In general, ROI (Return on Investment) is defined as a profitability ratio used to measure the effects of an investment within a specified period. Such an analysis makes it possible to identify potential areas of savings and to estimate the time needed for the return of the invested capital.* This demonstrates that a ROI analysis is an absolutely essential action that should precede the decision to implement a WMS solution.
Define implementation needs and goals
Generally speaking, a WMS implementation in warehouse management and distribution results in process optimisation, a reduction in operating costs, enhanced warehouse performance and minimisation of errors in warehouse processes.** However, the manner of reaching those goals may be different in every enterprise, and specific WMS operation goals may also differ. For this reason, in addition to conducting a pre-implementation analysis with a view to defining general and specific goals for the system, it is also necessary to assess how much the investment will contribute to improving the condition of the enterprise.
Logistics and warehouse managers, frequently familiar with the possibilities of using WMS solutions from the operating viewpoint, are able to forecast the increase in the efficiency of warehouse processes as such. It is much more difficult to evaluate the impact of the solution on the whole enterprise ecosystem as the introduction of a WMS entails changes in numerous other processes. For example, a direct result of the reduced number of errors in the distribution of goods among customers is the lowering of transport and handling costs, while a reduced workload in the finance department and call centre might be considered its indirect outcome. A broader outlook on all the processes within an enterprise is provided precisely by a ROI analysis.
Make it on time
According to experts, a ROI analysis of a planned WMS investment must not be performed too early. According to the accepted theory, such an audit should take place no earlier than two years prior to the implementation.*** The investor's basic responsibility in this period is to regularly collect operating data from all the key departments in the enterprise which will be then used in the analysis. It should also be noted that an in-depth analysis requires the client to be open and convinced of the validity of this action.
ROI – step by step
Obviously, a ROI analysis is too complicated to be performed with the internal assets of an enterprise, in the privacy of an office. It is recommended to hire an external company which will look at the enterprise from the appropriate perspective. Such research is frequently offered by major WMS suppliers who, having vast experience and a thorough knowledge of their products, are able to conduct an accurate analysis.
At the first stage of a ROI analysis the investor fills in a questionnaire which will form the essential knowledge base on the current situation of the enterprise, its needs and its vision for the future. Then, at a more specific level, a detailed list of requirements for the system is determined in cooperation with the logistics or warehouse manager. Following the theoretical preparation, the warehouse itself is examined at the next stage.
At that time all the processes are subjected to a thorough comparative analysis in the course of which visits are also necessary in other departments of the enterprise, especially in the accounting department. Such a visit offers a broad insight into the processes and the specifics of the enterprise’s operation.
Following the visit, documentation is developed concerning the current state and photos are made of areas and points in the warehouse where the analysts noticed optimisation potential. An example in case is the measurement of the distance and time needed for collecting paper documentation from the warehouse office by an employee for the purposes of picking goods.
The next step will be an in-depth analysis of the data gathered and the performance of relevant calculations. This process may take up to a few weeks. Then another meeting with the investor is arranged, at which the outcome of the analysis is presented.
ROI analysis results
The analysis estimates the growth in the enterprise’s performance and the tangible financial savings to be generated by the company planning the investment. However, in order to present the analysis results as accurately as possible, the potentially best-case and worst-case scenarios are prepared. Of course, apart from the calculations themselves also the methodology according to which the results are obtained is crucial – it offers a better understanding of the entire procedure. It is assumed that an investment in a WMS should pay for itself within 12-18 months of launching the system. Payback in more than two years is considered to be a less satisfactory outcome.****
Sometimes clients perceive other benefits in a WMS implementation, contributing to an even shorter return on investment period. One of them is the ability to introduce a fair incentive system. Independent research indicates that this may lead to an improvement in warehouse labour productivity by about 25%.*****
Moreover, a WMS facilitates the identification and recording of all product surpluses not documented by suppliers, which, in normal conditions, could be "taken over" by warehouse employees. A ROI analysis not only demonstrates the advantages offered by a WMS but also provides a better understanding of the operation of an enterprise as a whole. It is a good way to show how warehouse processes may be streamlined, what expenditure the investment involves and when the investment return is to be expected.
* Janusz Ostaszewski: Finanse, various authors. Warsaw: Difin, 2005
** Lee, Perlitz (2012). Retail Services. Australia: McGraw Hill.
*** Strong, Robert (2009). Portfolio construction, management, and protection. Mason, Ohio: South-Western Cengage Learning.
**** Rick Register, www.inboundlogistics.com/cms/article/top-five-ways-warehouse-management-systems-deliver-roi/
***** Philip Obal, „Selecting Warehouse Software from WMS & ERP Providers”,