Rethink The Business Case For Innovation

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Rethink the Business Case for InnovationTom Tiede; tomtiede@fortna.com

Agenda The Fundamentals of DistributionThe Prevailing Threat of the “Amazon Effect”The Business Case for InnovationMaturity of Innovative Technologies in DistributionBuilding a Persuasive Business Case for Executives1

The Fundamentals of OST

Fundamentally, The RightProduct Means Filling aCustomer NeedSelf ActualizationEsteemSocial BelongingMaslow’sHierarchyof NeedsSafetyPhysiological But, Competition and CustomerExpectations Continue to Change. The “Right” Product Today Might Not Bethe “Right” Product Tomorrow So, Companies Must Continually Adapttheir Products and Services by:o Listening to CustomersoCapitalizing on TrendsoExploiting Gaps in the MarketoOffering a Unique Value PropositionRIGHTPRODUCT3

“You can have anycolor you want, solong as it's black.”- Henry Ford4

RIGHTPLACERIGHTTIMECONVENIENCE!5

450 Facilitiesaround the GlobeEU89NA 20 Milesfrom 50%of US HH’searning 50K/Yr. 600MMProducts265 100MMPrimeMembersA-PIN66FreeShipping 50% ofOnline SalesCONVENIENCE!631

Death By AmazonDeath by Amazon: Apparel Retail Sporting Good Stores Book Stores Electronics Stores Basically, many of theconsumer goods availableonline Amazon Survivors:7 Very Strong Brands Unique Products or Services Vibrant eCommerce Channel But, many are still lagging theoverall financial market

Cost Will Always Be AnImportant Consideration, But Companies Should Not Minimize theInvestment in Distribution if itConstraints their Ability to: Grow into New Markets and SalesChannels Offer New Services, or CompeteCompanies with the goal to win investin innovation.Those that don’t either go away orbecome a shell of what they oncewere.RIGHTRIGHTPRODUCTCOST8

9

The Business Case for CEINCREASESPEED10

Tipping Point for the Business Case for InnovationRising Labour CostsDecreasing Technology Costs11

Maturity of Innovative Technologies in DistributionAugmented RealityMachine Learning &Picking BotsConceptualPilotGTP - AS/RS shuttle& crane systemsInitial ImplementationsProductionMaturePallet HandlingSystems – AS/RS,AGVsSmall Load - SelfDriving CollaborativeRobots - CoBotsAutonomous BotsHigh Load - Self DrivingVehicles (SDVs)Exoskeletons forHeavy LiftingEach Picking Systems- Vertical/ HorizontalCarouselsCarton & Unit SortationSystemsRobotic PalletizersWarehouse ExecutionSystems (WES)12Drones forInventory ControlSmart Glass TaskDirectionHumanoid BotsTerminatorBot?!

Business Needs Should Determine Where to Focus Innovation So, Identify the “The Burning Platform”13

Taking Time and Cost out of DistributionDistribution Operations CostsPicking Costs[CATEGORYNAME],[VALUE]Set-Up, 10%Storage, 20%Other, ],[VALUE]PickingShippingSearch, 20%Travel, 50%ReceivingStorageNote: Actual percentage of distribution operations costs will vary by company and industrySource: Various (WERC, CSCMP, SD, Fortna Experience)14PickSearchTravelOtherSet-Up

Evaluate the Impact of Alternative SolutionsDetermine “Sweet Spot” for Picking Solution(Illustrative Example)Goods to Person System Tradeoffs(Illustrative Example)“Sweet Spot”15

Maximize the Business Case EquationBusinessCaseValue Created Investment Required16

Identify the Value of Alternative Solutions al to Decision Maker TimeCostsWorking CapitalTaxesBusiness RiskRisk to Decision MakerValue 17IncreaseTheseDecreaseThese

Evaluate the Investment of Alternative SolutionsAn investment can be considered as any type of commitment necessary to createvalue, most of which can be translated to monetary terms. Capital ntBuildingInventoryImpact theBalance Sheet Expenses––––PeopleSuppliesProfessional FeesTravel Expenses18Impact theIncome Statement

Translate Value and Investment to Accounting TermsRevenueNon-OperatingRevenue &ExpensesInterestExpenseIncome TaxesEBITEarningsbefore Interest& TaxesNet OperatingProfit BeforeTaxesNet IncomeCosts & Revenues(Income Statement)Gross IncomeCost of GoodsSoldEBITDAEarnings beforeInterest, Taxes& DepreciationSelling come(Pre-Tax)Cash FlowfromOperationsS,G, & AAdmin. CostsNon CashExpense“Add Back”Depreciation(Non Cash)(ROI) Returnon Investment IRR SimplePayback(ROI) Returnon Investment NPV DiscountedPaybackAssets & Liabilities(Balance Sheet)Income Statement ImpactDepreciationNet Cash FlowDiscountedCash FlowBalance Sheet ImpactAccumulated DepreciationFixed Assets(e.g. Building,Equip., Syst.)WorkingCapital (e.g.Inventory)Cash Flowfrom BalanceSheetCash Flow from Long Term AssetsCash Flow from Working Capital19% Cost ofCapitalROIMetrics

Determine the Return on Investment(Illustrative Example)Financial AnalysisInvestment Life Span(Years)012345TotalCash 106R106R180(R200)(R40)R88R80R72R66R65Cash Outflows(Assumes Capital in Y0; Expense Y1)Net Cash Flow(Pre-Tax)Depreciation(5 Years)Net Operating Profit(Before Tax)Taxes(40%)Net Cash Flow(After Tax)Discounted Cash Flow*(using 10%)Net Present ValueR65Internal Rate of Return (IRR)18.7%*Also considered as the Present Value of after tax cash flow.20It’s All About TheCash!Accelerate or Not?It’s Actually Aboutthe Cash You Keep!Time Value ofMoney

Determine the Cash Flow HorizonGenerally, the longer the cash flow horizon the higher the return.Net Present Value - 5 Year HorizonR300R200R65R100R0-R100Yr. 0Yr. 1Yr. 2Yr. 3Yr. 4Yr. 5-R200Same AlternativeBut, Different Horizon-R300Net Present Value - 7 Year HorizonR300R180R200R100R0-R100Yr. 0Yr. 1Yr. 2Yr. 3-R200-R30021Yr. 4Yr. 5Yr. 6Yr. 7

Compare the ROI of Alternative SolutionsAlternative ANPV*R300R150R0R300NPV R655%10%20%NPV R261R150IRR 18.7%15%Alternative BNPV*25%Return30% RateR0(R150)(R150)(R300)(R300)IRR 24.4%Return5%10%15%20%25%30% Rate*The assumed discount rate used for is example is 10%Generally, the higher the return, the more favorable the Solution22

Assess and Compare the Impacts and Trade-offsThe “Right” Solution must find the right balance across multiple components and trade-offsInvestment &Return (ROI)Key BusinessMetricsDecision MakingCriteriaTime, Risk &FlexibilityPeopleExecutive Summaryof Impact AnalysisHolistic Evaluationof AlternativesProcessesBuilding &EquipmentSystems23

Develop a Persuasive Argument for the RecommendationThe “3 Legs” of a Persuasive ArgumentLogicAppealCredibilityA persuasive business case must be logical, credible, and appealing on a personal level tothe decision maker(s). The “stool” will collapse if any single leg is weak or missing.24

Appeal to Both Sides of the Brain(Otherwise, the Stool will Collapse)Business CaseLeft BrainRight BrainThinkingFactsLogicData DrivenFeelingCreativityIntuitionInstinct DrivenDominate Side whenRationalizing Decisions MadeDominate Side whenMaking DecisionsLogicAppealCredibility25

Develop a Plan to Manage Risk(example Pilot Approach)Learn theTechnologyAssessPotentialRisksConduct SiteVisitsStart with aPilotEvaluateResultsBusiness CaseEvaluation PhaseAddressIssuesPilotPhase26ProvePotential ofBusinessCaseReachDecision toImplementRolloutImplementation

Conduct the Meetings before THE MeetingThe purpose is to validate the recommendation and avoid surprises at the final presentation meeting27

Best Practice is to Avoid SurprisesClientDecision Maker“Former”consultant whofailed to conductthe meetingsbefore THEmeeting. RIP

Prepare and Present the Business CaseSample Agenda Meeting Objectives Project Scope and Objectives Business Imperative/Burning Platform Alternative Approaches & Recommendation Impact and Tradeoff Analysis Financial Business Case Risk Management Analysis Implementation Timeline Next Steps29

Steps to Building aPersuasive Business CaseIdentify Burning PlatformEvaluate Alternative SolutionsDetermine the ROIConduct the Tradeoff AnalysisAppeal to the Decision MakerDevelop Plan to Manage RiskMeet before “THE” Meeting toAvoid SurprisesPresent an Executive LevelBusiness Case30

Today’s Summary The Fundamentals of DistributionThe Prevailing Threat of the “Amazon Effect”The Business Case for InnovationMaturity of Innovative Technologies in DistributionBuilding a Persuasive Business Case for Executives31

Questions?32

Cost of Goods Sold Selling Costs Distribution Costs Admin. Costs Gross Income Operating Expenses Net Operating Profit Before Taxes (ROI) Return on Investment NPV Discounted Payback . R0 R56 (R44) (R44) (R44

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