When your Material Handling Automation vendor completes the project and satisfies all of the system performance specifications, does that mean you really get the ROI you anticipated?

The answer is No. This is neither good nor bad in itself, but something that is important to understand for any new project.

Key to this discussion is understanding the difference between Actual Rate versus Demonstrable Rate, and what part they each play in your project’s ROI.

It’s been my experience that MHA system buyers, especially first-time buyers, often justify their MHA projects based on shipping “X” cases per day.  This is entirely understandable given that it is how the capacity of a DC is typically measured. 

However, sometimes there is a “disconnect” between the buyer and the vendor of the system. In reality, in most cases, a vendor can only guarantee that the system will handle “Y” cases per minute.  As it relates to system ROI, the two metrics are very different.

Understanding this important distinction when planning your next project will enable you to focus on obtaining the required business results that are the basis of your project’s justification.

A system’s realized shipping capacity (yield or throughput), which in the material handling system industry is referred to as Actual Rate, depends to a large degree on your ability to properly train, staff, and manage the system over which your MHA vendor has no authority or responsibility. 

The following are but a few examples of the factors that impact actual system performance:

• Variation in carton length, and conveyable product from the original specs
• Proper staffing and training
• Re-induction of cartons from re-circulation and/or cartons with bad (non-scannable) labels
• Shipping lane availability
• Downtime for maintenance
• WMS or other software issue outside the conveyor system
• Management effectiveness
• Employee turnover
• Ability to close out and overlap “waves” on the system
• Etc.

While the vendor uses Actual Rate as the starting point or basis for determining the type and capacity of equipment that will be applied to the system design, it is a “soft” or target number. The hard number, which is what the Sales Agreement is based on, is the Demonstrable Rate.

For example, during acceptance testing, the vendor will “prove” this rate by filling the sorter feed conveyors with average length cartons (or totes) and “clocking” or measuring the actual induction rate. In this way, the vendor can declare victory while the cartons shipped per day may be way below what they should be, i.e., the customer’s actual rate.

So, let’s look at some numbers.

Let’s say a company needs to be able to process 20,000 cartons in a day (1 shift). This actually gets a bit tricky, because that design criteria likely is for a future year, not year 1, but we’ll stick with that number this exercise.

The system vendor will implement a system capable of doing that many cartons physically during that time period. Actually, they will add in some fudge factor for the inevitable losses that will happen regardless if everything else runs perfectly. That number is typically 10-20% - I’ll use 20% in this case.

That means the vendor would produce a system capable of handling 24,000 cartons per shift (20k x 1.2). Assuming 7.5 hours or 450 minutes of work per shift, then the system would be designed, and the contractual language would stipulate, that system will be capable of 53 cartons per minute (cpm) – 24,000/450.

But, as noted above, all kinds of things can happen that decrease the actual throughput numbers – in some situations substantially so. As long as the vendor can show under the right conditions that the system can manage 53 cpm, it has met its system and contractual obligations – even if the system as a whole is viewed as not meeting expectations.

In most MHA system projects, and especially fixed-price, bid-to-spec projects (which is by far the most common type), the vendor has no role in the business side of project justification. For the most part, their contractual responsibilities are centered on meeting system design specifications, demonstrable rates (as stated above), and schedule deadlines.

However, in actual practice, there are really two layers of responsibility – in the physical sense, there is the engineering/performance responsibility and, in the business sense, there is the goals/objectives and budget/financial (ROI) responsibility.  These are very different – and I would argue that, for many projects, no one really owns the latter.  For instance, when it’s all said and done, if it takes more workers to ship the product than was justified, who's really responsible?  When no one is looking at how the system will actually deliver the expected business results, you are far less likely to achieve them.

I believe that in all too many projects, the focus on business results gets lost in the urgency of completing the project, with all the inevitable challenges that just getting the project completed entails. But someone at the top of the project chain needs to be driven primarily by the business results the project should achieve – because, in the end, that’s really what matters.

So what’s the bottom line here? First, just be highly aware of the differences between demonstrable and actual rates, and make sure all along that you are clear as to the differences and relationships.

Second, be very careful about your estimates of actual rates. There are many factors, as discussed above. It is better to be conservative here (while hopefully still reaching ROI targets), rtather than aggressive and risk failure to meet expectations.

Third, when doing site visits or reference checks, especially for systems close to yours in design, make sure you ask about the system rates and actual rates achieved, and/or what they have learned about minimizing the gap.

Fourth, if you are not meeting expected or required actual rates, consider a system audit by a material handling expert to help identify what is going wrong. (See Distribution Center Audits – Real Value, or Marketing Exercise?)

Agree or disgree with Holste's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the website. Upon request, comments will be posted with the respondent's name or company withheld.

You can also contact Holse directly to discuss your material handling or distribution challenges at the Feedback button below.