MT437 Unit 9 Automation Business Case Example

A 5.7-Year Payback That Fails If Volume Drops a Fifth: An MT437 Unit 9 Automation Business Case for Vertical Lift Modules

[Student Name]

Purdue University Global

MT437: Strategic Warehouse Management

Unit 9 Automation Business Case

[Instructor Name]

[Date]

Lookout Parts Supply, the equipment quote and every cost and benefit are composite; the building lease assumption is stated up front, and the sources cited are real.

The Lease Assumption

The building is leased through the end of the decade, and the company has no current use for floor space the machines would free. The base case therefore gives no credit for freed space. That assumption matters, and a later section shows how much the answer would change if the space were used.

Scope

The modules would hold about 4,200 slow-moving small parts, sensors, gaskets, bulbs and clips, now spread across fourteen shelving aisles at the back of the building. These parts generate about 1,020 order lines a night, roughly a quarter of all night picking. Each is picked rarely, but together they force pickers into fourteen aisles they would otherwise seldom visit.

A vertical lift module is a tall enclosed unit holding trays on both sides of a central lift. When an operator calls for a part, the lift brings the tray holding it to a window at waist height, so the parts come to the person instead of the person walking to the parts.

Costs

Three modules cost $516,000. Software and the interface to the warehouse system add $58,000, and installation $46,000. Total capital is $620,000.

Running costs are maintenance, energy and an allowance for downtime, about $29,100 a year. Refilling the modules, moving stock from receiving into trays, adds about $15,906 a year of labor beyond what shelf replenishment costs today.

Benefits

Picking those 1,020 lines on shelves runs at about 41 lines an hour, about 24.9 hours a night, because most of the time is walking down long aisles for one or two parts. At the modules, an operator picks about 130 lines an hour, about 7.8 hours a night. Over 300 nights, the saving is about 5,110 labor hours, worth about $123,141 at $24.10 an hour.

Picking errors fall as well. The modules light the exact compartment to pick from and confirm the quantity, and the company's error records suggest this would avoid about $30,294 a year in mis-picks, returns and store credits.

Net of refill labor and running costs, the annual benefit is about $108,429.

Payback and Net Present Value

At about $108,429 a year, the $620,000 pays back in about 5.7 years. Over a ten-year life, using 8 percent as the rate to discount future savings, the net present value is about $107,600, positive but modest. Brealey et al. (2020) recommend net present value over payback for decisions of this kind, since payback stops counting once the investment is recovered and gives a late saving the same weight as an early one; both are reported here because the owner asks for payback.

The machines earn their cost only if the small-parts volume holds; at four fifths of today's lines, they never do.

Sensitivity to Volume

Volume is the input most likely to change, since the small-parts mix shifts as vehicle models age. If lines fell 20 percent, the annual benefit would fall to about $80,923, the payback would stretch to about 7.7 years and the net present value would fall below zero, to roughly minus $77,000. If lines rose 20 percent, the benefit would rise to about $135,934, the payback would shorten to about 4.6 years and the net present value would reach about $292,100.

Sensitivity to Wage Rates

If the loaded wage were $21 an hour rather than $24.10, the payback would lengthen to about 6.6 years. At $27, it would shorten to about 5.1. Rising wages make the case stronger over time, which the base case does not assume, so the base figures lean toward caution.

If the Freed Space Were Used

The fourteen aisles free about 7,000 square feet. If that space allowed the company to avoid leasing overflow storage at $5.90 a square foot, about $41,300 a year, the payback would shorten to about 4.1 years and the net present value would rise to about $384,700. The base case leaves this out because no such need exists today; it becomes relevant only if growth requires more space before the lease ends.

What the Operators Would Do

Picking at a module is different work. An operator stands at the window, the tray arrives, a light shows the compartment and quantity, and a scan confirms the pick. Two operators per shift would staff the three modules, replacing the pickers who now spend most of their time walking the fourteen back aisles. The work is less tiring but more repetitive, and the plan rotates operators between the modules and the floor to avoid strain and boredom.

Alternatives Considered

Two cheaper alternatives were considered. Re-slotting the slow parts more densely into fewer aisles would cut some walking for no capital, but the parts would still be spread over at least eight aisles. Moving them to a mezzanine would free floor space but add stair travel. Neither comes close to the modules' labor saving, but either could be done if the volume test fails.

Risks

A module failure would stop access to every part inside it, so the design spreads the fastest of the slow parts across all three units and keeps a manual override. Software integration with the warehouse system is the most common source of delay in such projects, and Azadeh et al. (2019) note that automated storage systems deliver their benefits only when their throughput is matched to the order profile. Frazelle (2016) adds that automation cases often fail because volume assumptions were optimistic.

What the Owner Is Being Asked to Decide

The decision is not whether the modules work, since they are well proven, but whether this building's slow-parts volume will stay high enough for long enough to repay them. That is a question about the business, not the machines. Store growth and the age of vehicles on the road both affect it, and the sales team's forecast for the next two years shows small-parts lines roughly flat. A flat forecast gives a positive but thin return, which is why the recommendation waits for two quarters of confirmation rather than approving now.

Recommendation

Approve the modules only if the next two quarters confirm small-parts volume at or above today's level, and revisit sooner if growth creates a need for the freed space, which would make the case clearly worthwhile.

References

Azadeh, K., De Koster, R., & Roy, D. (2019). Robotized and automated warehouse systems: Review and recent developments. Transportation Science, 53(4), 917-945. https://doi.org/10.1287/trsc.2018.0873

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.

Frazelle, E. H. (2016). World-class warehousing and material handling (2nd ed.). McGraw-Hill Education.