After months or even years of struggling to keep products moving into, out of, and all around your warehouse, it's finally dawned on you: You need a warehouse management system (WMS).

This revelation could have stemmed from any number of problems. For instance, your records say you've got plenty of product A; problem is, you can't find it. Or you got that rush order out to client Z on time—but you shipped more than they ordered. And receiving? They're still trying to figure out where they'll find space for the 1,000 cases of product K that are scheduled to arrive at noon tomorrow. Meanwhile, your accounting department has long since resigned itself to dedicating a full-time employee to pulling together payables and receivables based on the scattered information coming out of the warehouse.

Chances are you aren't failing on all of those counts, but an inefficient process or incorrect data in just one of those areas could be costing you thousands of dollars in missing inventory, extra shipping charges, and more labor every month. That's what Information Systems Manager Mike Rogers found four years ago when he joined Rev-A-Shelf, a Louisville, Ky.-based manufacturer of custom storage organizers. Back then, the company was running a paper-based operation and experiencing a host of data-related problems.

"We had numerous errors occurring because we didn't have any controls in place," recalls Rogers. "We had loss of paperwork; problems during, after and between shift changes; problems with shipping and receiving; issues with inventory accuracy; and movement errors."

Rogers knew that to correct those problems, he would need a WMS, and he knew it wouldn't be cheap. But instead of focusing on the cost—which was well into the six figures—he considered the return on investment (ROI). "It was a lot of money," Rogers says. "But if you are a company with only $5 million in inventory and you are writing off just under $10,000 a month because you are losing it, that's more than $100,000 a year. Add to that the man-hours spent trying to find this stuff and the productivity losses, and it can easily [cost you] between $200,000 and $300,000 just in the first year."

Not every WMS is so expensive—there are some lower-cost packages that make it possible for businesses with revenues below $50 million to find significant savings and not-too-distant ROI. But it's no simple matter for any company, large or small, to justify the cost. Before pitching a WMS purchase to management, buyers should assess their needs, understand how a solution would interface with legacy systems, and calculate what an implementation would really cost.

It's easy to spot when something is broken. Figuring out how to fix it can be much harder.

The first step is to conduct an audit of warehouse or distribution center (DC) operations. Many buyers use internal resources to identify bottlenecks, information gaps, and resource shortfalls as well as to identify areas that could benefit from automation. Buyers that don't have that expertise can turn to a consultant with experience in warehouse operations and information systems. And some buyers choose to take advantage of WMS vendors' pre-bid assessments of their distribution operations.

No matter who conducts the audit, it should include multiple facilities. "One thing we often find is businesses that have multiple distribution centers can have very different practices from one to the next," says Karin Bursa, vice president, marketing for Atlanta-based Logility Inc., a WMS provider. "So it is important to visit multiple DCs to identify the points of continuity in their process as well as suggest some best practices."

Audits are more effective if they include input from other business functions, including sales, manufacturing, and accounting, that use data generated from warehouse activities. That was the approach taken by Direct Fulfillment Inc., a direct-response marketing company in Robinsville, N.J. "We put a committee together from all the different departments and different client bases and we identified a number of items that were important for our business," says IT Director Mary Teehan. "For instance, I was interested in what the platform was and the capability for growth. We had an industrial engineer who wanted to know how many antennas there were going to be, and accounting was interested in how they would receive the transaction data, and so forth." Armed with that information, the group assigned values of importance to each item on their wish list and presented it to potential vendors to see how they would handle each priority.

When most people think about calculating the cost of a WMS implementation, they tend to focus on the initial cost of the software together with the price of hardware such as computer terminals and handheld scanning devices. But that total cost also includes less tangible elements—the time and money needed to train employees on the new system, for example, or the cost of integrating it with an existing IT infrastructure.

"Probably the biggest expense for companies will be the cost of integrating the WMS with the order-entry system, the planning system, and others," says Michael Godshall, executive vice president of product management for Catalyst International, a Milwaukee-based WMS vendor. "Usually that is a service that will be augmented by a system integrator who can integrate it with [the buyer's] legacy systems."

Top-tier WMS providers have addressed that concern by partnering with vendors of enterprise resource planning (ERP) software or by writing their WMS software to accommodate the business management tools commonly used today. "A lot of people take integration for granted," says Prashant Bathia, director of product management for WMS provider Manhattan Associates in Atlanta. "We are never a sole system; our company 'grew up' integrating with ERP and materials handling providers, and we are conscious of the fact that our clients need this and have built tools as part of our enterprise to handle it."

Companies that can't afford the top- tier WMS offerings can reduce their integration costs by seeking out software that's compatible with what they have in-house. Rev-A-Shelf, for example, was already using business applications from Epicor, a fact that influenced Rogers' decision to purchase a WMS from TDC Solutions. "The best way for us to move forward was to get TDC because we wanted something that would tie directly into the Epicor database," he explains. (Epicor later purchased TDC.)

That decision not only saved integration time and money, Rogers says, it also saved on training costs. The accounting department, for example, could continue using the software they already were familiar with because the WMS tied in with existing software. Nevertheless, Rev-A-Shelf needed to invest heavily in training warehouse personnel who would be using the new program.

That's an expense that every WMS buyer must be prepared to shoulder. "Training is absolutely essential to the success of any WMS implementation, because the companies are making such big changes in the way they operate," says Chris Heim, president and general manager of WMS vendor HighJump Software in Eden Prairie, Minn.

The cost of training often is included in the bids WMS providers submit, but that doesn't cover the cost of pulling employees off their jobs while they get up to speed with the new software. Most buyers try to minimize such disruptions by training key employees in each department or shift, and then having these in-house "experts" train other workers.

Even using this model, Rogers figures that on-the-clock staff training totaled more than 230 hours. "It was what I call a 'hidden cost of ownership,' but it was well worth it," he says. "It is easy to see the increased ROI based on the efficiency that resulted from the training."

Since no two businesses are alike, each WMS package is bound to need a few customized features that will allow it to dovetail with company-specific practices. Some software vendors, such as Logility, include pull-down menu-type options that address any needed customization as a part of their software. But in many cases, modifications will require writing additional code. "Nobody is going to get a package out of the box that does 100 percent of what they want it to do. It will require some tweaking here and there," says Rogers.

When considering the need for modifications to the software, users should keep an eye on the trajectory of the business. If the company is growing at a healthy clip and is likely to continue adding product lines and warehouses, WMS buyers should count on having to pay for upgrades and additional capabilities to accommodate that growth down the road.

A related concern that's weighing on many buyers' minds these days is whether they'll need to adopt radio frequency identification (RFID) technology in the future, and if so, what it will cost to integrate it with an existing WMS. The top-tier vendors are already rolling out RFID modules that complement their WMS offerings, but it's not yet clear what kind of ROI buyers will find in those applications. A more conservative choice would be to choose a WMS that not only uses bar coding and already tested RF technology, but also "layers" RFID on top of that system to allow for gradual testing and implementation, suggests Steve Banker, service director, supply management with ARC Advisory Group in Dedham, Mass.

Ongoing costs, though, include more than just modifications due to business changes. Most WMS vendors will provide customers with a "roadmap" that charts software upgrades and additional functionality that are planned or already in the works. "We try to limit the number of upgrades to one a year, and we give that information to our customers," says Logility's Bursa. "But while we'd like it if everyone upgraded once a year, we have plenty of customers who are doing very well with an older version and may go a couple of years between upgrades."

As Direct Fulfillment found out, future staff time and consulting fees for maintaining the database, upgrading software and hardware, and similar types of ongoing expenses also need to be figured into total ownership costs. Because the company often needs to create shipping, receiving, and inventory reports for its myriad clients, Teehan hired a full-time employee to handle those requests. "Our clients have the expectation that if they need a particular report for a meeting on Tuesday, they can call and get it from us," says Teehan. "It just didn't make sense for us to have to go back to the vendor every time we needed a different report."

Not all companies need a full-time specialist to support their system and data needs, but as with all systems, there are bound to be costs associated with keeping the system running at peak efficiency.

But these ongoing costs are often paid for by the added efficiencies companies achieve once a WMS is fully incorporated into the business. Teehan estimates the payback from consolidating three warehouses into one was a mere 18 months.

That's pretty fast, but not unusual. Rogers originally estimated the payback for the total costs to purchase and implement his company's new WMS would be three to three-and-a-half years. Today, less than two years after going live with the project, Rev-A-Shelf has already been repaid for its investment.

Companies of all sizes and business models today can achieve a solid payback for their investment in WMS solutions, says Logility's Bursa. How much and how fast, she adds, depend on what they are shipping. Each company's business environment is unique, and potential buyers of WMS packages must judge the software's total cost of ownership against the expected future benefit. In the end, she believes, deciding whether a WMS is worth the cost of acquiring and maintaining it is an individual matter. "There is not a standard rule of thumb for who can benefit from automation."