Building a Better Business Case and ROI

“A key Concept: The Time Value of Money”

These articles are provided so you can be familiar with the terms and methodology your CFO probably uses. Ultimately he/she will be evaluating a project you want to implement at your company.

The time value of money is a central concept in all of the Business Case Analysis methods. As mentioned in earlier articles, the reason is that an amount of money received today has greater value than getting that same amount of money next week, quarter, or year. Two important terms are present value and future value.

The time value of money is affected by two primary factors: the time between now and a date in the future, and the interest rate. In finance terms, the time element is measured in the number of time "periods", which can be set in days, months, quarters, or years. The interest rate is the percentage increase of the speed, or rate, at which money or "capital" grows in value over time.

Present value (PV) is the currency value of what capital, received at a future date, is equivalent to in today's dollars. Future value (FV) is the currency value of what capital, at this moment, will be equal to at a future date. Both use time and interest rate in their calculations. When performing the calculations for PV and FV, it is critical to be consistent with the measures of time and interest.

Another related term to the interest rate is the discount rate. The interest rate is forward looking: how capital increases in value over time (think future value). But because the value of capital increases over time, capital that we will receive in the future will be worth less than it is in today's terms. Why? Because we did not have it to invest. How much less is it worth? The value by which it will be decreased in value, relative to today's terms, is its discounted value. The discount rate is the rate by which we diminish the value of capital which will be received in the future.

Let's illustrate using a brief example. $10,000 in 1 year at an interest rate of 10% is worth $11,000, otherwise called its future value. The present value of $11,000 to be received 1 year from now is equal to $10,000, assuming a discount rate of 10%.

DCF: Discounted Cash Flow

DCF is a newer technique, about 50 years old, and is a favored method with finance and investment professionals. DCF is, as its name implies, a sum of the cash flows from an investment/purchase, adjusted for the diminished or discounted value of dollars received in the future. DCF is closely related to net cash flow (NCF), internal rate of return (IRR), and net present value (NPV), but it adjusts and compensates for the time value of money.

Example: You've decided to purchase a new conveyor system. You are expecting that it will both save money and help generate greater revenues, but it will take 3 years to begin seeing the cost advantages and revenues. DCF tells us what the monetary value of those dollars in will be in 3 years, less the cost of obtaining

A strength of DCF is for comparative purposes, that is, when comparing 2 or more different scenarios, each with differing cash flow streams. Note that it can be used to compare different alternatives for the use of capital, not just for comparing projects. Also, managers specifically trained in finance may prefer the analysis using both discounted and non discounted methods.

How expressed: DCF is a series of dollar values over the time period(s) indicated, expressed in positive (cash is generated or created) or negative (cash is used or consumed) terms.

How to evaluate: Higher positive DCF values are better, as they indicate greater cash flows.

Strength: Discretely illustrates cash flows on a period by period basis, adjusted for the time value of money, and is a preferable method for comparing multiple scenarios or choices.

Weakness: Similar to ROI, DCF can be complex and time consuming to accurately construct

You Do That? - FKI Logistex Conveyors

Package Handling Conveyor Systems
Moving items through a busy warehouse just got easier. Adding to their capability, Morrison Company has expanded its capabilities by expanding their partnership with South Shore Controls, Inc.

The enhanced partnership enables Morrison Company to offer design capabilities for small to intermediate sized conveyor projects.

What is the ideal application? If your operation has packaging handling processes involving a moderate level of diversions, then contacting Morrison Company to devise a solution should be your next move. Adding on to an existing conveyor or adding efficiency to your operation using a packaging conveyor will go smoothly with our experienced team.

The FKI Logistex conveyor line provides fast, accurate and efficient material handling, sorting and order-picking solutions for the warehouse and distribution operations. Their conveyor installations include some of the world's most sophisticated high-throughput distribution centers and warehouses for retail, mail-order, e-commerce, technology, apparel and pharmaceuticals, all of which share a common need for dependable, productive and efficient product distribution.

You benefit from the partnership as the capability for mastering more advanced conveyor projects can now be realized. Morrison Company’s expertise designing and implementing conveyor projects in warehouses for retail, mail-order, e-commerce, technology, and pharmaceutical clients, all of which share a common need for dependable, productive and efficient product distribution, is available to meet your needs.

Do you have a project to discuss? If so, contact Morrison Company today.

Ergonomics Best Practices

Ergonomics in the Distribution Denter: Picking from Pallet Hazards and Solutions
Most goods in the warehouse are stored for a period of time. Racking is used to expand the amount of storage that is possible. Metal racks are used for storage and the area created within the racking is called a pick bin or slot. Slots range in size, depending on the products stored.

Potential Hazards:

Palletized product is stored in pick bins. Typically pallets are placed on the floor, which requires employees to bend at the waist to access palletized loads that come to the warehouse stacked only a few feet high, or may be unloaded to the point where they are only a few feet high. Even when these pallets are stored in taller slots, employees must bend at the waist to access product. This is a significant problem since the heaviest product is usually in the shortest stacks.

Low racking can force employees to bend at the waist to access loads. Loads in bottom bins will require forward torso bending to reach under the rack, even when the top levels of the stack are at waist height or higher.

Potential Solutions:

Use a pallet positioner: Whenever possible, elevate the pallets within a slot bin. The best technique is to place a palletizer into a tall bin. A palletizer will lower in height under the weight of a full pallet, then will raise the load as items are removed. The use of a turntable (also called a Pallet Positioner) allows employees to reposition the load. This keeps the load close to the body.

Stack empty pallets beneath active ones: If your pallet does not have product stacked above waist height, stack empty pallets beneath it to elevate the load. Care must be taken so the top level of the heavy product is not raised higher than mid-chest height.

Use a set-low beam on your pallet rack bays: Raise the bottom level of racking so loads are at heights where torso bending is not necessary. This method allows you to rack your pallets normally by lift truck, and reduce the need for employees to bend over to access the loaded product.

Use a vacuum hoist: Provide a device such as a forklift with a built-in vacuum hoist. The strong suction can lift up to 150 lbs.

Interested in having your own lifting guide? Download one here.

Continuous Improvement Best Practices

Recognizing You Do It Well

As a continuation of last month’s article this issue looks at continuous improvement model and what are key preformane indicators or KPI.

Doing things well is just as important (and difficult) as doing the right things. Certain key questions need to be asked in this regard: Will performance that is better than your competitor expand your market base? Or it is enough to be just as good as the competition? Is there some absolute goal, like Six Sigma, that should be used as your performance standard? What about the relationship between multiple goals? Can exceptional performance in one area offset poor performance in another? Clearly, not defining the term "well" could result in lost market share if customer expectations are not met or if the product price becomes too high in the attempt to gain perfection.

Many companies turn to industry-specific best practices and KPIs [Key Performance Indicator] to figure out how "well" they need to perform. One valuable resource on supply chain metrics for planning, sourcing, manufacturing, fulfillment, and reverse logistics is the Supply-Chain Council, which has developed the Supply Chain Operations Reference (SCOR) model. Exhibit 4 shows sample KPIs adapted from the SCOR model.

Yet while such sources are helpful, they often only provide a broad approximation of how a company is doing. Different business strategies naturally lead to different performance levels on specific KPIs. In fact, the best comparisons are sometimes not to another company in the same industry but to a company with similar supply chain characteristics competing with a similar business strategy in another industry.

Most KPIs (including the SCOR model) are single-factor performance metrics—that is, a ratio of some system output quantity to some resource input quantity. For example, the output could be lines picked in a warehouse and the input could be labor hours. These metrics allow for detailed analysis of operations and can be reported in a consistent manner. However, the single-factor metrics are less suited to answering the question, "How well are we doing?"

The following example illustrates the point. If my warehouse averages 73 picks per hour and my competitor's warehouse averages 36, does that mean I am doing well and they are not? The answer is, "It depends." How much material handling equipment do I have compared to them? How big and bulky are my picks vs. theirs? It's a mistake to make comparisons based on a single-factor metric without fully understanding the respective contexts. Supply chain activities can be viewed as a system that has both inputs and outputs. The key is to devise metrics that capture those system interdependencies that provide fair performance benchmarks.

Often, qualitative best practice benchmarking proves more useful than quantitative benchmarking. In qualitative benchmarking, a company starts with a hypothesis: "We believe that we have a best-practice forecasting methodology for fashion products with long lead times." In an effort to support this hypothesis, supply chain practitioners need to do three things:

1. Learn the process used by other companies with similar supply chain dynamics.
2. Determine how the other companies are doing on that process. This entails identifying the metrics being used and the context in which they are being applied. When examining companies in a different industry, in-house resources can often do the research. But when companies in the same industry are part of the research, it's best to use an independent outside consultant for reasons of access and confidentiality.
3. Make an informed response to the hypothesis. This step is by no means scientific; there's an element of subjectivity involved. Because the comparison companies typically have different metrics and processes, the practitioners must use their best judgment as to which lessons learned apply to their particular situation.