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SAP SCM Extended Warehouse Management: Building a Business Case

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SAP SCM Extended Warehouse Management: Building a Business Case

SAP SCM Extended Warehouse Management: Building a Business Case

Executive Summary ................................................................................................. 1 Terminology .............................................................................................................. 2 Industry Trends and Demands ................................................................................ 2 Building Your Business Case .................................................................................. 3 Calculating the Savings .......................................................................................... 8 Using Labor Management to Help Build Your Business Case ........................... 12
SAP SCM Extended Warehouse Management: Building a Business Case

Migrating from ERP WM to SCM EWM ................................................................. 12 Developing Realizable Savings ............................................................................ 14 Conclusion ............................................................................................................. 15

Executive Summary
Second to transportation, labor is the largest cost in a supply chain. A well-designed Warehouse Management System (WMS) gives you the tools you need to improve your productivity, increase throughput, and improve overall customer service. Depending on your industry and business environment, there are different key drivers for implementing a WMS. Some companies may need a WMS to help them improve warehouse space utilization. Others may need it to improve inventory and shipping accuracy; improve order, inventory visibility, and customer compliance; or to help manage ever-growing labor costs. It is important to be able to identify and quantify the benefits that are most important to your organization. For a company that runs an SAP ERP solution, justifying an SAP WMS can be an easier task with the improved enterprise visibility that is enabled with the integrated solution. In addition, there are many benefits when a company leverages an existing SAP support organization and internal resources. This document provides you with the baseline and best practices for justifying a new WMS solution. It also provides you with the core strategy for justifying an SAP SCM EWM solution.

SAP SCM Extended Warehouse Management: Building a Business Case

Terminology
ERP WM What is currently referred to as traditional SAP Warehouse Management, ERP WM is a product that has been available since the SAP R2. The product has been widely adopted, with more than 7,000 customers worldwide. It is a scalable solution that has been deployed in various business environments and industries from simple raw materials warehouses to complex, high-volume, and automated distribution facilities. The application can be deployed as a centralized or decentralized solution. ERP EWM With the release of SAP 4.7, SAP introduced advanced functionality to accommodate cross docking, yard management, dynamic cycle counting and value added services. Within what was called an Extension Set, later to be renamed ERP EWM. This functionality resides within the ERP WM framework. SCM EWM In 2005, SAP released a new Warehouse Management solution called SCM EWM. This redesigned solution accommodates the core functionality of ERP WM with additional capabilities that match those available from third-party, state-of-the-art solutions. The most significant functionality advancements include labor management, slotting and a solution called Material Flow Systems, which is designed to allow the WMS to directly control automation without the use of what is commonly known as a Warehouse Control System or WCS.

Industry Trends and Demands


Over the past ten years, the WMS market has matured greatly. Most major WMS vendors now offer a full suite of functionality to accommodate a rather complex and diverse group of industry and business processes. Because of this, the key focus for research and development has been around architecture and technology modernization. Improved visibility and event management have been hot topics in the supply chain industry, where world-class organizations are looking for improved information flow within the organization as well as to their customers and business partners. A fully integrated WMS solution is a logical way to extend visibility past the four walls of the warehouse and to provide end-to-end visibility to optimize other functions such as purchasing and production. Helping to achieve better customer service, and reduction of overall cost of goods sold. According to Aberdeen, Functional silos continue to be the largest barrier to extended warehouse management performance. Companies still do not have the tight integration they need between their manufacturing, warehousing and transportation operations. To break down these silos, Best in Class companies are adept at making use of seven enabling technologies as part of their comprehensive extended warehouse management program: Dock Management, Yard Management, In-Transit Visibility, Multi-Warehouse Visibility, Distributed Order Management, Returns Management and Logistics Asset Tracking. Current economic conditions and the mature sophistication of many companies supply chains and systems has led the market to establish a strong and realizable business case for implementation of a new WMS solution, or for any software solution. This means that the business case process is even more important. Gartner Inc., a leading industry research group, comments, Cost containment is a dominant objective for supply chain organizations, and the need to lower costs will force buyers to scrutinize the business cases for all new supply chain management (SCM) application investments (especially WMS that are normally
SAP SCM Extended Warehouse Management: Building a Business Case

replacements of legacy systems) more thoroughly in 2009. This strong inclination of users to focus on minimizing SCM investment costs will make total cost of ownership a more important consideration in new WMS purchases.1

Building Your Business Case


It is difficult to generalize the return on investment (ROI) that any one company can realize through the implementation of SAP SCM EWM due to the various starting points or baselines. However, there are four key categories that encompass the majority of scenarios for determining the business case, including: Currently running SAP IM to SAP SCM EWM Currently running SAP ERP WM to SAP SCM EWM Currently running a third-party WMS to SAP SCM EWM Currently running a homegrown, or legacy, WMS to SAP SCM EWM

Benefits of Implementing a New WMS or Converting from SAP IM to SAP SCM EWM
SAP SCM Extended Warehouse Management: Building a Business Case

The transition from a stock management to a full warehouse management solution typically drives a significant ROI based on operational improvements. InfoLogix is often asked to assist in the determination of whether or not to migrate from SAP IM to SAP WM. While your operation may be performing satisfactorily, there may be productivity improvements, space utilization improvements, and cycle time and throughput improvements that can be achieved through a WMS. While your operation seems efficient and is accurate, can the same volume be done with less effort? Is your accuracy tedious because of double- and triple-checking, and can the same or better accuracy be achieved through a better process and less effort? The benefits of implementing a new WMS or converting from SAP IM to SAP SCM EWM include:  System-guided strategies to optimize routing in areas such as putaway and pick paths. Resource and manpower management. Multiple bin support to optimize warehouse space and productivity. Better controls to reduce the possibility of lost product and write-offs. RF-directed work allows for real-time transactions to match the physical process and the system. RF direction provides timely visibility to inventory status/quantity for allocation, purchasing and customer service.

Benefits of Converting from SAP ERP WM to SAP SCM EWM


Just to establish the facts: SAP ERP WM is not going to be decommissioned. SAP has several thousand customers using this product and there is no set date for the product to retire. Based on standard SAP timelines, the product will be supported for the next ten years at a minimum. The benefits of converting from SAP ERP WM to SCM EWM are highly dependent on the additional functionality that the solution offers. As your business requirements change and your volume grows, a more robust WMS can offer you many opportunities to achieve process improvements. The benefits of conversing to SAP SCM EWM include: Advanced functionality providing for more efficient warehouse processes. Warehouse slotting to reduce travel time and material handling time. Labor management to improve the management of work and improve overall productivity.

Benefits of Converting from a Third-Party WMS to SAP SCM EWM


In most cases, a company running a third-party WMS solution has, at most, the functionality to support the business requirements, assuming they are running a current release of the product. In this specific scenario, the business justification comes from: Advanced/new functionality providing more efficient warehouse processes. Reduction of IT costs. Reduction of license. Reduction in maintenance. Reduction in interface support. Reduction in costs for enhancements and upgrades elimination of reliance on third parties/less painful upgrades. Internal system support. Long-term vendor viability, as you have seen with scenarios of the acquisition of SSA by Infor, which acquired EXE and Provia (no longer offered), and Red Prairie, which acquired LIS Dispatcher, McHugh and Marc (no longer offered). Enterprise visibility of inventory, activities and metrics.
SAP SCM Extended Warehouse Management: Building a Business Case

Benefits of Converting from a Homegrown WMS to SAP SCM EWM


Sometimes a companys homegrown solution has built into its system the majority of the functionality to support the processes. In this case, the majority of the business case is derived from risk avoidance and the benefits of a common platform and support group. Other times, the homegrown WMS has reached its breaking point for adding more functionality without a major rewrite. This, along with other factors such as platform obsolesce, will drive the need for a new solution. The benefits of converting from a homegrown solution include:

Advanced/new functionality that provides more efficient warehouse processes. Potential reduction in IT costs. System sustainability. Reduction in interface support. Enterprise visibility of inventory, activities, and metrics.

Calculating the Savings


The basic steps for developing the ROI are: 1.  Education Review your potential system capabilities along with current and future operational objectives. 2. Establish the Baseline Review the current system capabilities and processes. 3. Data Collect current metrics and data to support the subsequent calculations. 4.  Assess the Opportunity Further review the process to determine the potential opportunities that a new system can facilitate.
SAP SCM Extended Warehouse Management: Building a Business Case

5.  Estimate Savings Calculate the hard and soft savings that can be obtained with the improvements enabled by the system. 6.  Estimate Costs Calculate the full costs for the implementation and system deployment. 7.  Calculate ROI Calculate the return on investment or payback based on your companys standard business case template. 8.  Conduct Post Implementation Audit While this is not always a required exercise, this will provide you with an understanding of the accuracy of the ROI analysis and better prepare your team for future projects. For the purposes of this document, we will focus on how to determine the benefits and savings, which are typically broken out to hard (tangible) and soft (non-tangible) savings. In addition to these savings, major factors in todays environment are customer and regulatory mandates. Common examples of this include Walmart RFID compliance and the Pharmaceutical ePedigree mandate.

Major categories where savings can be quantified: L abor Savings Labor savings can be achieved not only through headcount reduction, but also through the reduction of overtime and the better utilization and proper management of temporary staff.

T raining Consider training when doing your calculations. The use of RF and an easy-to-use system in general can greatly reduce ramp-up time for new employees and facilitate cross training to better balance the workload.

MaterialHandling Equipment Savings As the requirement for workers in a specific area such as putaway is reduced, the total equipment required to support the operation is also reduced. Cost per rolling stock unit as well as maintenance costs can be calculated to determine the total savings for equipment. Inventory Savings Better shipping and inventory accuracy through process improvements and scanning can reduce the total amount of inventory required in each facility. This is typically a difficult benefit to realize because the benefit has to be agreed upon and realized through purchasing. Because of this, many times it is only noted as soft savings in a business case. Better Inventory Visibility Accurate and real time visibility can also enable an overall reduction in inventory levels within the supply chain. Inventory Loss Savings R eduction in write-offs due to better inventory control (date code, lot control, etc.) management.  Warehouse Space Savings Customer Chargeback Savings Regulatory Non-Compliance Avoidance Transportation Savings IT Cost Savings C  ompetitive Advantage Many times having leading edge systems can set you apart from your competition. At the simplest level, being able to cost effectively provide product in broken case as well as full pallets to feed multiple types of distribution channels gives you an advantage. Also, take, for example, the opportunity to cost effectively and efficiently provide customized product for your customers. Having a system that allows your company to provide value-added services and maintain or improve customer service levels is a benefit.
SAP SCM Extended Warehouse Management: Building a Business Case

In addition, the following categories typically add significant value to your organization; however, they are more difficult to quantify: Employee Benefits Customer Service Cycle Time Improvements Throughput Improvements Management Visibility The following section provides examples of how improvements in a specific functional area can deliver savings in one or more of these categories and provide sample calculations to determine the savings.

System Guided Putaway


A WMS offers many strategies for putaway and placement of product in order to minimize travel time. When calculating the functional benefits, first identify all of the improvements by functional area so that aggregate savings can be calculated. With proper strategies, the travel time can be reduced for putaway, replenishment and picking. Warehouse Slotting will also have a large impact on replenishment and picking times, with some improvement in putaway; however, this may not impact receiving or loading functions. Current Cycle Time per Task (Min) 1.20 5.00 0.30 6.50 Number of Tasks per Year 1,000 900 30,000 31,900 Annual Cost $104,000 $390,000 $780,000 $1,274,000 Expected Savings 5% 15% 30% 23% Annual Savings $5,200 $58,500 $234,000 $297,700

SAP SCM Extended Warehouse Management: Building a Business Case

Function Putaway Replenishment Picking Total

Space Utilization
A WMS improves space utilization by driving denser storage. This may be done by combining multiple bins of the same material or by selecting the right-sized bin based on the quantity in storage. In order to calculate the savings, you must calculate the overall square footage required per location, including the proper allocation of aisle space. If you are currently using an overflow or off-site facility, then the cost of that facility, as well as the transportation costs, should be calculated. Dont forget the increased cost for mezzanine space. As noted in the following section, companies typically develop the business case to account for a five-year growth horizon. While you may not be out of space today, what are your growth projections? Will a WMS eliminate the need for outside storage or the need to move to a larger facility? Current Rack Utilization 65% 45% 45% Future Rack Utilization 85% 70% 70% Total Square Cost per Foot Square Foot Savings 20,000 5,000 3,000 $10 $10 $10 Annual Savings $200,000 $50,000
SAP SCM Extended Warehouse Management: Building a Business Case

Function Reserve Forward Case Forward Each Total

$30,000 $280,000

Inventory Savings
There are several opportunities to improve missing product depending on your business. Missing inventory, mis-shipments, and expired stock can be easy to quantify. A WMS with RF scanning can improve bin level inventory accuracy and improve shipping accuracy. Proper stock management rules or WMS strategies such as FIFO and FEFO provide the tools to manage inventory and minimize the loss of stock due to expiration. Function Inventory Write Off (Lost Product) Mis-Shipments Expired Product Total Annual Cost $100,000 $200,000 $200,000 Projected Savings 75% 50% 50% Annual Savings $75,000 $100,000 $100,000 $275,000

Using Labor Management to Help Build Your Business Case


Many organizations have adopted engineered standards or reasonable expectancies to firmly define metrics for standard warehouse tasks. The ability to report and track allows management to understand issues with the operation and for individuals to understand where the opportunities are and facilitate changes in best practices and training. A Labor Management solution is designed to provide this level of detailed tracking and reporting. In addition, labor management provides the ability to accurately schedule and balance labor. Leveraging an LMS with engineered standards typically results in a savings of 30-40% of labor costs through a reduction in head count, a reduction in overtime and better management of temporary staff. By using reasonable expectancies, a less-detailed approach resulting in lower total cost for the program typically results in a 10-20% savings. These savings should be applied in addition to the savings calculated for the benefits achieved with the WMS functionality. Below is a high level example of a savings calculation for an LMS. Full Time Equivalents 5 5 5 15 30 Hourly Rate (Loaded) $20.00 $20.00 $20.00 $20.00 Expected Savings 10% 20% 25% 30% 24% Annual Savings $20,800 $41,600 $52,000 $187,200 $301,600

Function Receiving Putaway Replenishment Picking Total

Annual Cost $208,000 $208,000 $208,000 $624,000 $1,248,000

SAP SCM Extended Warehouse Management: Building a Business Case

As you can see, with the example of a facility with 30 touch labor workers, an LMS can add significant savings.

Migrating from ERP WM to SCM EWM


One of the most frequent questions asked by customers pertains to the upgrade path from ERP WM to SCM EWM. These are two separate products offered by SAP; it is important to understand that a conversion from ERP WM to SCM EWM is not just an upgrade, but it is also a new implementation since the two solutions have a different code base and table structure. If a company is currently running SAP WM and wants to convert to SCM EWM, the business case will be based on the added functionality of SCM EWM; therefore, in order to achieve the savings, process changes must be implemented as well as the supporting functionality. With that said, it is possible to do a technical conversion to implement SCM EWM with the same processes that exist in ERP WM.

Warehouse Structure
The warehouse structure configuration in SCM EWM is very similar to that of ERP WM. The concept of the Warehouse Number remains unchanged. The warehouse is still divided into logical and physical areas by Storage Types, which are further subdivided into Storage Sections and, ultimately, Storage Bins. Therefore, it is possible to replicate exactly the Warehouse/Storage Type/Storage Section/Storage Bin structure from ERP WM to SCM EWM.

Handling Unit and Storage Unit Management


In the ERP system, two concepts exist for dealing with pallet and container management: Handling Unit (HU) Management and Storage Unit (SU) Management. HU Management is a cross-application component that is integrated with the MM, SD, PP and QM modules for identifying the hierarchical packing structure of pallets and containers. Within WM, pallets are identified using Storage Units, a concept that is only used in the WM application. It is possible to use Storage Units without Handling Units in WM; however, using Handling Units also then requires the use of Storage Units if the stocks are managed in WM. The activation of Handling Unit management applies to the Storage Location level in the ERP system. The activation of Storage Unit management is made at the Storage Type level. In SCM EWM, SAP has eliminated the SU concept and adopted HU as the go-forward solution for pallet and container management. HU management does not need to be activated in the ERP MM module for a given storage location, but the Handling Units can still be integrated to the SD and QM modules if needed. Within EWM, it is now possible to combine both HU and non-HU stocks within the same storage type, and even within the same bin. Previously in ERP WM, the activation of SU management at the storage type level required that all stocks within the storage type be placed into a storage unit. This change in functionality makes the HU solution more flexible, eliminates some transactional overhead burdens associated with using HUs in MM-IM, and also allows for more options in material handling and storage in the warehouse.

SAP SCM Extended Warehouse Management: Building a Business Case

Below is a summary of the similarities in structure between SAP ERP WM and SAP SCM EWM: ERP WM Master Data Material Master Storage Type Storage Section Storage Bin N/A Handling Unit Storage Unit Strategies Use of the Condition Technique allows all of these same sorting rules, as well as others, to be configured. Product Master Storage Type Storage Section Storage Bin Activity Area Handling Unit N/A Replaced by Handling Unit SCM EWM

Picking and Putaway Strategies


SAP SCM Extended Warehouse Management: Building a Business Case

Developing Realizable Savings


There may be several improvements to your process; for instance, in picking, the use of RF or wireless transactions can eliminate non-value time for travel to the office. Batch picking can greatly reduce travel, and a labor management system can improve the overall utilization and productivity. In this case, it can be difficult to calculate a final estimated picking rate and savings. When all of the benefits have been identified, it is important not to double dip on the savings and look at the overall savings in aggregate. For instance, a 5% savings in RF plus a 5% travel plus 10% savings with an LMS may not equal 25% savings. In order to do the calculations, each improvement must be accounted for based on the other factors. If the process is already improved by 5%, then another 10% savings would only equate to a net 14.5% savings based on the subsequent calculation. One way to prove the benefits is by performing time studies of simulations in order to mock up the process and understand the final potential rates. When calculating the realizable savings for LMS or any savings, it is also important to account for realistic savings. While the process may improve by 15%, only 12% may be realized as there are certain functions that can never be removed. For example, while the replenishment process may be greatly improved, there may always be a fixed time for manual bin consolidation, emergency replenishments, troubleshooting, etc.

Since it is difficult to forecast what the realizable savings will be, the exercise of using a Sensitivity Analysis is an effective way to understand the variance or sensitivity of the calculated savings. During this process you can calculate savings based on multiple savings estimates to establish a comfort level for realizable savings. If you are confident that you will be able to achieve 5% picking savings based on the benefits, 10% is realistic and 15% may be a stretch, run the scenarios to determine which savings will provide a conservative amount of savings while still achieving the target return on investment or payback period. Many companies use industry benchmarks and research reports to generalize the benefits that can be achieved and realized through a WMS implementation. Depending on your organization, you may need to provide more justification. This may involve performing simulations with time standards to better understand the improvement that can be achieved. Also, in order to understand the potential benefits and savings, it is important to know the capabilities of the system and the associated cost for implementation along with any required modifications. During this process some companies will look at the individual improvements to justify that specific change and then look at the implementation as a whole. Partners such as InfoLogix and Tom Zosel Associates can be critical in the process in identifying the benefits and calculating the realizable return on investment.

Conclusion
SAP SCM Extended Warehouse Management: Building a Business Case

As your organization matures and the scrutiny for capital expenditure tightens, the business case becomes ever more important. It is critical that the full opportunities and benefits that a new system can provide are understood and communicated so that a comprehensive analysis

Authors
Gavin Klaus SAP Business Development Manager InfoLogix, Inc. Tom Zosel Associates

InfoLogix Leads the Way for Supply Chain Execution and Mobility Solution Services.
InfoLogix has a unique mix of SAP SCM Execution and Enterprise Mobility expertise that deliver:
Increased Supply Chain Velocity & Efficiencies Increased Visibility into Assets & Data Streams Increased Control of the Entire Mobility Lifecycle Change Management & Business Process Optimization

Managing Editor
Jason Fradin Vice President of Marketing InfoLogix, Inc.

We help you optimize your mobile workers by delivering the critical business data needed directly at the point of decision. Our winning combination of mobile computing technology and technical business knowledge enables us to pave the way for mobilizing your entire enterprise. Our Global Services Group is comprised of expert SAP SCM consultants who can share a wealth of experience and knowledge in designing and implementing world class SAP SCM solutions and services to meet the exacting demands of multiple industries. With strong business best practices knowledge and acumen, our team can help to drive supply chain efficiencies throughout your organization.

About InfoLogix, Inc.


InfoLogix is a leading provider of enterprise mobility solutions for the healthcare and commercial industries. InfoLogix uses the industrys most advanced technologies to increase the efficiency, accuracy, and transparency of complex business and clinical processes. With 19 issued patents, InfoLogix provides mobile managed solutions, on-demand software applications, mobile infrastructure products, and strategic consulting services to over 2,000 clients in North America including Kraft Foods, Merck and Company, General Electric, Kaiser Permanente, MultiCare Health System and Stanford School of Medicine. InfoLogix is a publicly-traded company (NASDAQ: IFLG).

About Tom Zosel Associates


TZA is a leading supply chain consulting firm delivering management consulting, engineering, technology and human capital solutions to assist companies in achieving world-class customer service and a leastcost operating position within their supply chain. To find out more, please visit www.tzaconsulting.com

www.infologix.com info@infologix.com 215.604.0691 InfoLogix, Inc. 101 E. County Line Road, Hatboro, PA 19040

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