It’s a time of great opportunity in the logistics industry, but there are equally great challenges that any logistics business will have to overcome first. With shortages affecting everything from trucking labor to plastic enclosures for electronics, businesses are tasked every day with finding ways to maximize limited resources and focus on what’s most important.
Warehouses, in particular, must modernize their operations to ensure they can stay competitive in today’s complex and fast-moving logistics market. To determine the clearest path to an efficient and financially sustainable warehouse, it’s critical to brush up on one of the most important business fundamentals: return on investment (ROI).
Below, we’ll take a quick dive into a few of the most important aspects of determining ROI for investing in warehouse improvements.
The Basics of ROI
First, step back for a second and remember the basics of calculating ROI. Investopedia has a handy summary of the formula, which boils down to this:
- Find the final value of the investment.
- Subtract the initial cost of the investment from the final value.
- Divide the result by the cost of the investment.
- Multiply the number by 100.
The resulting number is your ROI percentage — the percentage of your investment that was returned to you as profit. Using this number, you can track the performance of many different kinds of assets, from buying stock to investing in real estate.
How does this apply to warehouse modernization projects? Some modernizations that you make in your warehouse will bring you better ROI than others, and ROI is thus one of the major factors in evaluating whether an improvement project will be a good investment. Before making common warehouse improvements like a loading dock improvement or purchasing new warehouse software, take time to calculate the ROI of various improvement options.
What Is Anticipated ROI?
To make ROI a factor in your analysis of potential warehouse modernization projects, you’ll need to calculate the anticipated ROI of your project. Anticipated ROI uses projected figures for the final value of the investment (and sometimes for the costs too). By contrast, ROI calculated after the fact using the actual numbers is known as actual ROI.
That means that it’s crucial to calculate the anticipated ROI under multiple different scenarios. Any projected number that could vary, such as the cost of a construction project or your business’s yearly revenue, should be projected under various conditions. Consider both optimistic and pessimistic projections and research market trends such as the cost of supplies or borrowing rates to find anticipated ROI in the best case, worst case, and a range of possibilities in between.
Using multiple scenarios addresses one of the key weaknesses of ROI, which is that it normally doesn’t measure risk. With proper attention to generating a realistic set of projections and monitoring market trends, an anticipated ROI can give you better tools for quantifying risk. A project that generates a profit under one scenario might cause a loss under others, and gaming out multiple scenarios using ROI calculations can help you spot these possibilities.
However, just like any ROI calculation, anticipated ROI also needs to account for all relevant factors and costs. Even a relatively small cost like project box enclosures for warehouse electronic devices could significantly alter the calculation, especially in the unsettled reality of 2020s supply chains.
Other Metrics to Consider
ROI, for all its usefulness, is a simple metric that only shows you part of the picture. To address the limitations of ROI, you’ll need to use it alongside other metrics. These other metrics can provide you with key decision making information about modernizing your warehouse, and they include:
- Time to Value: Measures how long the investment takes to recoup costs and begin generating return
- Annualized Rate of Return: Measures how well the investment performs over a period of years
- Social ROI: Measures (in a dollar value) how much the investment contributes to socially important causes such as environmental conversation
On top of these factors, there will be numerous pros and cons specific to the investment. Some may be hard to quantify, such as changes in employee morale. These require input from stakeholders close to the problem, such as floor managers and warehouse workers themselves.
Four Warehouse Upgrades with (Potentially) Great ROI
- Inventory Tracking Systems
Inventory is the reason warehouses exist, and upgrading your inventory systems can have a substantial direct effect on your bottom line through the prevention of inventory loss and backorders. RFID scanning is one of the most popular options, but smartphone-based inventory systems can also be a great alternative for small businesses.
- Warehouse Management Software
Warehouse management software often goes hand in hand with inventory tracking, but upgrading your software package often brings general productivity benefits such as reducing paperwork and coordinating your warehouse’s operations. Many cloud-based WMS systems are now offered as subscription services, which can make them easier to fit into a tight budget.
- Additional Storage
Adding storage space to a warehouse is one of the most important ways to expand capacity, especially now that supply chain disruptions have spurred some businesses to keep more reserve stock on hand. However, maximizing your return on this investment also often requires a corresponding expansion in handling and labor capacity.
- Dock Improvements
Updating your warehouse’s loading dock can improve your warehouse’s ability to efficiently ship and receive stock. Upgrades such as dock levelers and wheel alignment curbs are excellent ways to make your dock safer and more productive for everyone involved.
ROI is one of the most useful tools for any logistics business to find a path that balances smart investments with a bold vision. Make it one part of your warehouse’s holistic toolbox for building its capacities for 21st-century commerce.