WMS ROI: How to Measure & Calculate ROI
Originally published on August 19, 2019 by Erhan Musaoglu, Updated on May 18, 2023
6 Ways To Measure & Calculate WMS ROI
Your warehouse management system (or WMS) plays an integral role in your warehouse. When it comes time to renew your service, upgrade your existing package, or enter into a partnership with a new supplier, the question of return on investment (ROI) should come up.
So, how do you assess the ROI of a system? By understanding your warehouse’s key performance indicators (KPIs) and relentlessly measuring them.
For starters, smart warehouse managers analyze ROI in different categories since tools like a WMS deliver tangible and intangible benefits. For instance, labor cost is an easy cost to measure while employee satisfaction is a bit tricky to evaluate.
Here’s how to get started proving the ROI of a new—or your current—WMS.
In this guide, we’ll help you understand:
- Three Categories of Warehouse Management Software ROI
- How To Generate Tangible WMS ROI
- Improve the Outbound Process
- A WMS Facilitates The Most Optimal Picking Method
- A WMS Designs the Optimal Pick Path
- Improving Outbound Processes Is Especially Important for B2C and DTC Businesses
- Improving the Inbound Process
- Improving the Inventory Count Process
- Reducing Fulfillment Error Rates
- Improving Customer Service
- Implementing The Right WMS Will Offers The Best ROI Opportunity
Bonus: Before you read further, download our Warehouse Management Software ROI Calculator so that you can follow along and calculate the return on investment you’re getting from your warehouse management system.
Three Categories of WMS ROI
Everyone’s gunning for “positive” ROI, but not all positive ROI is measured equally.
If you have a goal to reduce labor costs by 20% by using a new WMS, that’s an easy value to measure. You just take a look at your average labor costs before implementing the tool and compare it to your average labor costs a few months after implementing the tool.
But what about something like employee satisfaction? You could certainly send around surveys to assess how happy your workers are, but it’s not an exact science. And just because this type of KPI isn’t measured with an obvious monetary value, doesn’t mean there isn’t the potential for cost savings or additional value creation from happier workers.
Here’s a real-world example: The warehouse industry is pressed for workers—it’s a candidate-driven market. One study showed that companies could spend more than $16,000 in agency fees just to fill one position. Peter Schnorbach, senior director of product management with Manhattan Associates, commented, “We’ve reached the highest number of people quitting without having another job than has ever been measured.”
In other words: It’s cheaper to keep your current employees happy.
Happy employees are less likely to look for another job or fall ill or become injured on the job. Moreover, they’re more likely to recommend the job to others in their network, reducing your recruiting costs. A good WMS supports this objective.
So, when you’re considering the potential benefits of a WMS, make sure you consider the following categories of WMS ROI:
- Tangible ROI
- Intangible ROI
- Support ROI
Tangible ROI is easily measured. You can quickly look at warehouse KPIs like cost per item, volume per employee, and the average number of items picked per employee, and compare your pre-WMS numbers with your post-WMS numbers.
Intangible ROI refers to those benefits that you notice after implementation, but that you can’t easily measure. Employee satisfaction falls into this bucket, along with things like improved transparency, easier access to data and insights, and better collaboration among your team.
It’s not impossible to measure the benefits in this bucket, but it’ll take some critical thinking. For instance, the examples we mentioned above for measuring employee satisfaction (e.g., employee retention and absenteeism rates) are ways that you can indirectly measure this kind of WMS ROI.
Support ROI is significant, but difficult to measure because it tends to fluctuate. One example is the way a new or upgraded WMS can qualify you for new opportunities. For instance, some customers may require their supply chain partners to have EDI capabilities. If your new WMS has this, it can expand the scope of opportunities you can bid on.
Does this mean you have to send potential WMS vendors a list of questions about ROI titled tangible, intangible, or support? No. This is about strategically assessing your warehouse’s needs in a holistic way so you can source all the information you need.
How To Generate Tangible WMS ROI
Before choosing a new WMS, consider the tangible ROI you’d like to generate. We’ve rounded up five process improvements that can generate the most benefit for the company. Once you improve these warehouse processes, you’ll have access to more opportunities for streamlining. Those may lead to additional indirect benefits.
When you’re assessing a warehouse process and its potential for improvement, remember the primary function of a warehouse: to ship customer orders, in the most optimal and economical way, and in a timely manner. This should be the function you’re trying to perfect when identifying warehouse KPIs for improvement.
Improve the Outbound Process
Improvements to the outbound process generate the most obvious benefits and tangible return on investment. The ultimate goal of the outbound process is order fulfillment. This is a labor-intensive process that involves order pickers and packers. A WMS simplifies and optimizes the movements of these workers, which is good for their wellbeing and great for your bottom line.
A WMS Facilitates The Most Optimal Picking Method
Different warehouses use different order picking methods based on their business’s needs. Once a warehouse starts growing, discrete order picking (picking orders one at a time) becomes inefficient. This is when warehouse managers begin applying different picking methods, and a WMS can assist with the following popular methods.
|Method||Description||How a WMS Supports This Process|
|Zone Picking||Pickers stay in a dedicated zone. Totes or bins move through zones. If an order needs a SKU from zone 1, that zone’s picker grabs it, puts it in the bin, and sends the bin to the next zone. If an order doesn’t need a SKU from zone 1, the bin moves on to the next. This method is also known as “pick and pass.”||A WMS helps the bin navigate the warehouse efficiently. It also determines when more workers are needed in a specific zone.|
|Cluster Picking||Pickers use a multi-tote bin and move through the warehouse, picking the goods they need for multiple orders without unnecessary traveling back and forth.||A WMS helps determine the best configuration of totes for each picker’s walk through the warehouse.|
|Wave Picking||Orders are scheduled to be picked at specific times of the day, usually tied to when trucks will be leaving for specific destinations.||A WMS helps schedule waves accurately to ensure that goods headed to the east coast are picked and ready for shipment before the eastbound trucks depart.|
Case Study: We compared the 3 picking methods above by simulating a real-time scenario and found that your choice of picking method could reduce your picking times by over 25%. Learn more by downloading our Order Picking Guide.
How to prove ROI: Assess how effectively you implemented your chosen pick method (e.g., upfront work planning waves, percentage of goods prepped in time for an outbound truck) and compare it to how much better it’s executed with a warehouse management system.
Easily calculate the ROI of your Warehouse Management System: Our Warehouse Management Software ROI Calculator helps you conduct a cost-benefit analysis for your WMS.
A WMS Designs the Optimal Pick Path
The larger your warehouse grows, the more important pick path optimization becomes. Pick path optimization is about choosing the best route for your warehouse employees to take, and the overall effectiveness of that path depends on the WMS you use.
For example, Amazon built a customized warehouse management system that allowed the ecommerce giant to embrace the inherent chaos of warehouses. Rather than taking the traditional approach of putting items in dedicated warehouse sections, Amazon employees place goods anywhere and record the location in their WMS. When an order comes in for that SKU, an employee quickly checks the WMS to see where the closest unit is.
Of course, Amazon has a unique business model where customers can buy almost anything, so putting away large quantities of goods is an inefficient use of resources. For most warehouses, it’s smarter to create dedicated locations for goods and use a WMS’s algorithms to design the best path.
For instance, “ant colony optimization” is a popular approach used by warehouses that care about pick path optimization. In this scenario, workers first take off in random directions while technology records the speed of the pick path is in real time. Once the WMS understands which is the fastest path, it starts directing the remaining pickers to take that same route.
Your WMS can also assess your list of items to pick and identify which item on the list is closest to your current location. Rather than working through your pick list in a linear fashion and unnecessarily traversing the entire warehouse, the WMS takes your current location and your pick list into consideration to direct you on the most efficient pick path.
How to prove ROI: Compare the average pick rate before you optimized your pick path to your average pick rate after you implement WMS algorithms.
Improving Outbound Processes Is Especially Important for B2C and DTC Businesses
All warehouses should work on improving their outbound processes, but it is especially important for business-to-consumer (B2C) and direct-to-consumer (DTC) businesses. With so many individual orders delivered all over the map (and to consumers with high expectations for speedy delivery and order accuracy), getting orders right is critical.
Business-to-business (B2B) customers often understand that delays happen and work regularly enough with their suppliers to put mistakes in the context of the larger relationship. B2C and DTC consumers are less forgiving, and they can turn to countless other ecommerce brands if dissatisfied.
Improving the Inbound Process
Outbound processes like picking, packing, and shipping get the most attention during continuous improvement efforts. That said, warehouse businesses should also show some love to their inbound processes.
Your putaway processes ensure your goods are on the shelves in time for your workers to pick them so your customers can receive them. In other words, a great inbound process keeps things moving.
Excellent inbound processes also limit the amount of time incoming goods spend off the shelf, which helps limit theft, loss, or damage to your inventory.
And, keep in mind that the inbound process consumes a chunk of your labor costs just like your outbound processes do. So, it’s important to think about ways to make your inbound work more efficient.
How to prove ROI: Compare your pre-WMS and post-WMS putaway speed and inventory accuracy rates.
Improving the Inventory Count Process
Counting inventory is a pain, but it’s a necessary pain. Cycle counting helps a warehouse continually monitor its inventory accuracy without needing to shut down the warehouse several times per year to take a full count.
Like all warehouse processes, there are different strategies for cycle counting. The most popular method is ABC cycle counting where goods are prioritized for counts either by value or sales volume. A warehouse management system with an integrated inventory management system makes it easier to identify which goods are selling most often and, therefore, which goods must be checked more frequently.
How to prove ROI: Compare your pre-WMS and post-WMS inventory accuracy rates.
Reducing Fulfillment Error Rates
Fulfillment errors can cost businesses roughly $35 to $50 per error. Manual B2C operations have an average fulfillment error rate of 3%, which translates to seven-figure losses each year for medium-sized businesses. Total losses may climb even higher if fulfillment errors cost you a major client, especially if you’re running a 3PL business.
Online retailers that sell on major marketplaces like Amazon must be especially wary of fulfillment errors. Errors can decrease customer satisfaction, lead to bad reviews, negatively impact seller ratings, and eventually jeopardize the viability of an entire sales channel.
A WMS brings structure and efficiency to the overall process, allowing warehouses to keep their fulfillment error rates low. One of the biggest causes of human error is non-standardized processes.With a WMS, companies can introduce automation and consistent speed into their operations..
How does it manage to do this? A WMS eliminates unnecessary manual processes and introduces a number of checkpoints to ensure the right packages are going out the door. It can schedule waves to leave on a specific outbound truck, reducing instances of late delivery.
How to prove ROI: Compare your pre-WMS and post-WMS error rates.
Improving Customer Service
Consumers have high expectations when it comes to customer service and they want accurate information about the status of their orders. A WMS properly integrated with your larger enterprise resource planning (ERP) system allows you to interact with customers about returns and shipment errors. It also allows you to provide an up-to-date catalog that reflects your true inventory, which avoids stock-outs and customer frustration.
How does this save your organization money? With an automated system that provides accurate information for standard inquiries, your customer success team can focus on thornier problems. Customers can even use their order details to check the status without ever speaking with customer service.
Moreover, a WMS system integrated with a company’s ERP can make billing easier, especially if your system has EDI capabilities. With this technology, you can easily invoice customers and their accounts payable departments instantly receive the information, thanks to straight-through data processing.
How to prove ROI: Compare your pre-WMS and post-WMS stock-out rates, call center contact rate, and speed of receiving client payments.
Implementing The Right WMS Will Offers The Best ROI Opportunity
A warehouse management system offers ample opportunity for return on investment, both tangible and intangible. In fact, the more your organization commits to capturing key data, the easier it is to demonstrate value to your management team.
Discover how Logiwa’s Cloud Order Fulfillment Software platform can help you make high-volume order fulfillment your competitive advantage.
Interested in easily calculating your WMS ROI?: Download our full WMS ROI calculator to start reporting on your system’s benefits.
FAQs: Warehouse Management System ROI
How can I calculate the ROI of my warehouse management system?
To calculate the ROI of your warehouse management system, you must determine the costs associated with the system, including the cost of the software, implementation, and training, as well as the cost savings achieved by the WMS (e.g. increased efficiency, higher throughput, and reduced labor expenses). From there, you can calculate ROI by taking the net value (profits minus costs) divided by the cost of adoption, and multiplying by 100 to get a percentage. This number is the ROI of your warehouse management software.
What are the most important metrics to consider when measuring the ROI of my WMS?
When measuring the ROI of your WMS, it’s important to factor in any metrics that affect your overall profit margins, including:
- Inventory accuracy
- Labor efficiency
- Order fulfillment accuracy and speed
- Shipping and receiving efficiency
- Labor costs
- Customer satisfaction
- Inventory carrying costs
- Order returns
How can I justify the cost of investing in a warehouse management system to my company?
When presenting the case for investing in a warehouse management system to your company, it’s important to demonstrate the potential ROI, as well as the key benefits the system will provide. This can include increased efficiency, improved inventory management, reduced labor costs, automation features (e.g. shipping rate shopping, order routing, streamlined replenishment, etc.), higher rates of customer satisfaction, better client retention, and competitive operational growth. Additionally, you can point out any compliance or regulatory requirements that a WMS will help your company meet.
How long does it typically take to achieve a ROI from a warehouse management system?
The time it takes to see a return on investment from a WMS varies depending on a number of factors, including the size of your warehouse, whether you are a multi-location operation, the number of SKUs you manage, and the specific features and functionality of the system you’re implementing. Some companies see a return on investment right away. That said, most see a return on their investment within the first year of implementation, but it can take longer depending on the unique circumstances of your operation.
Are there any industry-specific factors that should be taken into account when measuring the ROI of a WMS?
Yes, certain industry-specific factors such as the turnover rate of your inventory, the size of your warehouse, whether you are a multi-location operation, and the complexity of your fulfillment operations should be taken into account when measuring the ROI of a WMS. For example, a warehouse that handles a high volume of fast-moving products will likely see a quicker return on investment than one that handles slower-moving products. The same can be said for a direct-to-consumer (DTC) warehouse, as opposed to a hybrid B2B/DTC hybrid fulfillment operation.
Are there any best practices for ongoing measurement and optimization of WMS ROI?
Yes, it’s important to monitor the performance of your WMS on an ongoing basis and make adjustments as needed to optimize ROI. This can include regularly reviewing key performance indicators (KPIs) such as inventory accuracy, labor efficiency, and order picking/ fulfillment success rates, as well as thoroughly training employees on how to use the system.
Are there any other benefits to implementing a WMS beyond ROI?
Yes! In addition to ROI, a WMS can also benefit order processing by streamlining warehouse functions (e.g. replenishment, order routing, and carrier/shipping box suggestions), provide real-time insights into operational data and discrepancies, accurately forecast demand, improve inventory management, increase employee morale, and bolster higher rates of order accuracy to strengthens brand credibility and client retention. Additionally, a WMS can also help improve operational compliance and meet regulatory requirements, as well as improve customer satisfaction through faster and more accurate order fulfillment.
How can I ensure that my WMS investment will deliver the highest possible ROI?
To ensure that your WMS investment delivers the highest possible ROI, it’s important to choose a system that fits the specific needs of your warehouse, and to properly train all your employees on how to use the system. Additionally, it’s important to regularly monitor the performance of the system using KPIs and built-in BI analytics tools, and make adjustments as needed to optimize ROI.