The candidate should ask questions about geography, business model and company objectives
Some questions that can be asked are
Warehouse Location and Operations:
Range of Action:
Operational Processes:
Revenue Streams:
Efficiency and Productivity:
Cost Structure:
Company Objectives:
Technology and Innovation:
Stakeholder Involvement:
While all of the above are valid questions, the candidate should bucket them and show a clear path to getting the information they need. The key pieces of information they should understand is the business model of the warehouse and the KPIs used to measure success
The structure of the candidate will depend on how they handle the formulate the problem statement but you should guide them towards focussing on the costs. It would be acceptable for the candidate to start from the revenue side and work down towards cost. A proposed structure follows. Note that the candidate is not expected to build it on their own but they should start from the first level and slowly moving towards more granularity. Note that it is of for the candidate to include the initial investment in the structure itself. We are not doing it here but the candidate can do it if they wish to do so.
Exhibit: </span> letsautomate1structure<span style="text-align: center;">
They should be able to list labour, equipment, insurance and storage space as the key drivers of costs. You should then guide the candidate to elaborate on labour and equipment. They should be able to segment labour across direct, and indirect workers and overheads. This segmentation is not strictly necessary but they should be able to identify low-skilled and high-skilled labour as two separate segments of the workforce.
In terms of equipment, they should be able to relate the equipment needed with the business model, breaking it down into lifting and handling, storage and packaging and shipping.
They should mention other items, such as insurance and storage space, to show they have a good understanding of the overall cost drivers.
Finally, they should include the cost of automation in the cost structure as they should recognise that automating will have a recurring cost that needs to be factored in the new setup. If they do not do it, they should mention it later in the analysis.
At this point the candidate should mention that the equation they are trying to solve is investment/(yearly cost savings)<2.
The candidate at this point would enquire about the cost of the investment.
| Annual Maintenance and Support Costs | 30,000/year |
Current Costs:
Expected Savings:
Current Labor Costs:
High Skilled Direct Labor: $500,000/year
Low Skilled Direct Labor: $300,000/year
High Skilled Indirect Labor: $200,000/year
Low Skilled Indirect Labor: $100,000/year
Overheads (administrative, management): $150,000/year
Total Current Labor Costs: $1,250,000/year
Expected Savings:
High Skilled Direct Labor: 10% reduction
Low Skilled Direct Labor: 20% reduction
High Skilled Indirect Labor: 15% reduction
Low Skilled Indirect Labor: 25% reduction
Overheads: 10% reduction
Savings Calculation:
High Skilled Direct Labor Savings: $500,000 * 0.10 = $50,000/year
Low Skilled Direct Labor Savings: $300,000 * 0.20 = $60,000/year
High Skilled Indirect Labor Savings: $200,000 * 0.15 = $30,000/year
Low Skilled Indirect Labor Savings: $100,000 * 0.25 = $25,000/year
Overheads Savings: $150,000 * 0.10 = $15,000/year
Total Labor Savings: $50,000 + $60,000 + $30,000 + $25,000 + $15,000 = $180,000/year
Current Equipment Costs:
Lifting and Handling Equipment: $200,000/year
Storage Equipment: $150,000/year
Packaging and Shipping Equipment: $100,000/year
Total Current Equipment Costs: $450,000/year
Expected Savings:
Lifting and Handling Equipment: 10% reduction
Storage Equipment: 15% reduction
Packaging and Shipping Equipment: 20% reduction
Savings Calculation:
Lifting and Handling Equipment Savings: $200,000 * 0.10 = $20,000/year
Storage Equipment Savings: $150,000 * 0.15 = $22,500/year
Packaging and Shipping Equipment Savings: $100,000 * 0.20 = $20,000/year
Total Equipment Savings: $20,000 + $22,500 + $20,000 = $62,500/year
Current Depreciation:
Annual depreciation of existing equipment: $50,000/year
Reduction in Depreciation:
Reduction percentage: 15% (same as reduction in equipment costs)
Depreciation Savings: $50,000 * 0.15 = $7,500/year
Current Insurance Premium:
Annual insurance premium: $80,000/year
Expected Reduction in Insurance Premium:
Reduction percentage: 10%
Savings Calculation:
Insurance Premium Savings: $80,000 * 0.10 = $8,000/year
Ongoing Maintenance Costs:
Annual maintenance and support costs for the software: $30,000/year
Total Annual Savings:
Labor Savings: $180,000/year
Equipment Savings: $62,500/year
Depreciation Savings: $7,500/year
Insurance Premium Savings: $8,000/year
Total Annual Savings: $180,000 + $62,500 + $7,500 + $8,000 = $258,000/year
Initial Costs:
Software Purchase: $150,000
Installation and Integration: $50,000
Training: $20,000
Total Initial Costs: $150,000 + $50,000 + $20,000 = $220,000
Total Annual Financial Impact:
Total Savings: $258,000/year
Less Ongoing Maintenance: $30,000/year
Net Annual Savings: $258,000 - $30,000 = $228,000/year
Payback Period Calculation:
Payback Period = Total Initial Costs / Net Annual Savings
Payback Period = $220,000 / $228,000 ≈ 0.96 years
This means that the investment in the new software solution will pay for itself in approximately 0.96 years (about 11.5 months), providing significant savings and reduced operational costs.
The analysis indicates significant cost savings and operational efficiencies, with a payback period well within the target of 2 years.
Key Savings Areas:
Payback Period: 0.96 years (approximately 11.5 months).
Labor Costs: Annual savings of $180,000.
Equipment Costs: Annual savings of $62,500
The investment in the new software solution is a financially sound decision that will enhance operational efficiency and reduce costs effectively.