Six Steps to Savvy Project Planning

Mar 01, 2004 10:30 PM  By

I confess to struggling a bit with the best way to make this material useful. Budgeting for material handling equipment is so intimately tied to the specifics of each set of circumstances (design, functional and operational requirements, retrofit versus new, and so on) that it is difficult to provide more than general guidance regarding resource allocation.

Having said that, there are some guidelines that can prove useful in most circumstances. Figures 1 through 6 on the following pages take you through a step-by-step strategy to estimate the costs of upgrading or buying new material handling equipment for a warehouse or distribution center.

The budgeting process doesn’t end, however, with figure 6. One could even argue that the “real” budget takes shape after this stage, as it is possible to generate huge cost savings if you shop around for what you need. Although it is possible to do this informally, the most valuable tool for comparing and evaluating the products available is a formal proposal. Developing and using one affords you a considerable advantage in acquiring any large quantity of material handling equipment. And, unless the talent and experience to evaluate the marketplace are available within your company, compelling arguments prevail for enlisting the aid of outside, professional resources in an effort of this magnitude and complexity.

The areas of importance in a formal proposal are several, beginning with design options. If a number of alternative designs are developed, and other considerations such as throughput are not significantly different from one option to another, equipment cost differences can be the tiebreaker. Also to be taken into account are forecasts, slotting, labor, and other factors. Employing a competitive-bid approach (developing specs and an RFP, “apples-to-apples” analysis of solutions, and vendor negotiations) can yield savings of up to 15% in equipment costs.

Applied to the five-facility project shown in figure 6, a well-run, formal bid process could have reduced costs by $330,000 to $707,000 to acquire the same equipment — between $66,000 and $141,000 per building on average.

Another example is even more dramatic. For a new facility with a holding capacity of about 70,000 pallets, and sporting a full range of equipment including automated sortation and numerous conveyors, the initial bid from the two leading vendors was very similar: about $6,500,000. The final price, after the client’s team evaluated all the bids and conducted negotiations with the vendors, came down by $250,000 (4%), to which the successful bidder added other services and materials valued at $200,000. The total savings for the buyer was about $450,000 (7% of the original bid) for a single facility. Assume, therefore, that there is generally some elasticity in equipment pricing and that a formal comparative process will improve that pricing, often by a double-digit factor.

Ron Hounsell is vice president at Tom Zosel Associates, a distribution consulting firm in Long Grove, IL. Senior consultant Gavin Klaus of TZA contributed to this article. The authors can be reached at (847) 540-6543 or rhounsell@tzaconsulting.com.

Fig. 1 Equipment Costs

First, look at some typical costs for equipment. At right are average prices for conveyors, pallet racks and other fixtures, pick-to-belt modules, and assorted rolling stock equipment. Used-equipment costs are provided for fixtures, which are often available in good condition and suitable quantities, and are therefore worth considering. Unit costs include freight and installation, but relevant taxes are not included.

Type Item Detailed Description Unit New Used % Off
Conveyor Belt conveyor (incline/decline)
Transportation conveyor
Accumulation conveyor
Sliding shoe sorter
200 ft., 20 diverts per foot
per foot
per foot
each
$200
$250
$350
$312,000
N/A
N/A
N/A
N/A
Fixtures Bin shelving
Caseflow
Pallet rack
Drive-in
Pushback
Pallet flow
20′ upright, 5 levels, 4 pr. beams Bay
Bay
Bay
Per pallet
Per pallet
Per pallet
$150
$1,800
$373
$70
$150
$250
$100
$1,000
$200
$35
N/A
$200
-33%
-44%
-46%
-50%
-20%
Other 300′ PTB module Full case Each $450,000
Rolling Stock Sit-down fork truck
Stand-up reach truck
Powered double pallet jack
Order picker
Additional battery
Each
Each
Each
Each
Each
$24,000
$27,500
$6,000
$20,000
$2,200

Fig. 2 Slotting Analysis

Bins/Shelving Caseflow Rack
Cube/year 0 to <=6.4 6.4 to <=19.2 >19.2 to <=480 480 to 5,000 5,000 to 10,000 >10,000
Total cube movement 33,030.3 50,755.3 377,592.7 299,386.2 68,394.0 10,375.0
Estimated bin shelves 10,355.7 3,166.5
Average items/bay 12.1 7.1 27.0 4.0 4.0 2.0
Estimated bays 2,097.0 635.0 177.6 543.0 2.8 0.5
Accumulated bays 2,097.0 2,714.0 177.6 543.0 57.0 57.5

Next, to decide which and how many storage fixtures you will need, it is important to go through the exercise of slotting (or profiling) the facility. At the “macro” level, this analysis will produce the quantities of each storage medium needed by type, based on the number of merchandise SKUs handled, cube movement, and unit volume for each SKU group or type.

In the simplified analysis shown in this table, the fixtures required are 2,714 bays of bin shelving, 178 bays of caseflow shelving, and 58 bays of pallet racks.

Conveyors, sortation systems, and rolling stock decisions are subject to a different kind of analysis and are not discussed in detail here. Both volume and manpower requirements are factored into that analysis as well.

Fig. 3 Used or New?

Type
Fixtures
Item Detailed Description Unit New Used Units New Used $ Diff. % Diff.
Bin shelving Bay $150 $100 2,714 $407,100 $271,400 $135,700 -33%
Caseflow Bay $1,800 $1,000 178 $320,400 $178,000 $142,400 -44%
Pallet rack 20′ upright, 5 levels, 4 pr. beams Bay $373 $200 58 $21,634 $11,600 $10,034 -46%
TOTAL $749,134 $461,000 $288,134 -38%

Budget for some equipment needs by applying typical costs to the results of the slotting analysis. An example is shown above. Note that if you were to meet all your fixture requirements with used equipment, the savings for this portion of the budget alone would approach $300,000!

Note: Freight and installation are included; taxes are not.

Fig. 4 Forecasting Growth

Repack Module Bins* Repack Module Caseflow Repack Rack
Bays 2,714.0 177.6 57.5
Growth factor 1.286 1.286 1.286
Future bays 3,489.1 228.4 73.9
Equivalent 36″ × 144″ 436.1 N/A N/A
Plus 25% working space 545.2 285.4 92.4
Bays per module level 181.7 95.1 N/A
Aisles at 68 bays/aisle N/A N/A 1.4 Total
2004 items 29,730.0 4,800.0 229.0 34,759.0
Estimated fixture facings 52,336.8 9,134.2 295.7 61,766.7

After you calculate fixture requirements by type, forecast the impact of growth impact on a single repack/pick area, as shown above. Once you determine the necessary quantities of each type of fixture, you can apply unit costs to find out the total equipment cost for each functional area. Then, aggregate the various individual requirements to build a budget.

*Repack module bins are 36″ × 18″ each.

Fig. 5 Labor Requirements

At this point, you might want to try another approach to budgeting for material handling improvements. The method shown here considers labor requirements. Taking the existing (basic) scenario, including shipment volume, staffing, productivity, and order characteristics, the graph shows the labor requirement by picking process as related to the cost of each of seven possible solutions. Each option takes into account all of the factors listed in the basic scenario.

Fig. 6 Total Budget

You’re now ready to combine all of your data into one spreadsheet. The table at right shows a full cost analysis for a new facility. This example is for a multiple-building campus, with each building performing a different function and requiring different combinations of equipment. It is worth noting here that the prices include sprinkler, lighting, and office requirements (all too easy to overlook); any additional costs for ventilation resulting from the use of mezzanines or multilevel pick modules are not included, but should be if they pertain. Used equipment was not considered in this example.

Building 1 Building 2 Building 3 Building 4 Building 5 Total
Rack $136,720 $91,035 $118,458 $14,948 $522,154 $883,315
Full-case module $307,410 - - - $189,780 $497,190
Tote sort module - $103,820 - - - $103,820
Cross-dock lines $147,075 - - - - $147,075
Full-case module conveyor $256,864 - - - $340,724 $597.588
Tote sort module conveyor - $190,466 - - - $190,466
Sorter - - $179,627 - - $179,627
Clothing mezzanine rack - - - - $503,502 $503,502
Clothing mezzanine conveyor - - - - $210,820 $210,820
Sprinkler $26,818 $5,785 - - $59,448 $92,051
Lighting $14,284 $22,538 - - $77,806 $114,628
Office - - - - $40,000 $40,000
Put-to-light module — rack - $272,869 - - - $272,869
Put-to-light module — conveyor - $566,100 - - - $566,100
Put-to-light module — light - $316,843 - - - $316,843
Subtotal $889,171 $1,569,456 $298,085 $14,948 $1,944,233 $4,715,894