Warehouse Automation Financial Options

Financial Options Removing Barriers to Warehouse Automation Deployment

Guest Blog By Bob Hoffman, senior director, consulting, retail/e-commerce, MHI Member Company, Swisslog Americas

The business case for warehouse automation has never been stronger, and the return on investment has never been shorter. Nevertheless, organizations both large and small face a significant hurdle when advancing automation initiatives.

That hurdle is, of course, securing the required capital. Current debt, rising interest rates, economic uncertainty and competition from other strategic initiatives within the organization are just some of the factors that can limit access to funding and delay crucial automation projects.

The good news is that financial options are available today for moving ahead with warehouse automation. What’s changed is the maturity of today’s technology. Previous systems would sometimes become obsolete before realizing any return on investment. But the promise of performance and the ROI of new-generation systems are reducing the risk for financial services companies.

This is enabling financial services providers to offer fiscal solutions that cover the complete solution investment, including soft costs such as software, configuration and installation, and have end-of-lease terms that are well-defined upfront and very favorable to the lessee. It has also created a resale market that allows for a more accurate projection of value at the end of a lease.

In addition to providing financial options for companies planning to automate, these leases create opportunity for organizations that might have thought automation was beyond their reach. Now, small and medium-size businesses can add the automation needed to keep pace with larger competitors, while third-party logistics providers can align lease terms with their customer contracts to protect themselves from financial exposure at contract end.

There are two significant differences between what was offered in the past and what’s available today. The first is that these options recognize that successful automation is about more than hardware. The solutions are structured to cover all elements of a project, including software, configuration, installation and auxiliary equipment such as conveyors.

The second difference is that the end-of-lease terms are now well-defined up front, and highly favorable to the lessee. Both capital and operating leases are available with terms that generally extend from 36-84 months. With a capital lease, the lessee pays either nothing or 15% down at the beginning of the lease. There is then a one-dollar buyout at the end of the lease, at which point the lessee owns the system. With an operating lease, the lessee has the option of buying the equipment at a pre-determined price at the end of the lease, extending the lease, or returning the equipment.

Solutions for Cyclical Business

There are even financial options available for businesses that need to mitigate the impact on cash flow created by peaks and valleys in demand.

One such option is having the lease structured so that the monthly payment fluctuates with order volume. For instance, a business that depends heavily on the holiday shopping season may see order volumes jump 3-5X in the last quarter of the year. That volume may then dip into the negative as returns are processed following the holidays. Instead of going cash negative during the low months, the business could structure the agreement so that monthly payments align with demand, rising above the baseline in peak months and dropping below it in down months.

Over the course of a year, the company pays the same amount as if it had been making a set payment each month while avoiding becoming cash negative during any period. And at the end of the agreement, the company has the option of returning the system, buying it at the pre-established price or extending the leasing agreement.

Another option is to enter into a pay-per-pick agreement. This arrangement sets a baseline cost for each pick based on the labor savings created by the automation. The agreement is typically structured in tiers with the “first tier” being a minimum yearly pick volume with a base pay-per-pick costs. “Tier two” then provides a significantly lower per-pick costs for volumes above the base requirement.

The typical reconciliation period for these agreements is quarterly and the specifics of the payment structure are established between the lessee and the finance company on a case-by-case basis. With this arrangement, solution costs naturally align with demand based on the number of orders processed through the solution.

So, whether demand is fairly steady month-to-month and quarter-to-quarter or varies monthly or seasonally, there are financial options available for companies planning to automate. These options also create opportunity for small and medium-size businesses that might have thought automation was beyond their reach.