(ROI): Understanding Why, Where and How

The Role of Your CFO
The CFO, or Chief Financial Officer, is most likely the final stop in the approval process of a Capital Request. (While Capital Request, Capital Expenditure, or CapEx are common terms, your company may refer to this process by another term. What these terms refer to is the process by which your company decides how to spend large amounts of money.) A Capital Request asks the company to fund - that is, to make an investment into - a project, with the expectation that the result will produce a value greater than its cost to the company. Let's briefly examine some of the factors that confront the CFO to better understand what leads them to approve or deny a Capital Request.

Your CFO has among the most challenging jobs in an organization. He or she must work with CEO and executive team to make the business better (better means more valuable, which means more profitable). The CFO must tell shareholders and investors how the business has performed, and what is being done to improve its performance. CFO's must ensure that the business is sustainable, and has "capital adequacy" - that is, enough money to spend to cover how it generates and consumes cash. There exists a fiduciary responsibility to invest responsibly, and, in light of a new and more stringent regulatory environment from regulations like Sarbanes-Oxley, the CFO must also assure that the business maintains regulatory compliance.

Your CFO has a significant role in determining in those areas in which the business should invest for future success. An investment results in one of two conditions: it either creates value, or it consumes it. Creating value means that the company received more back in benefit than it invested (a positive return). Some investments will not, by necessity, create value. Examples of this might include risk reduction investments and regulatory compliance investments. These types of investments will not help a company create higher earnings, but will help it preserve value. Most investments, however, are expected to be accretive, that is additive, to the company's earnings.

Another consideration for the CFO is the overhang of prior investment performance. Executives are skeptical of the because of prior claims that an investment would make the business more financially successful. The evidence may indicate they were "not successful".

"Not successful" in this context does not mean a failure; rather, it means a lack of financial success. While technical success (meaning it operates as expected) may have been achieved, if the investment underperforms its expected financial result, it is not considered to be successful. An important way to think about such a circumstance is that the business, in essence, "lost" the profit that could have been created by investing in a different project that would have created a positive return (an equal or better ROI). Technical successes are indeed important. What is more important, however, is to achieve a business (financial) success that results from a technical success.

Realize further that your request is but one of many requests under consideration. CFO's receive numerous requests, more than what the business can spend or effectively manage. So how does the CFO decide which projects/investments should receive funding approval? This will be addressed in next month’s article on “Building a Better Business Case”.

You Do That?

Interlake Rack: Storage Solutions for Every Application
No matter what kind of warehousing function, racking plays an important role in storing inventory or raw material for later use. There are a variety of configurations for storage rack, all which achieve a different level of selectivity and storage density.

Interlake manufactures a variety of rack configurations for your storage needs including selective, pushback and pallet flow rack. Although the following represents the most common configuration styles, talk to a rack professional about your particular environment and application. The basic configuration styles are:

1. Selective Rack
   
   
2. Drive-in, Drive-through, and Pushback Rack
   
   
3. Pallet Flow Rack
   
   

This versatile choice provides 100% selectivity to every load. You can always access every pallet. However, they require numerous aisles and result in lower storage density than some other alternatives. For faster moving product, and the best access, selective racks are the system of choice.

Drive-in, Drive-through, and Pushback Rack

These systems are designed to store pallets two, three, or more deep. These kinds of rack systems offer greater storage density than selective racks, but less selectivity. They are "last-in, first-out" systems with reduced selectivity, and great product density. For items that will have longer life in storage, and don't require immediate access, these systems are an excellent solution.

Pallet Flow Storage Rack

Unsurpassed storage density is the key strength of flow rack systems. They are limited only by the size of your facility. Flow storage systems offer automatic "first-in, first-out" product rotation, an advantage with perishable and time-sensitive products.

Perhaps your operation has racking that may have damage. Whether obvious or not, damaged racking can lead to lost-time accidents and potentially a stoppage of work. Even if your racking has been evaluated recently, many companies are looking at expanding or renovating storage areas. Working with the racking professionals at Morrison Company will alley your fears about what might occur with damaged racking. An evaluation of your storage needs can also include an assessment of your rack integrity.

To request an evaluation, select storage facility assessment.

Warehouse Fire Safety Best Practices

Intro to Fire Codes
The best way to become familiar with the fire codes is to read the codebooks. If there is a fire codebook written for amateurs, I am unaware of it, so you’re going to have to spend some time learning to navigate the actual codebooks and interpret the codes. To make this a little more confusing, there are a number of organizations that publish fire codes. Individual states and municipalities will then adopt the codes put out by a specific organization. In addition, the states or municipalities can also amend the codes they adopt to include additional codes. There are also a lot of provisions left up to the discretion of the local fire chief. Just a note: In the event of conflicts interpreting the fire code, the fire code is “whatever the local fire chief says it is”.

Recently the Building Officials and Code Administrators International, Inc (BOCA), International Conference of Building Officials (ICBO), and Southern Building Code Congress international, Inc. (SBCCI) got together forming the International Code Council (ICC). This new organization put out the 2000 International Fire Code (2003 International Fire Code is now available) in an effort to standardize the fire codes. For educational purposes I would recommend using this code. For the most part, all of the various codes are similar and since you should be using an expert for the detailed evaluation, I think this should be sufficient. You will find in going through the codes that in certain cases you may be referred to a separate publication for additional code information such as publications put out by the National Fire Protection Association (NFPA) on specifications for sprinkler systems or storage of aerosols.

While the codebooks may at first seem confusing, you can obtain a good overview of the key requirements fairly quickly. You will also quickly learn why you will need expert help when it comes to the details of determining hazard classifications and code requirements. For information relating to warehousing, the best place to start is the section on High-Piled Combustible Storage. Generally, high-piled combustible storage codes apply to floor or racked storage exceeding 12 feet in height; however, at the discretion of the fire chief, the codes may also apply to high hazard commodity storage exceeding 6 feet in height. The codes use the combination of commodity hazard classifications, size of storage area (square footage), maximum storage height, material handling methods, and storage configurations (solid-piled storage, racked storage, shelf storage, decking type, storage height, etc.) to determine sprinkler density, flue space requirements, aisle widths, as well as the need for building access, smoke and heat removal systems, curtain boards, fire walls, and in-rack sprinklers.

The following are some code requirements and recommendations that apply to many warehouse operations. I’ll again note that specific code requirements will vary depending upon your municipality and storage characteristics

1. Although some smaller warehouses may not legally require them, automated sprinkler should be considered as standard requirement in any warehouse.
   
   
2. Storage should be maintained at least 18 inches below sprinkler head deflectors.
   
   
3. In racked storage, transverse flue spaces of at least 3 inches should be maintained. Transverse flue space is the space to either side of a racked pallet.
   
   
4. In racked storage, longitudinal flue spaces of at least 6 inches should be maintained. Longitudinal flue space is the space between the rows of back-to-back rack. It is important to note that the flue space is measured as the distance between the loads, not the distance between the racks. In a standard pallet rack configuration you will usually have 3 inches of pallet overhang, calculating this into the flue space would require the rows of rack to be at least 12 inches apart.
   
   
5. Most warehouses meeting the above flue space requirements do not require in-rack sprinkler systems. Racking with solid decking, storage configurations that prevent maintaining the flue spaces, storage of high hazard materials, or storage greater than 40 feet in height will probably require in-rack sprinklers.
   
   
6. In solid piled floor storage there must be an aisle at least every 100 feet and within 50 feet of walls when materials are stored against the wall. Essentially this means that any portion of the solid piled storage should be within 50 feet of an aisle.
   
   
7. During restocking operations using manual stocking methods (using stock carts, rolling ladders, etc.) a minimum unobstructed aisle width of 24 inches or ½ the aisle width, whichever is greater, must be maintained.
   
   
8. During mechanical stocking operations a minimum unobstructed aisle width of 44 inches must be maintained.
   
   
9. Automated material handling equipment such as carousels and ASRS units will have additional code requirements to prevent the equipment’s motion from spreading a fire.
   
   
10. Battery charging areas have specific code requirements including ventilation, acid neutralization, eye wash stations, and spill control systems.
    
    
11. Liquid Propane fuel cylinders used on LP forklifts should not be stored within 20 feet of fire exits and are limited to a maximum quantity of 300 lbs per storage location. This is the equivalent of six 43 lb cylinders or nine 33lb cylinders. Empty cylinders are considered full for this calculation. If additional storage locations are required they must be separated by a minimum of 300 feet.
    
    
12. One word: Plastics. Plastic content is the single storage characteristic most likely to contribute to a class IV or Class V high-hazard commodity classification. The classification is based upon the type of plastic and the overall content, measured by percent by weight for unexpanded plastics and percent by volume and weight for expanded plastics. This is where operational changes such as changing packaging materials from paper based to polystyrene or changing from wooden to plastic pallets can have a substantial impact.
    
    
13. Another word: Aerosols. “Rocketing” is a term used to describe the ability of aerosol containers to propel them across a warehouse, carrying a trail of fire behind them. There is a whole series of codes dedicated to the storage requirements for aerosol products. Depending upon the chemical content and the amount of aerosols stored (measured by weight), separation areas, chain-link fence enclosures, fire walls, and additional sprinkler protection may be required.
    
    
14. One last word: Hazardous Materials. Flammable liquids, solids, and gasses, explosives, oxidizers, and reactive materials fall under the category of Hazardous materials and have their own series of codes that apply. You’re definitely going to need some expert guidance when storing these types of materials.
    
    Obviously there are a lot of other code requirements including basic fire safety requirements such as not blocking fire exits and maintenance and placement of portable fire extinguishers. And, in addition to the fire codes you may also be subject to OSHA and EPA regulations.

Continuous Improvement Best Practices

A Foundation for Operational Excellence

Companies striving for operational excellence at any level must have a model for continuous improvement. One proven model is known as DMAIC, which stands for define, measure, analyze, improve, and control. The model's first four components—define, measure, analyze, and improve—describe the sequential steps that need to be taken in assessing and improving performance. The last component, control, ensures that the improvements realized are sustained. Exhibit 1 depicts the synergistic relationship among the model's components.

In the context of supply chain management, the DMAIC model is implemented most effectively in conjunction with supply chain process management (SCPM) solutions. These robust, relatively new solutions help companies evaluate performance toward supply chain process improvement and maintain process synchronization. SCPM manages both event alerts, such as a shipment not leaving a supplier within a preset time period, and key performance indicator (KPI) alerts, for example, fulfillment throughput in the distribution centers falling below a preset parameter.

How wide is the gap between your awareness of what to do and putting these practices into action? Facing this will define how optimistic your outlook for 2008 will be.

Supply chain process management is composed of two types of subapplications: supply chain event management (SCEM) and supply chain performance management (SCpM). While some vendors treat these subapplications separately, they naturally complement each other. Event management solutions monitor key performance events (KPE), which drive the company's KPIs and form the basis for SCpM's performance evaluations.

To illustrate how DMAIC and SCPM solutions complement one another, consider the following example. Let's assume that, in the define stage, a company identifies percentage of perfect orders as a problem area needing attention. Assume further that a perfect order is one that is billed correctly and delivered without any breakage, with all the required value-added service performed correctly, on time, in the proper quantities, and with no unauthorized substitutions.

In the measure stage, the company gauges how well it is doing against the perfect order metric. In this case, it would decompose this broad metric into submetrics such as on-time delivery, correctly billed, and so forth. The data used to calculate performance on these metrics comes from a variety of internal and external systems and are fed into SCEM solutions via enterprise application integration (EAI) tools. SCpM solutions would then access this data to provide the aggregation and analysis to evaluate progress against the perfect order objective.

The company's next step is to analyze the root cause of the identified problem areas. Here is where tools like Pareto charts and bottleneck analysis become critical. Supply chain performance management, particularly when fed with event-management data, can effectively support this root cause analyses. These solutions can give managers far better visibility over where variability is occurring in their extended supply chain. Is it on the inbound side, where suppliers may be delivering late, in the wrong quantities, or with a greater number of rejects? Is it on the outbound side because carrier partners are delivering late to customers? In the case of our company example, a Pareto analysis indicates that the "billing correctly" subprocess was the biggest contributor to poor performance on the perfect order metric

Improve is the next step in the DMAIC process. Supply chain event management solutions also can improve the overall supply chain process by detecting potential problems before they affect overall performance. Our sample company might use SCEM to flag events like a purchase order missing a shipping address, thereby taking care of a potential problem before it becomes a perfect order defect. While event management applications can improve internal operations, their greatest potential lies in detecting problems and rapidly notifying supply chain partners of those problems.

During the control stage, the company applies process management solutions to maintain the improvements realized. When alerts occur early enough, companies can stay on plan and achieve the savings anticipated from implementing new planning systems, for example. Even when a problem cannot be rectified, the process management applications help managers mitigate the impact. SCPM can also help in the control stage by becoming the foundation for KPI-based performance incentive programs for supply chain managers. At one company, for example, such an incentive program was credited with driving much better intercompany collaboration. Managers being measured on the same KPIs were paying very close attention to their peer's performance. When certain managers emerged as stars on these KPIs, their peers began calling them and asking for advice.