Building a Warehouse Management System Business Case

All businesses put a high priority on making their supply chains efficient, economical and a strong contributor to profitable growth. The gains made throughout a supplier network are, at times, marginalized by inefficient distribution, storage and warehouse locations that don’t have a Warehouse Management System (WMS) in place, or are relying on one built for business requirements of the past. In high-performance supply chains, the WMS orchestrates every aspect of optimizing multiple warehouse locations, from receiving and storage to inventory management, order processing, shipping and Material Handling Device Control. In many ways, the WMS is the core of any supply chain and supplier network.

Benchmarking a WMS to Get a Baseline Level of Performance Defined

As inventory, space, time-to-market, material handling labor and transportation requirements all shift as a result of quickly changing business models, any WMS will face the challenge of flexing for the unique customer and market needs. It’s best to regularly benchmark a WMS to make sure it’s still aligned with the needs of the broader supply chain and supplier networks, while still providing valuable information back to customers. The four core areas to rely on for completing a WMS benchmark include order fulfillment, inventory management, warehouse productivity and transportation performance. Taken together, these four areas provide an accurate glimpse into how effective an existing WMS is, especially in the areas of providing real-time data to customers, buyers and suppliers.  These four areas also provide insights into how well an existing WMS is scaling against more challenging requirements that are supplier-, customer- and internally-based.

Keeping Warehouse Management Systems Current is a Continual Challenge

The most common reason a WMS will be replaced is that it’s built for a different business model and series of products in the past. This legacy, often 3rd-party and highly customized systems are a challenge to keep current, often requiring a programming team just to keep them going. When a legacy WMS is only delivering a fraction of the data it has the potential to, there’s often a parallel dynamic of an enterprise needing richer functionality and better compliance reporting than in the past. There’s also the customer-driven requirement of change, including closing the competitive gap of how quickly data can be provided, which platforms it can be provided on and which interfaces and application technologies can manage it. Legacy WMS can’t often provide HTML5 or responsive web interfaces for data, as the systems were created well before those recent technologies existed.

The proliferation of products has also created a challenging environment for manufacturing companies that rely on legacy WMS applications. The majority of legacy WMS was designed for far less complex products, and often didn’t require product customization spanning the scope of build-to-order, configure-to-order or engineer-to-order. The proliferation of products is also leading to the need for greater real-time data integration across the entire supply chain. It’s very rare to find a legacy WMS capable of being upgraded to real-time data integration at the API level.  There’s a wide variety of integration technologies available for integrating legacy WMS and ERP systems together, yet the foundational data structures of these systems aren’t designed for flexible manufacturing. More often than not, they’re created for high volume standardized manufacturing, with little variation.

Knowing When it’s Time to Replace a Warehouse Management System

The following are the top ten symptoms to look for in a WMS that can’t keep up with the pace and scale of the broader manufacturing operation. Key problem areas include Order Fulfillment, Inventory Management, Warehouse Productivity and Transportation Performance. The finance department will most likely have the majority of data required for quantifying just how much gross margin, sales and yield is being lost due to an ineffective WMS process. Quantifying in financial terms, the following ten symptoms are essential for building a strong business case to replace a WMS or acquire a new one:

1. Supply chain planning is breaking down, leading to more allocations, out-of-stocks and fluctuations in on-time delivery
2. Increasing product quality problems from suppliers that slip through the initial screening systems in the warehouse
3. Starting to get into the habit of expediting orders for production and paying rush charges to get finished products to customers by the delivery dates
4. Yard Management is breaking down, and there’s inventory building up, waiting for use during production
5. Having to resort to more manually-based methods to get warehouse inventory levels to balance and have enough raw materials on hand to complete production runs
6. Overtime and high operating costs are starting to increase, per distribution location
7. Production scheduling is starting to be impacted by a lack of materials in warehouse storage locations
8. Taxonomies that worked in the past for managing warehouses are starting to break down, leading to confused direction and misplaced internal orders
9. High per-unit costs dominate the financial statements over the last few months with inventory, warehouse management and logistics costs being the primary sources of cost overruns
10. Production yields are decreasing with more errors and unusable materials, leading to further reductions in gross margin

Building a Business Case for a Warehouse Management System

In building a business case for replacing a WMS, it’s important to consider the sales, margin, cost avoidance and cost reduction components of the business case itself. An excellent first step is to create a strong cross-functional team that’s able to scale the many information, analysis and reporting requirements inherent in the steps required to build a business case.

Before jumping in to define financial calculations and ROI metrics, choose a senior management team member to champion the program. It’s not enough to just have a Senior Director, Vice President or C-level executive on the team to define the business case. It’s best to have a member of the senior management team create a coalition or base of support across multiple members of the senior management team. Accomplishing this level of cohesion and collaboration at the C-level improves the probability that a WMS business case will succeed and receive funding. Having a group of C-level or senior management team members supporting the project will fuel greater change management support as well.

The following are the steps to building a business case for a Warehouse Management System (WMS):

1. Create and fine-tune a change management plan that includes a coalition of C-level partners who can support the business case and WMS implementation. The single most expensive part of any WMS business case is change management, or getting people that’ll be using the system daily trained on it. There’s also the challenge of having supervisors, managers, leaders in production and every warehouse location buy into the system and use it when it comes online. It’s good to estimate that for every dollar spent on software, nine dollars will need to be spent on change management, training and reinforcing the value of the new WMS to the company.
2. Define a cross-functional team to help create the business case that includes IT, facilities management, finance, human resources, legal, procurement, logistics and sales.  Each of these departments is essential for creating a strong business case. Of these, finance will be invaluable in creating pro forma financial statements, modeling various scenarios and coordinating with procurement and operations to gain insights into costs.
3. Define the scope and scale of the business case before the first cross-functional meeting, and rely on the first meetings to get feedback and fine-tune the structure. It’s important to get the structure of the business case done before the cross-functional meetings begin so there’s a roadmap to work from. The structure of the business case needs to include, at a minimum, the following:
   1. Goals And Objectives Of The Business Case
      1. Using the list of ten symptoms, define the most urgent problem areas that can be financially measured.
      2. Start benchmarking the financial performance and losses from the problem areas, based on the symptoms listed earlier in this post.
   2. Define The Scope And Scale of the Proposed WMS
      1. What business requirements will the proposed WMS focus on?
      2. Are there any cross-functional aspects of the WMS that need to be improved?
   3. Summarize The Business Requirements and Define Costs and Benefits
      1. Working with finance, capture the anticipated costs of a new WMS, based on vendor quotes and the reduction in costs and benefits of having the new system.
      2. Finance and the cross-functional team will need to define the assumptions, constraints and potential risks impacting the overall WMS business case.
   4. Define A Proposed Project Plan
      1. Prepare a Gannt chart with dependencies, resources and potential conflicts all defined.
      2. Meet with the C-level change management team and ask for their assistance in gaining resources and commitments from other teams to get the WMS project done.

4. Summarize the Investment Benefits and Use Them to Promote the WMS. Quantify and share the project benefits slides and create additional materials showing the benefits of a new WMS.  Use these materials to support the proposed project plan. Use production data that shows potential scenarios of how the WMS will reduce costs, improve customer response times and improve revenue growth and sales. Create a pro forma financial analysis showing cost reduction, operating cost avoidance, net gross margin and net sales improvement over the next twelve quarters.  This data will be invaluable for building the business case going forward with the WMS; it’s the financial contributions of getting the new system. Build a cost model that can be quickly updated for program and project management costs, process redesign costs and costs of disrupting production while a new WMS is being implemented. These include additional labor and overtime, data cleaning and customized WMS development. Be sure to invest heavily in User Acceptance Testing (UAT) as well, across all geographies the WMS will be used in.

5. Making the WMS Business Case Support the Most Urgent Corporate Initiatives Increases the Probability Of Success. For many manufacturers, cost reduction is one of the most urgent strategic priorities they’re challenged with today. Define the WMS business case first from a cost reduction standpoint, based on the data captured in Step 4. For the top-line growth component, forecast the percentage increase in perfect order performance, in addition to new revenues based on additional yields. A successfully deployed WMS can significantly reduce overall operating costs and drive up yield rates. Summarize the key benefits of the WMS from a cost and revenue standpoint, showing the effects of improving supply chain and warehouse processes when a new WMS is up and running.

6. Have the C-Level Leaders Championing the WMS Business Case Meet With the CEO and Board to Get Approval. It’s invaluable having a coalition of C-level executives present the business case and defend it in front of senior management. Delegating this task to that team increases the probability by over 60% in previous experiences. Showing the impact on top-line revenue growth also significantly increases the probability of success for the initiative.

7. Gain the Funds Requested in the Business Case and Begin Implementation. Assign a Project Management Office (PMO) leader as the project manager on the WMS implementation. It’s preferable that this person has a PMO certification and experience in leading enterprise software implementations.

Conclusion

The business case for a WMS system needs to balance top-line revenue growth requirements with the need for cost reduction. The best business cases are predicated on a balance of cost avoidance, cost containment, margin and sales contribution. Aligning the WMS business case with the most urgent strategic priorities a company has increases the probability of success. Having a C-level coalition of project champions also increases the probability of success. When the financial data is so compelling from a revenue uplift standpoint, objections to getting a new system fall away. There are always going to be objections, and the best way to win them over is to show how a strong WMS is an investment in winning new customers and keeping existing ones. Having a scalable, agile WMS is essential to fueling new revenue growth.