Bu
uildiing a Bus
sines
ss Ca
ase ffor
M
Materrial Hand
H dling Systtem Inve
estm
ment
Intrroduction
ew or update
ed material handling equip
pment and co
ontrol system
ms offer an o
outstanding opportunity fo
or
Invesstments in ne
Supp
ply Chain lead
ders to contrib
bute bottom line benefit to
t the financiaal performancce of their orrganizations. The first and
d
perha
aps most imp
portant step in realizing th
his benefit is communicatin
ng the value of these inve
estments in tterms that are
e
impo
ortant to execcutive stakeho
olders and de
ecision makers. This pap
per will define
e the primaryy financial terrms and basic
building blocks to
o consider wh
hen developing an executtive level bussiness case ffor an investtment in matterial handling
g
ems or any other
o
capital intensive
i
sup
pply chain inittiative. Particcular emphassis will be pla
aced on the accounting of
o
syste
depre
eciation due to
t the vital ro
ole it plays wh
hen calculating
g the return o
on investment.
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Page 1
Building a Bus
siness Case
e for Materiial Handling
g System IInvestmentt
The
e Purpose of a Busin
ness Case
mportant to realize
r
that a business case
e is much mo
ore than preseenting a returrn on investm
ment (ROI) an
nalysis. Rarely
y
It’s im
will a
an executive make a deciision purely based
b
upon the
t
numbers presented in
n the financia
al justification
n. Instead, a
myria
ad of other fa
actors must be
b considered
d. For examp
ple, does thee investment address a ke
ey business p
priority? Wha
at
are tthe risks of moving
m
forward with this investment? What other alternatives were conside
ered? What is the cost of
o
doing
g nothing? How
H
credible is the analyssis? Etc. Th
he business ccase needs to
o anticipate a
and address concerns and
d
questtions through
h the eyes of the decision maker. Morre importantlyy, the businesss case needs to persuade
e the decision
n
make
er to take action.
Persuasive Business C
Case
Credibility
Logic
Appeal
The ffundamental means of building a persu
uasive argume
ent are logic, credibility, an
nd appeal. LLike three legss on a stool, ifi
any a
are missing the
t argumentt will collapse
e. Therefore, a business ccase must be
e logical, cred
dible, and app
pealing to the
e
decission maker. In
I other word
ds, the analyssis must be logically consttructed and kkey assumptio
ons regarding
g timing, cash
h
flow estimates, an
nd organizational capabilitties to implem
ment and reaalize benefits must make sense. The analysis musst
e estimates frrom unbiased
d, knowledgeaable sources add to the ccredibility of tthe argumentt.
also be credible. Conservative
ddition, the an
nalysis must be
b correctly constructed
c
in
n the financiall accounting tterms used byy the business. Finally, the
e
In ad
busin
ness case mu
ust appeal to the key prio
orities of executive decisio
on makers. A high invesstment propossal for a high
h
returrn project in an
a area of low
w priority to th
he decision maker
m
isn’t likeely to be perssuasive.
The purpose of the businesss case is to persuade th
he decision maker to ta
ake your reccommended p
path forward
d.
erstanding this fundamenta
al requiremen
nt will create a solid foundaation for build
ding your bussiness case.
Unde
Deffining Valu
ue
The e
emphasis on material han
ndling solution
n decisions iss often too heeavily focused
d on the inve
estment to be
e made rathe
er
than the value to be created. One reason is
i because we
e too narrowlly scope the b
benefits gene
erated from th
he investmen
nt
dervalue the business case
e. The value
e of a materiaal handling ssolution should be viewed more broadly
y
and ttherefore und
than the impact on space and labor. Value can come in many fo
orms. Conce
eptually, the goal of any supply chain
n
ding MHS) is to increase re
evenue, grow
wth, quality, sservice, and fflexibility while
e also reducin
ng time, riskss,
invesstment (includ
costss, working ca
apital, and taxes. This ca
an be viewed
d as a simplee value equa
ation to reference when id
dentifying the
e
bene
efits of your re
ecommended investment.
• Revenue
R
• Growth
G
Incre
ease
• Quality
Q
These
• Service
S
• Flexibility
F
Value
e=
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• Risks
R
• Time
T
• Costs
C
• Working
W
Capita
al
• Taxes
T
Page 2
Decre
ease
These
Building a Bus
siness Case
e for Materiial Handling
g System IInvestmentt
Here are a few po
otential ways in which mate
erial handling
g solutions can
n increase the
e “numeratorr” in the value
e equation:
R
Revenue & Gro
owth
• Increase throug
ghput/ •
orage capacitty
sto
• En
nable new or value
v
•
ad
dded service (VAS)
(
• En
nable higher fill
f rate
• En
nable faster order
•
turnaround time
• Prrovide higher picking/ •
hipping/ invoiccing
sh
acccuracy
Quality
ncrease receiv
ving/
In
pu
utaway accura
acy
Prrovide higher
picking/shipping/
inv
voicing accuracy
In
ncrease inventtory
acccuracy
In
ncrease reportting
acccuracy
Servicee
Flexibility
S
new ccustomer
• Support
requirements
r
• Increase
I
fill raate
• Reduce
R
order
fulfillment
f
tim
me
• Increase
I
shipm
ment
compliance
c
• Employ low risk/proven
ttechnologies
• S
Support non-compliant
vvendor receip
pts
• S
Support new customer
requirementss
• S
Support varia
able
d
demand levells
The p
potential mea
ans of decreassing the “denominator” in the value equ
uation go beyyond the impa
act on labor a
and space.
Risks
Time
• Em
mploy low risk
k/proven •
tecchnologies
• Em
mploy proven tools & •
me
ethodologies during
im
mplementation
n
•
• Le
everage highly
y skilled
de
esign and
•
im
mplementation
n
resources
Reduce
R
dock to
o stock
time
Reduce
R
replenishment
time
Reduce
R
order to
t
sh
hipment time
Reduce
R
shipme
ent to
in
nvoice time
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Costs
Working C
Capital
R
labor costs
ntory
• Reduce inven
• Reduce
• Reduce
R
superv
rvision
• Reduce cash to cash
costs
c
cycle
• Reduce
R
facilityy space
costs
c
• Reduce
R
overhead costs
• Reduce
R
freigh
ht costs
• Reduce
R
IT cossts
• Reduce
R
inventtory
carrying
c
costss
Page 3
Building a Bus
siness Case
e for Materiial Handling
g System IInvestmentt
Buillding the Business
B
Case
C
The rremainder of this paper will focus primarily on the terms used an
nd mechanicss of generatin
ng the financial justification
n
within a business case. Althou
ugh all busine
ess cases are unique, therre are a numb
ber of commo
on terms to kknow, rules to
o
w, and steps to consider. The followiing table outlines a suggeested 10 step
p process to follow when developing a
follow
detaiiled business case. Each
h of these steps
s
will be discussed in
n greater de
etail througho
out the rema
ainder of this
document.
Basiic Steps
to Business Ca
ase Develop
pment
1. S
Specify the fea
asible alterna
atives
2. D
Determine the
e financial me
etrics to
a
assess
3. E
Establish pre-ttax cash flow
e
estimates
4. U
Use accountin
ng view of cassh flow
a
and ROI (retu
urn on investm
ment)
5. D
Determine dep
preciation exp
pense
6. C
Calculate after-tax cash flow
7. C
Calculate disco
ounted cash flow
f
8. A
Assess alterna
atives based on
o
ffinancial metrics
9. C
Complete quantitative and
q
qualitative ana
alysis
10. Package and present the business
ccase
Conssiderations
• What are we
e comparing aagainst?
• What is the cost of doing nothing?
• What financial metrics wi ll be compare
ed (e.g. Payba
ack, NPV,
IRR, MIRR, etc.)?
e
• What are the
e positive and
d negative cash flows for e
each
alternative?
• What is the timing of thesse cash flowss?
• What is the cash flow horrizon?
• How do we impact
i
the in come statement?
• How do we impact
i
the baalance sheet??
• What will be
e capitalized vvs. expensed??
• What deprecciation metho
od will be used
d?
• What is the depreciation time period fo
for each assett?
• What is the client incomee tax rate?
• What rate will
w be used to
o determine th
he NPV of cassh flows?
• How do the numbers stacck up and com
mpare?
• Does the answer change if different asssumptions are used?
• What other decision
d
facto
ors need to be
e considered beyond
the ROI?
• What is the level of detai l needed to p
present your
recommenda
ation?
• What questio
ons must be aanswered to drive a decisiion?
• Are you fully
y prepared to present yourr recommendation?
Define the Feasible
F
Alte
ernatives
1. D
The ffirst step in justifying an investment
i
iss to define the feasible altternatives, inccluding the p
possibility of d
doing nothing
g.
The p
path of least resistance is often doing nothing.
n
It’s also
a
usually th
he least riskyy proposition. But, doing n
nothing always
come
es at some co
ost. Often, itt means the cost
c
of mainta
aining or devveloping new capabilities w
within older e
equipment and
d
syste
ems. There iss also the opp
portunity cost of not taking
g advantage o
of newer tech
hnologies.
“Bu
usiness Ca
ase” =
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Value
e to be Crreated
(relative
e to doing nothing)
Invesstment Re
equired
(relative
e to doing nothing)
Page 4
Building a Bus
siness Case
e for Materiial Handling
g System IInvestmentt
Be co
ognizant of th
he need to define
d
and de
evelop a list of
o feasible altternatives. A
An executive d
decision makker will always
wantt to know if otther options were
w
considerred and how they
t
comparee on a relative
e basis. Therrefore, an ide
eal approach is
to ga
ain insight in
nto alternative
es they deem
m important for consideraation during the very early stages off the financia
al
analyysis.
Determine the Financial Metrics to Assess
2. D
The term Return on Investme
ent (ROI) is often
o
used sy
ynonymously with a busin
ness case, but there are m
many financia
al
termss and metricss to consider.
F
Financial Te
erm
Net Cash Flow
Deffinition
Con
nsideration
• Simple, but does not con
nsider time
value of money
• Overstates tthe relative va
alue of
longer term cash flow
Simple RO
OI
Ratiio of net cash
h flow divided by the
• Simple, but does not con
nsider time
initial investmentt
value of money
• Difficult to ccompare alterrnative
investmentss without also
o knowing
the size of ccash flow
S
Simple Payb
back
The
e period of tim
me, usually me
easured
• Conceptuallyy easy to und
derstand
in years,
y
required
d to recover the
t
• Measures re
elative risk of projects
orig
ginal project in
nvestment without
(i.e. short pa
ayback = low
wer risk)
app
plying a discou
unt rate
• Simple, but does not con
nsider time
value of money
• Does not co
onsider positivve cash
flow after brreakeven
Discount Ra
ate
The
e interest rate
e (or opportun
nity cost
• Generally difficult to dete
ermine
of capital
c
rate) used in determ
mining
what rate to
o use
the present value
e of future ca
ash flows. • Perform sen
nsitivity analyssis using
The
e opportunity cost of capita
al can
different disscount rates
eith
her be how much you woulld have
earn
ned investing the money
som
meplace else, or how much
h interest
you would have had to pay if you
borrrowed money
y
Dis
scounted Payback The
e period of tim
me, usually me
easured
• More accepttable version of
in years,
y
required
d to recover the
t
payback
orig
ginal project in
nvestment co
onsidering • But, does no
ot consider po
ositive
the time value off money
cash flow affter breakeven
Disc
counted Cas
sh Flow Com
mmon method
d of estimatin
ng an
• Most accepttable method of
(DCF)
inve
estment's present value ba
ased on
evaluating ccash flows
the discounting of
o projected cash
c
• Perform sen
nsitivity analyssis of
inflo
ows and outflows
different disscount rates a
and time
horizons
Ne
et Present Value
V
(NPV)
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Sum
m of negative and positive cash
flow
ws
The
e net present value of expe
ected
futu
ure cash flowss of a project minus
the initial projectt investment
Page 5
• Result of disscount cash fllow
analysis
• Positive NPV
V represents a
favorable prroject
• Pursue the p
project alternative with
the highest NPV
Building a Bus
siness Case
e for Materiial Handling
g System IInvestmentt
IInternal Ratte of
Return (IR
RR)
The
e internal retu
urn rate which
h equates • Often compa
ared against desired
the present value
e of a projectt’s
“hurdle rate
es”, which are
e generally
expected cash in
nflows to the present
p
higher than the cost of ca
apital
valu
ue on its expe
ected outflowss – can
• Pursue proje
ect alternative
e that
also
o be viewed as
a the expecte
ed rate of
exceed interrnal hurdle ra
ate
retu
urn on a proje
ect
• Incorrectly a
assumes posittive cash
flow can be reinvested att IRR
Mod
dified IRR (M
MIRR) The
e internal rate
e of return usiing a
• Assumes po
ositive cash flo
ows are
rein
nvestment rate for positive cash
reinvested a
at average company
flow
ws equivalent to the compa
any’s cost
rate of returrn
of capital
c
or averrage rates of return
• Generates m
more conserva
ative and
realistic exp
pected rate of return
Each of these fina
ancial terms will
w be illustra
ated in examp
ples as the bu
usiness case developmentt process is fu
urther defined
d
in thiis document.
Establish Pre
e-Tax Cash Flow Estima
ates
3. E
The core compon
nent of a fina
ancial justificcation is the anticipated p
positive and negative cash flow assocciated with an
n
invesstment. Net Cash Flow is the cumu
nd negative cash flows over the life
ulative sum of
o positive an
e span of the
e
invesstment. A fa
avorable invesstment must obviously ha
ave positive n
net cash flow
w. So, a pre--tax net cash flow analysis
allow
ws for “quick and dirty” analysis of an
n investment to determinee Net Cash FFlow, Simple ROI and Sim
mple Payback
k.
Simp
ple Payback iss perhaps th
he most popu
ular “quick an
nd dirty” metthod of evalu
uating a pote
ential investm
ment. Simple
e
payback is the perriod of time, usually
u
measu
ured in years,, required to recover the o
original projecct investment.
The ffollowing is a simple example that illustrates these ca
alculations.
Financial A
Analysis
IInvestment Life Span
(Yearss)
0
1
2
3
4
5
Total
Cash Inflow
$0
$0
$1
150
$15 0
$150
$150
$600
Cash Outfflows
($200)
($100)
(
$0
$
$0
0
$0
$0
($300)
Net Cash Flow
ax)
(Pre-Ta
($200)
($100)
(
$1
150
$15 0
$150
$150
$300
C
Cumulative Ca
ash Flow
($200)
($300)
(
($1
150)
$0
0
$150
$300
$600
Net Cash Flow
$300
Total Invesstment
($300)
Simple ROI
R
(Pre-Tax Cassh Flow)
100%
S
Simple Paybacck Years
3
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Building a Bus
siness Case
e for Materiial Handling
g System IInvestmentt
Time
e Horizon Co
onsideration
ns
her importan
nt consideration when de
eveloping a business casse is the tim
me horizon o
of the cash fflow analysiss.
Anoth
Gene
erally, the lon
nger the cash flow horizon
n the higher the
t return. T
This is especia
ally importantt when evaluating materia
al
hand
dling solutionss. Material handling
h
equipment and control systeems have lon
ng useful live
es that contin
nue to enable
e
bene
efits for years after their installation. Th
herefore, the financial evaaluation of the
ese solutions should fairly consider their
usefu
ul life.
n example forr comparison,, the following
g illustrationss depict the saame investme
ent evaluated
d over a 5 yea
ar vs. a 7 year
As an
horizzon. One can clearly see that the net present value (NPV) is sign ificantly highe
er when view
wed over the llonger horizon
n
because positive cash
c
flow continues to accrrue.
mple of 5 vs
s. 7 Year Horrizon:
Exam
C
Cumulative
Discounted Cassh Flow
(5 Ye
ear Horizon)
$600
0
$400
0
$200
0
NP
PV = $141
1
$0
0
0
1
2
3
4
5
($200
0)
($400
0)
Cumula
ative Discounted Cash Flow
(7 Year Horizo
on)
$600
0
$400
0
NPV = $303
$200
0
$0
0
0
1
2
3
4
5
6
7
($200
0)
($400
0)
ough a longerr term horizon
n generally im
mplies a highe
er return, theere are also practical and cconservative cconsiderations
Altho
to ap
pply. From an accounting standpoint, material hand
dling equipmeent is usuallyy depreciated over a 7 yea
ar period, and
d
softw
ware solutionss are usually depreciated
d
over
o
5 years. So, a solid rrule of thumb
b is to align th
he time horizo
on for positive
e
cash flows with th
he time horizo
on over which
h the investme
ent is being d
depreciated.
Use Accountting View off Cash Flow & ROI
4. U
The n
next importan
nt step in the
e process is to
o put the cassh flow analyssis into accou
unting terms sso that the in
nvestment can
n
be evvaluated on an
a after tax ba
asis. To do so
s requires a basic understtanding of the income stattement, the b
balance sheett,
and h
how depreciation impacts both.
The p
premise behin
nd a return on investmentt analysis is to
o determine tthe net incom
me generated by virtue of tthe net capita
al
employed. The following
f
illusstration depicts the relatio
onship betweeen the incom
me statement (costs and rrevenues) and
d
nce sheet (asssets and liabilities) when determining
d
a return on invvestment.
balan
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Page 7
Building a Bus
siness Case
e for Materiial Handling
g System IInvestmentt
Costs & Revenues
Increase
Revenues
Decrease
COGS
Increa
ase
Gross Profit
P
Increase Net
Operating Proffit
Before Taxes
Reduce
S
Selling
Costs
Reduce
Disstribution Costs
Reduce
Income Taxess
Redu
uce
Opera
ating
Expen
nses
In
ncrease
Nett Income
Reduce
Interest Expensse
Increase
e
Return on
n
Investmen
nt
Assets & Liabilities
Reduce
A
Admin.
Costs
D
Depreciation
Reduce
W
Working
Capital
Redu
uce
Net Ca
apital
Reduce
F
Fixed
Assets
Redu
uce
% Cost off Capital
R
Reduce
Capita
al Charges
Deprreciation impa
acts net incom
me because itt is a pre-tax
x expense thaat reduces taxxable income
e. Depreciatio
on impacts the
e
balan
nce sheet by reducing the
e book value of the investtment. Appro
opriately acco
ounting for d
depreciation is vital for the
e
finan
ncial analysis to
t be credible
e. In doing so
o, a point to remember is that deprecia
ation is a non-cash expensse. Therefore
e,
the d
depreciation expense
e
mustt be “added back” to the affter tax valuee in order to d
determine the
e actual after tax cash flow
w.
The ffollowing example illustrate
es how this iss done.
Net Cas
sh Flow (exa
ample)
Revenu
ue
- COGS
- Expensses (excl. depreciation)
Depreciation
ofit Before Tax
xes
Net Pro
- Taxes
Net Pro
ofit After Taxe
es
+ Depreciation (add back)
b
= Net Affter-Tax Cash Flow
$2,040
($1,000)
($470)
($200)
$370
($148)
$222
$200
$422
5. D
Determine Depreciation
D
n Expense
n the importa
ance of deprecciation in dev
veloping a bussiness case fo
or material ha
andling solutio
ons or any ca
apital intensive
e
Given
proje
ect, it is worth
h reviewing a number of acccounting rule
es and guidel ines regardin
ng depreciatio
on.
eral Rules and
d Guidelines when
w
Accountting for Depre
eciation:
Gene
• Capital ex
xpenditures (C
CAPEX) form the
t basis of the assets bei ng depreciate
ed
• Capital ex
xpenditures arre expenditurres creating fu
uture benefitss
buy fixed asssets or improvve the value of an existing
• CAPEX is incurred whe
en a businesss spends mon
ney either to b
g
et with a usefu
ul life that extends beyond
d the taxable year
fixed asse
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Building a Bus
siness Case
e for Materiial Handling
g System IInvestmentt
•
•
•
•
•
•
•
•
•
•
•
•
•
The general rule is tha
at if the prope
erty acquired
d has a usefu l life longer tthan the taxable year, the cost must be
e
d
capitalized
The CAPE
EX costs are th
hen amortized
d or depreciatted over the llife of the assset
For accou
unting purposses, a CAPEX is added to an
a asset acco
ount (e.g. Pro
operty, Plant,, and Equipm
ment), and the
e
asset’s bo
ook value is de
ecreased ann
nually by the amount
a
of acccumulated de
epreciation
For tax pu
urposes, CAP
PEX are costs that cannot be deducted in the year iin which theyy are paid or incurred, and
d
must be capitalized
c
If the exp
pense is one that
t
simply maintains
m
the asset at its ccurrent condittion, the costt must be ded
ducted fully in
n
the year of
o the expense
Tangible operational
o
asssets, except land, are sub
bject to depreeciation becau
use they have
e limited econ
nomic lives
Depreciation begins the
e period when the asset iss placed into sservice for it’ss intended usse
Depreciation is a non-ccash expense that reduces the asset’s b
book value an
nd a companyy’s tax liabilityy
Depreciation for each asset
a
is usually calculated separately an
nd is based on
n four factorss:
– Acquisition cosst
– Esstimated life
– Residual
R
(or sa
alvage) value (book value after
a
being fu
ully depreciate
ed)
– Method
M
of dep
preciation sele
ected
Acquisition cost is all cost
c
incurred to
t acquire, trransport and prepare the a
asset for its in
ntended use, such as sales
tax, comm
missions, transportation, an
nd installation
n
Estimated
d life is the number of years
y
a company expectss the asset to last or th
he amount o
of measurable
e
production
n it expects frrom the assett
Residual value
v
is an esstimate of the
e dollar amount that can b
be recovered ffor the asset at the end off its useful life
e
when it iss disposed off (sold or trad
ded in). This remaining am
mount canno
ot be deprecia
ated for finan
ncial reporting
g
purposes. Acquisition Cost
C
– Residual Value = De
epreciable Ba se
Several po
otential depre
eciation metho
ods may be used
u
(to be fu
urther discusssed)
ermining Acq
quisition Co
ost
Dete
oted, the capital amount to be deprecia
ated is the accquisition costt less the antticipated resid
dual value. T
The acquisition
n
As no
cost is all cost inccurred to acqu
uire, transporrt and preparre the asset ffor its intende
ed use, such as sales tax, commissionss,
nd installation as illustrated
d in the follow
wing example..
transsportation, an
Acquisition Cost (example)
Invoice pricce, gross
Less: 20% discount for payment
Invoice pricce, net
State sales tax @ 5%
Transportattion costs
Installation costs
quisition Cos
st
Total Acq
$
$
$
$
$
$
$
000
150,0
(30,0
000)
120,0
000
6,0
000
4,0
000
10,0
000
140,0
000
Insta
allation costs may include the cost of internal and external reso
ources deployyed. Typicallly, resource costs may be
e
capitalized if thesse resources are
a engaged in the detail design, the developmentt, or the actu
ual installation
n of the asse
et
wherreas resource
e costs are ex
xpensed if the
ey are engag
ged in other aactivities such
h as process design, selecction, training
g,
and o
operations tra
ansition.
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Page 9
Building a Bus
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Deprreciation Me
ethods
There
e are severall methods tha
at may be ussed when calcculating deprrecation. It’ss interesting tto note, however, that the
e
meth
hod required for
f tax reporting is differen
nt than the methods most often used fo
or financial re
eporting.
Financial Reporting Me
ethods
•
Tax R
Reporting Metthods
Generally Accepted
A
Acco
ounting Principles
(GAAP) is th
he standard framework
f
of
guidelines for
f financial re
eporting
GAAP Methods for Depre
eciation
o Straaight Line
o Pro
oductive Output
o Decclining Balancce
o Sum
m of the Yearrs Digits
The deprecciation period is based on itt’s
estimated useful
u
life or units
u
•
•
•
Modified A
Accelerated Co
ost Recovery System
(MACRS) iss the required
d method of
depreciatio
on required byy IRS
Specific typ
pes of assets are assigned
d to Xyear propeerty classes w
with distinct
accelerated
d depreciation
n schedules.
MACRS is rrequired by th
he IRS for taxx
reporting b
but is not alig
gned with GAA
AP for
external fin
nancial reportting.
•
•
epreciation
Straight Line De
ght line depre
eciation is the
e easiest to de
etermine. Th
he following ex
example illustrrates how it iss calculated.
Straig
•
•
Depreciation = (Cost - Salvage
Example:
– Acquisition Cosst
alvage Value
– Sa
– Depreciable
D
Va
alue
– Useful Life
D
Year
– Depreciation/Y
•
The MS Ex
xcel Function is SLN(cost,ssalvage,life), where
w
– Cost is the initial cost of the
e asset.
alvage is the value at the end
e of the de
epreciation (so
ometimes called the residu
ual value of th
he asset).
– Sa
– Liife is the num
mber of period
ds over which
h the asset iss depreciated (sometimes ccalled the use
eful life of the
e
assset).
Yea
ar
value) / Useful liffe
$14
40,000
$20
0,000
$12
20,000
5 Years
Y
$12
20,000/5 = $2
24,000
0
Deprreciation Perce
entage
Deprreciable Base for Calculatio
on
$120,000
0
1
2
3
4
5
20%
20%
20%
20%
20%
$120,000
$120,000
$120,000
$120,000
$120,000
Deprreciation Expe
ense
$
-
$ 24,000
$ 24,000
$ 24,000
$ 24,000
$ 24,000
Cumu
ulative Depreciation
$
-
$ 24,000
$ 48,000
$ 72,000
$ 96,000
$120,000
Begin
nning Book Va
alue
$140,000
0
$140,000
$116,000
$ 92,000
$ 68,000
$ 44,000
Endin
ng Book Value
e
$140,000
0
$116,000
$ 92,000
$ 68,000
$ 44,000
$ 20,000
Acce
elerated Dep
preciation
eciation meth
hods are com
mmonly used because theyy reduce a ccompany’s taxx burden durring the initia
al
Accelerated depre
e straight line
e method. Co
ommon accele
erated deprecciation method
ds include:
yearss following insstallation morre so than the
• Sum of Ye
ears Digits;
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•
•
Declining Balance;
Productive
e Output.
m of Years Diigits Deprec
ciation
Sum
a
de
epreciation method
m
with a decreasing p
percentage off depreciation
n applied each
h
Sum of the Years Digits is an accelerated
year..
•
•
Depreciation = [Useful Life – (Currrent Period– 1)]/SYD * Deepreciable Va
alue, Where S
SYD = Useful Life*[(Usefu
ul
Life+1)/2]]
Example
$14
40,000
– Acquisition Cosst
alvage Value
$20
0,000
– Sa
– Depreciable
D
Va
alue
$12
20,000
– Useful Life
5 Years
Y
– Current Period
3rd
d Year
3+4+5 = 15
SYD = 5*[(5+1)/2] = 15, or 1+2+3
000 = $24,000
0
Depreciation = [5-(3-1)]/15*$120,0
•
The MS Ex
xcel Function is SYD(cost,ssalvage,life,pe
er), where Peer is the perio
od being depre
eciated
Yea
ar
0
Deprreciation Perce
entage
Deprreciable Base for Calculatio
on
$120,000
0
1
2
3
4
5
33%
27%
20%
13%
7%
$120,000
$120,000
$120,000
$120,000
$120,000
Deprreciation Expe
ense
$
-
$ 40,000
$ 32,000
$ 24,000
$ 16,000
$ 8,000
Cumu
ulative Depreciation
$
-
$ 40,000
$ 72,000
$ 96,000
$112,000
$120,000
Begin
nning Book Va
alue
$140,000
0
$140,000
$100,000
$ 68,000
$ 44,000
$ 28,000
Endin
ng Book Value
e
$140,000
0
$100,000
$ 68,000
$ 44,000
$ 28,000
$ 20,000
D
Ba
alance
Deprreciation – Declining
ble declining balance
b
is a common
c
meth
hod of accele
erated deprec iation, where
e the straight line percenta
age is doubled
d
Doub
and a
applied to the
e remaining book value of the asset.
•
•
Depreciation =(1/Life*2)*Book Valu
ue,
ook Value = Acquisition
A
Cost – Accumula
ated Depreciaation
Where Bo
Example:
– Acquisition Cosst $140,000 (e
equals initial book value)
alvage Value $20,000
– Sa
– Useful Life
5 Years
– Current Period 3rd Year
Depreciation
Depreciation
Depreciation
Depreciation
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Factor
1st Year
2nd Year
3rd Year
=
=
=
=
(1/5*2) = 40%
40% * $140,000 = $5
56,000
40% * ($
$140,000 - $5
56,000) = $33
3,600
40% * ($
$140,000 - $8
89,600) = $20
0,160
Page 11
Building a Bus
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•
•
•
The switch to the straight-line meth
hod is necessa
ary in the yeaar that the sttraight-line me
ethod, using the remaining
g
ble balance, yiields a higherr depreciation expense tha n the double--declining me
ethod.
depreciab
The MS Ex
xcel “VDB” fu
unction will co
orrectly calcula
ate the depreeciation for ea
ach year
VDB(cost,,salvage,life,sstart_period,end_period,facctor,no_switcch), where:
– Sttart_period iss the starting period for wh
hich you wantt to calculate the depreciattion.
– End_period is the
t ending pe
eriod for whicch you want to
he depreciatio
on.
o calculate th
actor is the rate
r
at which the balance declines. If ffactor is omittted, it is assu
umed to be 2 (the double
e– Fa
de
eclining balan
nce method).
– No_switch is a logical value
e specifying whether
w
to sw
witch to straig
ght-line depre
eciation when
n depreciation
n
n the declinin
ng balance calculation.
c
Iff no_switch is FALSE or o
omitted, Exce
el switches to
o
iss greater than
sttraight-line de
epreciation wh
hen depreciattion is greate r than the de
eclining balancce calculation
n.
Year
0
1
2
3
4
5
40%
40%
40%
34%
0%
Deprreciable Base for Calculatio
on $140,000
$140,000
$ 84,000
$ 50,400
$ 30,240
$ 20,000
Deprreciation Expe
ense
$
-
$ 56,000
$ 33,600
$ 20,160
$ 10,240
$
Cumu
ulative Depreciation
$
-
$ 56,000
$ 89,600
$109,760
$120,000
$
$120,000
Deprreciation Perce
entage
-
Begin
nning Book Va
alue
$140,000
$140,000
$ 84,000
$ 50,400
$ 30,240
$ 20,000
Endin
ng Book Value
e
$140,000
$ 84,000
$ 50,400
$ 30,240
$ 20,000
$ 20,000
ations of declining balance may be used
d. The followiing is an exam
mple of 150%
% Declining Ba
alance Deprecciation.
Varia
•
•
VDB(cost,,salvage,life,sstart_period,end_period,1.5
5,False),
Example:
$14
40,000 (equals initial bookk value)
– Acquisition Cosst
alvage Value
$20
0,000
– Sa
– Useful Life
5 Years
Y
Year
0
1
2
3
4
5
30%
30%
30%
30%
41%
Deprreciable Base for Calculatio
on $140,000
$140,000
$ 98,000
$ 68,600
$ 48,020
$ 33,614
Deprreciation Expe
ense
$
-
$ 42,000
$ 29,400
$ 20,580
$ 14,406
$ 13,614
Cumu
ulative Depreciation
$
-
$ 42,000
$ 71,400
$ 91,980
$106,386
$
$120,000
Deprreciation Perce
entage
Begin
nning Book Va
alue
$140,000
$140,000
$ 98,000
$ 68,600
$ 48,020
$ 33,614
Endin
ng Book Value
e
$140,000
$ 98,000
$ 68,600
$ 48,020
$ 33,614
$ 20,000
P
Output
O
Deprreciation – Productive
uctive outputt is a method
d of deprecia
ation where the useful lifee of the asse
et is based on
n the expecte
ed number of
o
Produ
lifetim
me units to be
e produced, hours
h
to be co
onsumed, etcc.
•
•
Depreciation = (Cost - Salvage
Example:
– Acquisition Cosst
alvage Value
– Sa
– Depreciable
D
Va
alue
– Liifetime Units
– Depreciable
D
$//Unit
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value) * (Actual Units
U
Produceed/Lifetime Un
nits Expected)
$14
40,000
$20
0,000
$12
20,000
100
0,000
$1..20
Page 12
Building a Bus
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e for Materiial Handling
g System IInvestmentt
Ye
ear
Prod
ductive Outpu
ut
Dep
preciation Percentage
Dep
preciable Base
e for Calculatiion
Dep
preciation Exp
pense
Cum
mulative Deprreciation
Beg
ginning Book Value
V
End
ding Book Valu
ue
0
1
2
3
4
5
$120,00
00
$
$
$140,00
00
$140,00
00
15,000
0
15%
$120,00
00
$ 18,000
0
$ 18,000
0
$140,00
00
$122,00
00
25,000
25%
$120,000
0
$ 30,000
0
$ 48,000
0
$122,000
0
$ 92,000
0
25,000
25%
$120,000
$ 30,000
$ 78,000
$ 92,000
$ 62,000
20,000
20%
$120,000
$ 24,000
$102,000
$ 62,000
$ 38,000
15,000
15%
$120,000
$ 18,000
$120,000
$ 38,000
$ 20,000
M
Deprreciation – MACRS
overy System
m (MACRS) is a depreciatio
on method req
quired by the
e IRS for asse
ets placed into
o
Modified Acceleratted Cost Reco
6. Because th
he depreciatio
on expense ca
alculated by M
MACRS may vvary significan
ntly from othe
er depreciation
n
servicce after 1986
meth
hods used for financial reporting purposses, most org
ganizations on
nly use the MACRS for tax reporting. H
Here is a basic
overvview of the MACRS
M
depreciation method
d.
•
•
•
•
Assets are
e grouped into
o property cla
asses
The depre
eciation is pre
edetermined by
b a MACRS table
t
for each
h property classs
– Nonresidential real property
y (real estate
e) is deprecia ted over a usseful life of 3
39 years using
g straight line
e
epreciation
de
– Other
O
asset cla
asses utilize accelerated
a
de
epreciation methods
– The residual va
alue of the assset is ignored
d
The two most
m
common
n asset classes other than real estate arre the five-yea
ar and the se
even-year asset classes.
– The five-year asset
a
class inccludes information systemss, computers,, and vehicless
– The seven-yea
ar class includes most mach
hinery and eq
quipment
All fixed assets
a
are assumed to be put
p in and tak
ken out of serrvice in the m
middle of the yyear. Thereforre:
– Fo
or the five-ye
ear class assetts, depreciatio
on is spread o
over six yearss.
– Fo
or seven-yearr class assets,, depreciation
n is spread ovver eight yearrs.
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Building a Bus
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The ttable below represents
r
the depreciatio
on percentage
es applied forr taxes purpo
oses based on asset prope
erty class and
d
assum
ming a mid-y
year conventio
on. The high
hlighted cells are the yearrs in which d
depreciation iss converted tto the straigh
ht
line m
method.
R
Recovery
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3-Year
33.33%
44.45%
14.81%
7.41%
5-Year
20.00%
2
32.00%
3
19.20%
1
11.52%
1
11.52%
1
5.76%
7-Year
14
4.29%
24
4.49%
17
7.49%
12
2.49%
8.93%
8.92%
8.93%
4.46%
10-Y
Year
10.0
00%
18.0
00%
14.4
40%
11.5
52%
9.2
22%
7.3
37%
6.5
55%
6.5
55%
6.5
56%
6.5
55%
3.2
28%
15-Yeear
5.00
0%
9.50
0%
8.55
5%
7.70
0%
6.93
3%
6.23
3%
5.90
0%
5.90
0%
5.91
1%
5.90
0%
5.91
1%
5.90
0%
5.91
1%
5.90
0%
5.91
1%
2.95
5%
100.00%
100.00%
100.00%
100..00%
100.0
00%
20-Yea
ar
3.75%
%
7.22%
%
6.68%
%
6.18%
%
5.71%
%
5.29%
%
4.89%
%
4.52%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
4.46%
%
2.23%
%
100.00
0%
The ffollowing is an
n example of how the MAC
CRS deprecation method m
may be applie
ed.
• Example:
equals initial book value)
– Acquisition Cosst $140,000 (e
alvage Value $20,000 (no
ot used in MA
ACRS calculattion)
– Sa
– Prroperty Class 5 Years
Year
1
2
3
4
5
6
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%
Deprreciable Base for Calculatio
on $140,000
$140,000
$140,000
$140,000
$140,000
$
$140,000
Deprreciation Expe
ense
$ 28,000
$ 44,800
$ 26,880
$ 16,128
$ 16,128
$ 8,064
Cumu
ulative Depreciation
$ 28,000
$ 72,800
$ 99,680
$115,808
$131,936
$
$140,000
Begin
nning Book Va
alue
$140,000
$112,000
$ 67,200
$ 40,320
$ 24,192
$ 8,064
Endin
ng Book Value
e
$112,000
$ 67,200
$ 40,320
$ 24,192
$ 8,064
$
Deprreciation Perce
entage
-
M
Comparison
Deprreciation – Methods
The sstraight line method
m
is the
e easiest to co
ompute wherreas acceleratted methods accelerate th
he tax benefit by expensing
g
depre
eciation earlie
er over an asset’s
a
useful life. The fo
ollowing charrt illustrates tthe comparisson of annua
al depreciation
n
expense for each of the previou
us examples of
o depreciatio
on methods.
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Page 14
Building a Bus
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Depreciattion Expensse Comparisson
$6
60,000
$5
50,000
Straig
ght Line
Sum of the Yearss Digits
150%
% Declining Balance
B
Doub
ble Declining Balance
Produ
uctive Outpu
ut
MACR
RS
$4
40,000
$3
30,000
$2
20,000
$1
10,000
$1
2
3
4
5
6
ars
Yea
6. C
Calculate Aft
fter Tax Cash
h Flow
e a well grounded understtanding of de
epreciation is established, it is now posssible to begin calculating
g the after tax
x
Once
cash flow. The ba
asic steps to determine
d
aftter tax cash flow are as fol lows:
•
•
•
•
•
First, estim
mate pre-tax cash flows fo
or each year of
o the investm
ment life span
n
– Outflows
O
(e.g. one time cap
pital and expe
enses)
– In
nflow (e.g. ne
et annual savings)
Determine
e the annual depreciation
d
on
o the capital investment
Subtract the
t annual de
epreciation fro
om the pre-ta
ax cash flow to determine the taxable net income (Net Operating
g
Profit befo
ore Taxes)
Calculate the tax expen
nse (for non-ccapital spending). The ressult is the Nett Operating P
Profit after Taxxes (NOPAT)
Subtract the
t tax expen
nse from the pre-tax
p
cash flows
f
to arrivee at the after tax cash flow
w.
The ffollowing example illustrate
es the calcula
ation of after tax cash flow
w.
• Example:
$20
00K (deprecia
able)
– Acquisition Cosst
$10
00K (not deprreciable)
– Prroject Expensse
– Sa
alvage Value
$0
– Useful Life
Y
5 Years
D
Method
M
Stra
aight Line
– Depreciation
– In
ncome Tax Ra
ate
40%
%
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Page 15
Building a Bus
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Finan
ncial Analysis
Investmen
nt Life Span
(Ye
ears)
0
1
2
3
4
5
Total
Cash Inflow
$0
$0
$150
$150
$150
$15
50
$600
Cash Outflows
O
($200
0)
($100)
$0
$0
$0
$0
0
($300)
Net Cash Flow
(Pre--Tax)
($200
0)
($100)
$150
$150
$150
$15
50
$300
Depre
eciation
(5 Ye
ears)
$0
($40)
($40)
($40)
($
$40)
($40
0)
($200)
Net Opera
ating Profit
(Beforre Tax)
$0
($140)
$110
$110
$110
$110
$100
Tax
xes
(40
0%)
$0
$56
($44)
($44)
($
$44)
($44
4)
($120)
Net Cash Flow
(Afterr Tax)
($200
0)
($44)
$106
$106
$106
$10
06
$180
Net Cash Flow
$180
0
Total Inv
vestment
($300
0)
Simplle ROI
(After-Tax Cash Flow)
60%
%
(A
Assumes Capital in Y0; Expense Y1)
Y
Calculate Dis
scounted Ca
ash Flow
7. C
The n
next step in the
t process iss to determine
e the discoun
nted cash flow
w. A discountt rate must b
be applied to cash flow due
e
to th
he time value of money which assumess that a dolla
ar in hand tod
day is worth more than d
dollar to be re
eceived in the
e
he investmen
futurre. The sum of
o the discoun
nted cash flow
w is the prese
ent value of th
nt.
Preset Value
V
of an
a
Inve
estment
Futu
ure Cash F
Flows
(Factored
d by Disco
ount Rate))
=
+
+
+
Discou
unted Cash Flow
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Page 16
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Building a Bus
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P
Present Value
e simply disco
ounts future cash
c
flow base
ed upon an aassumed rate (i.e. discountt rate, interesst rate, hurdle
e
rrate, or opporrtunity cost off capital).
•
•
Net Present Value =
C … CN
C0 + C1 + C2 + C3
1+r1 1+r2 1+
+r3 … 1+rN
The highe
er the discou
unt rate the lower the prresent value of future ca
ash flow as iillustrated in the following
g
example.
10% Discoun
nt Rate
Financial A
Analysis
Time Period (Years)
0
1
2
3
4
5
Total
Future Cash
h Flow
$100
$100
$1
100
$10 0
$100
$100
$600
Present Value
V
((@10% discou
unt rate)
$100
$91
$83
$
$75
5
$68
$62
$479
Net Presentt Value
$479
20% Discoun
nt Rate
Financial A
Analysis
Time Period (Years)
0
1
2
3
4
5
Total
Future Cash
h Flow
$100
$100
$1
100
$10 0
$100
$100
$600
Present Value
V
((@20% discou
unt rate)
$100
$83
$69
$
$58
8
$48
$40
$399
Net Presentt Value
$399
Assess Alterrnatives Bas
sed on Finan
ncial Metrics
s
8. A
The n
next step is to
t calculate, assess,
a
and compare the financial
f
resullts of each fe
easible alterna
ative. The ba
asic process is
as fo
ollows:
• Confirm cash flow assu
umptions
• Confirm correctness off worksheet ca
alculations
• Conduct sensitivity
s
ana
alysis on key parameters.
p
Examples:
– Discount
D
rate
– Time horizon
– Magnitude
M
of investment
– Prrobabilities off annual savin
ngs realized
– Prrobabilities off operating co
osts required
ernal Rate off Return
Net Present Value and Inte
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Building a Bus
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As re
eferenced earrlier, the Nett Present Valu
ue (NPV) is determined
d
b
by simply disccounting ann
nual net cash
h flows by the
e
assum
med discountt rate. The hiigher the net present value
e the more faavorable the in
nvestment.
R
(IRR) is often used in conjunctio
on with or in lieu of an NP
PV analysis because it is n
not dependen
nt
Interrnal Rate of Return
on an assumed discount rate. IRR is the rate at which
h the investm
ment has a Ne
et Present Va
alue of $0. T
The lower the
e
nal rate of re
eturn the lesss favorable th
he investmentt. IRR is ofteen compared against a co
ompany’s thre
eshold “hurdle
e
intern
rate”” to determine
e whether the
e investment is worth pursuing.
•
Example:
– Acquisition Cosst
– Prroject Expensse
– Sa
alvage Value
– Useful Life
D
Method
M
– Depreciation
– In
ncome Tax Ra
ate
– Discount
D
Rate
– Reinvestment
R
Rate
$20
00K (deprecia
able)
$10
00K (not deprreciable)
$0
Y
5 Years
Stra
aight Line
40%
%
10%
%
10%
%
Finan
ncial Analysiss
Investmen
nt Life Span
(Years)
0
1
2
3
4
5
Totall
Cash Inflow
$0
$0
$150
$150
$
$150
$150
$600
0
Cash Outflows
O
(Asssumes Capita
al in Y0; Expe
ense
Y1)
($200
0)
($100)
$0
$0
$0
$0
($300
0)
Net Cassh Flow
(Pre--Tax)
($200
0)
($100)
$150
$150
$
$150
$150
$300
0
Depreciation
(5 Ye
ears)
$0
($40)
($40)
($40)
(($40)
($4
40)
($200
0)
Net Opera
ating Profit
(Beforre Tax)
$0
($140)
$110
$110
$
$110
$110
$100
0
Tax
xes
(40
0%)
$0
$56
($44)
($44)
(($44)
($4
44)
($120
0)
Net Cassh Flow
(Afterr Tax)
($200
0)
($44)
$106
$106
$
$106
$106
$180
0
Discounted
d Cash Flow
(using
g 10%)
($200
0)
($40)
$88
$80
$72
$6
66
$65
Net Prese
ent Value
$65
Internal Ratte of Return
(IR
RR)
18.7%
%
Modifie
ed IRR
((w/10% reinv
vestment rate
e)
15.1%
%
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Building a Bus
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The M
Modified Inte
ernal Rate of Return (MIRR
R) is often ussed rather thaan the IRR du
ue to the con
nceptual inacccuracies in the
e
IRR calculation. IRR assumess all positive cash flows can
c
be reinveested at the IRR rate, w
which generallly is a flawed
d
mption. Insttead, a more
e appropriate approach is to assume p
positive cash flows can b
be reinvested at either the
e
assum
avera
age rate of re
eturn of all company
c
inve
estments or th
he company cost of capita
al rate. The MIRR allowss the use of a
more
e conservative
e reinvestmen
nt rate in the calculation and therefore results in a m
more conserva
ative and realistic expected
d
rate o
of return.
Complete Qu
uantitative and
a
Qualitattive Analysis
9. C
oted earlier, a business ca
ase is more than
t
presenting a return o
on investmen
nt (ROI) analyysis. It mustt also address
As no
otherr factors thatt executive decision
d
make
ers will weig
gh in the finaal decision. Generally, decision making requires a
connection between the left brrain (logical siide) and the right brain (in
ntuitive, creattive, and holisstic side). Th
herefore, for a
ness case to be
b persuasive
e to decision makers,
m
it must encompasss both quantittative and qu
ualitative crite
eria.
busin
The ROI analysis is an obvious quantitativ
ve criterion. If the ROI analysis doe
esn’t identify positive cash
h flow with a
sufficcient rate of return
r
to the business, the
en there is little need to ad
ddress other d
decision criterria unless the investment is
an im
mperative to sustaining
s
the
e business.
i
But, even iff the ROI anaalysis revealss a very high rate of potential return, it
doesn’t necessarily
y mean the in
nvestment is the correct one
o to make. Large organizations almo
ost always havve a basket of
o
native investm
ments they ca
an make, but they are limitted by a finitee set of fundss in which to invest. So, th
he decision on
n
altern
wherre to invest is often determ
mined by the more
m
persona
al, motivationaal criteria of tthe decision m
maker.
ply chain execcutives are often
o
evaluate
ed by perform
mance againsst of numberr of key perfo
ormance indicators (KPIs)).
Supp
Oppo
ortunities to improve KPI performance
e can be a highly
h
motivaating decision
n factor. Com
mmon KPIs in distribution
n
includ
de:
• Distributio
on Costs as a % of Sales
• Distributio
on Cost per Unit
• Units per Total Labor Hours
H
• % Fill Ratte
• Inventory
y Turn Rate
• Order Fulffillment Lead Time
erial handling equipment and
a control sy
ystem solutions can have a dramatic, p
positive impa
act on many o
of these KPIss.
Mate
There
efore, the bu
usiness case presentation should speccifically ident ify how the distribution K
KPIs tracked by executive
e
decission makers will
w be impacte
ed by the inve
estment.
ddition to qua
antitative crite
eria, a numbe
er of qualitatiive considera tions should be addressed
d within the b
business case
e.
In ad
As a rule of thum
mb, the busin
ness case sho
ould answer the
t
questionss we would a
ask ourselvess if we had to
o put on own
n
ey on the line
e. Below is a listing of a fe
ew of the morre prevalent q
questions to a
address:
mone
• What is th
he priority of investment?
– Within
W
the disttribution organization
– Across the exe
ecutive team
• What are the risks and how will they
y be mitigated?
• What are the critical su
uccess factorss?
• Are the asssumptions fe
easible?
• Do we hav
ve the resourrces to successsfully implem
ment?
• What are the intangible
e benefits?
Package and
d Present th
he Business Case
C
10. P
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Building a Bus
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e for Materiial Handling
g System IInvestmentt
The ffinal step in the
t process iss to package and
a present the
t Business C
Case for execcutive decisio
on makers in a manner tha
at
will a
allow them to quickly understand the
e scope of th
he recommen
nd investment and the im
mpact on rele
evant decision
n
criterria.
gested components of an executive
e
busiiness case incclude:
Sugg
• Statementt defining purrpose of meetting… convey
y your expecteed outcomes from the mee
eting
• Overview of project sco
ope and objecctives…put th
he discussion in context
• Key business assumptions…summarrize major asssumptions thaat lead to you
ur recommend
dation
• Alternatives considered
d…summarize
e the primary alternatives eevaluated
• Overview of project an
nalysis & resullts…briefly de
escribe how yo
ou got to thiss point
• Recomme
endation…clea
arly state wha
at you recomm
mend and wh
hy
• Anticipate
ed benefits…p
put in terms im
mportant to th
he audience
– Fiinancial return
n
– Ke
ey performan
nce indicators (KPIs)
– Qualitative
Q
facttors
• Required investment…d
define how much,
m
when, and
a who
– Fiinancial comm
mitment necesssary
– Organizational
O
resources required
– Timing of invesstment
• Critical success factors…address risk
ks and mitigating actions tthat will be ta
aken
• Project ro
oadmap…create a summary
y gantt chart of major worrk streams
• Supporting analysis and assumption
ns (appendice
es)…organize in a separate
e file or docum
ment for easyy access.
ourse, the bu
usiness case documentatio
on itself will rarely sell th
he recommendation. Instead, the doccumentation is
Of co
simply the ammunition needed
d during the presentation.. Selling thee recommenda
quire a lead p
presenter fully
y
ation will req
wledgeable an
nd rehearsed in describing the recomme
ended solutio
on and the bu
usiness case ssupporting th
he investmentt.
know
Ideallly, utilizing th
he terms and methods pre
escribed within
n this documeent will adequ
uately arm th
he presenter tto successfully
y
gain approval and
d eventually re
eap the botto
om line benefits enabled byy the material handling sysstem investment.
Sum
mmary
n leader, yourr responsibility
y is to continually seek to maximize the
e long term p
profitability off the businesss.
As a Supply Chain
n, this is posssible through a rational investment in a new or updated maaterial handlin
ng system so
olution. Such
h
Often
invesstments offer great opporrtunity to reduce costs, in
ncrease capaccity, improve service, and
d positively im
mpact the key
y
perfo
ormance indiccators (KPIs) by which Sup
pply Chain exe
ecutives are eevaluated. W
When confrontted with an o
opportunity fo
or
such an investment, it is imperative to put together a business case that fairly an
nd conservativvely evaluates the value of
o
This paper ha
as provided a
the investment and its potenttial bottom-line contribution to the prrofitability of business. T
mental financcial terms and
d methods to use when con
nducting this evaluation.
detaiiled overview of the fundam
This paper has alsso described other decisio
on impacting factors
f
that m
must be considered when developing a
and presenting
g
usiness case must be log
gical, crediblee, and presented in term
ms that are important and
d
your business case. Your bu
ealing to executive stakeho
olders. Decisiion makers arre motivated to contribute
e to bottom lin
ne performan
nce. But, they
y
appe
are a
also motivated
d by more pe
ersonal criteria
a. Understan
nding and add
dressing the p
personal decission criteria o
of the decision
n
make
er will be as much
m
or more
e important as
a the return on investmen
nt analysis in building a pe
ersuasive bussiness case fo
or
your material hand
dling system investment.
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About Fortna
na helps com
mpanies with
h complex diistribution operations m eet custome
er promises and competitive
Fortn
challlenges profittably. We’re a profession
nal services firm built on
n a singular promise – w
we develop a solid
busin
ness case fo
or change an
nd hold ourse
elves accoun
ntable to tho
ose results. Our experttise spans su
upply chain
strattegy, distribu
ution center operations, material handling, supp
ply chain sysstems and orrganizational excellence.
For o
over 60 yearrs, we’ve parrtnered with
h the world’ss top brands – companie
es like ASICS
S, O’Reilly Au
uto Parts
and MSC – helping them imp
prove their distribution
d
operations
o
aand transform
m their busin
nesses.
How
w Can We Help?
H
Fortn
na helps com
mpanies dev
velop businesss cases for supply chain
n investment, including Material Han
ndling
syste
ems. To learn more, ask to speak with
w one of our
o consultan
nts.
C
Call:
800-367-8621
1
E
Email:
in
nfo@fortna.ccom
W
Web:
www.fortna.c
w
com
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