiveness. Importantly, that strategy must be intimately tied to understanding what types of customers the company can serve well and at a profit. Serving those customers well, in turn, is intimately related to the company's current (or potential) supply chain capabilities. Continuous improvement is an iterative, incremental process. Similarly, building a winning strategy is an iterative, incremental process that requires focusing on both customer and supply chain capabilities. Because business strategy is focused on customer segments or key accounts, supply chain strategies need to be tightly linked to the appropriate channel strategies.

Identifying the "right things to do" can be especially challenging in many environments. Supply chain partners that are several steps removed from end customers, for example, may only have a vague idea of those customers' real needs. Here's where a company with a direct-sales model like Dell has an advantage over competitors that go through distributors. Dell knows what product are hot weeks before those demand signals ripple upstream to their competitors. What's needed is a process that rapidly communicates plans throughout the organization and keeps all operations and partners synchronized. Accordingly, collaboration with customers and supply chain partners is a key element of supply chain operational excellence.

For many companies, being responsive will be a "right" thing to do. Responsiveness is a measure of how quickly a supply chain can react to internal or external disruptions. While an individual partner may be able to ramp up production at a moment's notice, can the rest of the supply chain support this capability? Is this capability, in fact, important to the supply chain's customers? Are there opportunities to exploit this capability to gain market share or increase profitability? In setting improvement goals, companies need to develop appropriate response capabilities across the supply chain. Exhibit 3 provides some responsiveness metrics that can help in this effort.