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SAP® SCM EXTENDED

WAREHOUSE MANAGEMENT:Building A Business Case

INDUSTRY WHITEPAPER



SAP® SCM Extended Warehouse Management: Building A Business Case

Second to transportation, the largest cost in a supply chain is labor. A well designed Warehouse

Management System (WMS) provides you with the tools to improve your productivity as well as increasethroughput and improve overall customer service.

Depending on your industry and business environment, there are different key drivers for implementing

a WMS. Some companies may need a WMS to help them improve warehouse space utilization, some

to improve inventory and shipping accuracy, some to improve order and inventory visibility, some for

customer compliance, and of course some to help manage the ever growing labor costs. It is important

to be able to identify and quantify the benefits that are most important to your organization.

For a company that is running SAP’s ERP solution, justifying an SAP WMS can be an easier task with

the improved enterprise visibility that is enabled with the integrated solution. In addition, there are many

benefits when a company leverages an existing SAP support organization and internal resources.

Within this document we will provide you with the baseline and best practices for justifying a new WMS

solution and provide you with the core strategy for justifying an SAP SCM EWM solution.



Terminology

ERP WM – What is currently referred to as traditional SAP Warehouse Management, ERP WM is a

product that has been available since the SAP R2. The product has been widely adopted with over

7,000 customers worldwide. It is a scalable solution that has been deployed in various business

environments and industries from simple raw materials warehouses to complex, high volume and automated

distribution facilities. The application can be deployed as a centralized or decentralized solution.

ERP EWM – With the release of SAP 4.7, SAP introduced advanced functionality to accommodate

Cross docking, Yard Management, Dynamic Cycle Counting and Value Added Services within what was

called an Extinction Set, later to be renamed ERP EWM. This functionality resides within the ERP WM

framework.

SCM EWM – in 2005, SAP released a new Warehouse Management solution called SCM EWM. This

is a redesigned solution that accommodates the core functionality as ERP WM with additional

capabilities that match the functionality available with third party, state of the art solutions. Some of the

most significant functionality advancements are Labor Management, Slotting and a solution

called Material Flow Systems, which is designed to allow the WMS to directly control automation without

the use of what is commonly known as a Warehouse Control System or WCS.

Industry Trends and Demands

Over the past ten years, the WMS market has matured greatly. Most major WMS vendors now offer

a full suite of functionality to accommodate a rather complex and diverse group of industry and business

processes. Because of this, the key focus for research and development has been around architecture

and technology modernization.

Improved visibility and event management have been hot topics in the supply chain industry where

world class organizations are looking for improved information flow within the organization and to

their customers and business partners. A fully integrated WMS solution is a logical solution to extendthe visibility past the four walls of the warehouse and provide end-to-end visibility to optimize

other functions including purchasing, production to achieve better customer service and reduction

of overall cost of goods sold.

Aberdeen stated, “Functional silos continue to be the largest barrier to extended warehouse management

performance. Companies still do not have the tight integration they need between their manufacturing,

warehousing and transportation operations. To break down these silos, Best in Class companies

are adept at making use of seven enabling technologies as part of their comprehensive extended warehouse

management program: Dock Management, Yard Management, In-Transit Visibility, Multi-warehouse

Visibility, Distributed Order Management, Returns Management and Logistics Asset Tracking.” 1

Current economic conditions and the mature sophistication of many companies’ supply chains and

systems has lead the market to establish a strong and realizable business case for implementation and

a new WMS solution, or any software solution for that matter. This means that the business case process

is even more important. Gartner inc., a leading industry research group, comments, “Cost containment

is a dominant objective for supply chain organizations, and the need to lower costs will force buyers to

scrutinize the business cases for all new supply chain management (SCM) application investments

(especially WMS that are normally replacements of legacy systems) more thoroughly in 2009. This strong

inclination of users to focus on minimizing SCM investment costs will make TCO a more important

consideration in new WMS purchases.”2



Building your Business Case

It is difficult to generalize the return on investment (ROI) that any one company can realize through the

implementation of SAP SCM EWM due to the various starting points or baselines. However, there are fourkey categories that encompass the majority of scenarios for determining the business case, including:

Curren• tly running SAP IM to SAP SCM EWM

Currently running SAP WM to SAP SCM EWM•

Currently running a third party WMS to SAP SCM EWM•

Currently running a homegrown or “legacy” WMS to SAP SCM EWM•

Benefits of Implementing a New WMS or Converting from SAP IM to SAP

SCM EWM

The transition from a stock management to a full warehouse management solution is typically going

to drive a significant ROI based on operational improvements. LogiStar is often asked to assist in the

determination of whether or not to migrate from SAP IM to SAP WM. While your operation may be

performing satisfactorily, there may be productivity improvements, space utilization improvements, cycle

time and throughput improvements that can be achieved through a WMS. While your operation seems

efficient and is accurate, can the same volume be done with less effort? Is your accuracy tedious because

of double and triple checking, and can the same or better accuracy be achieved through a better process

and less effort?

The benefits of implementing a new WMS or converting from SAP IM to SAP SCM EMW include:

System guided strategies to optimize the routing in areas such as putaway and pick paths•

Resource and manpower management•

Multiple bin support to optimize warehouse space and productivity•

Better controls to reduce the possibility of lost product and write offs•

RF directed work allows for real time transactions to match the physical process and the system•

RF direction provides timely visibility to inventory status/quantity for allocation, purchasing•

and customer service



Benefits of Converting from SAP ERP WM to SAP SCM EWM

Just to establish the facts, SAP ERP WM is not going to be decommissioned. SAP has several thousand

customers using this product and there is no set date for the product to retire. Based on standard SAPtimelines, the product will be supported for the next ten years at a minimum. The benefits of converting

from SAP ERP WM to SCM EWM are again highly dependent on the additional functionality that the

solution offers. As your business requirements change and your volume grows, a more robust WMS can

offer you many opportunities to achieve process improvements. The benefits of conversion to SAP SCM

EWM include:

Advanced functionality providing for more efficient warehouse processes•

Warehouse slotting to reduce travel time and material handling time•

Labor management to improve the management of work and improve overall productivity•

Benefits of Converting from a Third Party WMS to SAP SCM EWM

Often a company running a third party WMS solution has most the functionality to support the

business requirements, assuming a current release of the product. In this specific scenario, the

business justification comes from:

Advanced/new functionality providing more efficient warehouse processes•

Reduction in IT costs•

Reduction in license•

Reduction in maintenance•

Reduction in interface support•

Reduction in costs for enhancements and upgrades – elimination of reliance on third parties/less•

painful upgrades

Internal system support•

Long term vendor viability – As you have seen with scenarios of the acquisition of SSA by Infor, which•

acquired EXE and Provia (no longer offered), Red Prairie, who acquired LIS Dispatcher, Mc Hugh and

Marc (no longer offered)

Enterprise visibility of inventory, activities and metrics•



Benefits of Converting from a Homegrown WMS to SAP SCM EWM

Sometimes a company’s homegrown solution has built into the system the majority of the functionality

to support the processes. In this case, the majority of the business case is derived from risk avoidance andthe benefits of a common platform and support group. Other times, the homegrown WMS has reached

its breaking point for adding more functionality without a major rewrite. This along other factors such

as platform obsolesce will drive the need for a new solution. Benefits of converting from a homegrown

solution include:

Advanced/new functionality that provides more efficient warehouse processes•

Potential reduction in IT costs•

System sustainability•

Reduction in interface support•

Potential for reduced costs for enhancements and upgrades – elimination of reliance on third parties/•

less painful upgrades

Long term vendor viability – As you have seen with scenarios of the acquisition of SSA by Infor, which•

acquired EXE and Provia (no longer offered), Red Prairie, who acquired LIS Dispatcher, Mc Hugh and

Marc (no longer offered).

Enterprise visibility of inventory, activities, and metrics.•

Calculating the Savings

The basic steps for developing the ROI are:

Education1. – Review your potential system capabilities and review the current and future operational

objectives

Establish the Baseline2. – Review the current system capabilities and processes

Data3. – Collect current metrics and data to support the subsequent calculations

Assess the Opportunity4. – Further review the process to determine the potential opportunities that

a new system can facilitate

Estimate Savings5. – Calculate the hard and soft savings that can be obtained with the improvements

enabled by the system

Estimate Costs6. – Calculate the full costs for the implementation and system deployment

Calculate ROI7. – Calculate the return on investment or payback based on your company’s standard

business case template

Conduct Post Implementation Audit8. – While this is not always a required exercise, it will provide

you with an understanding of the accuracy of the ROI analysis and better prepare your team for

future projects.



Below are the major categories where savings can be quantified:

Labor Savings – Labor savings can be achieved not only through headcount reduction, but as well•

with reduction of overtime and better utilization through proper management of temporary staff.- Training - Consider training when doing your calculations. The use of RF and an easy to use system

in general can greatly reduce ramp up time for new employees and facilitate cross training to better

balance the workload.

Material handling Equipment Savings – As the requirement for workers in a specific area such as•

putaway is reduced, the total equipment required to support the operation is reduced as well. Cost

per rolling stock unit as well as maintenance costs can be calculated to determine the total savings for

equipment.

Inventory Savings – Improved shipping and inventory accuracy through process and scanning can•

reduce the total amount of inventory required in each facility. This is typically a difficult benefit to

realize because the benefit has to be agreed upon and realized through purchasing. Because of this,many times it is only noted as soft savings in a business case.

Better inventory Visibility – Accurate and real time visibility can also enable overall reduction in•

inventory levels in supply chain.

Invento• ry Loss Savings

Reduction in write-offs due to better inventory control (date code, lot control, etc.) management.•

Warehouse Space Savings•

Customer Chargeback Savings•

Regulatory Non-Compliance Avoidance•

Transportation Savings•

IT Cost Savings•

Competitive Advantage – Many times having leading edge systems can set you apart from your•

competition. At the simplest level, being able to cost effectively provide product in broken case as

well as full pallets to feed multiple types of distribution channels gives you an advantage. Also, take,

for example, the opportunity to cost effectively and efficiently provide customized product for your

customers. Having a system that allows your company to provide value added services and maintain

or improve customer services levels is a benefit.



In addition, the following categories typically add significant value to your organization;

however, they are more difficult to quantify:

E•

mployee Benefit

Customer Service•

Cycle Time Improvements•

Throughput improvements•

Management Visibility•

In the following section we will provide examples of how improvements in a specific functional area

can provide savings in one or more of these categories and provide sample calculations to determine the

savings.

For the purposes of this document, we will focus on how to determine the benefits and savings, whichare typically broken out to hard (tangible) and soft (non-tangible) savings. in addition to these savings,

a major factor in today’s environment are customer and regulatory mandates. A couple common

examples are Walmart RFID compliance and the Pharmaceutical ePedigree mandate.

System Guided Putaway

A WMS can offer many strategies for putaway and placement of product in order to minimize the travel

time. When calculating the functional benefits, first identify all of the improvements by functional area

so that aggregate savings can be calculated. With proper strategies, the travel time can be reduced for

putaway, replenishment and picking. Warehouse Slotting will also have a large impact on replenishment

and picking times, with some improvement in putaway; however, this may not impact receiving or loadingfunctions.



Space Utilization

A WMS can improve space utilization by driving denser storage. This may be done by combining multiple

bins of the same material or by selecting the right size bin based on the quantity in storage. In order tocalculate the savings you must calculate the overall square footage required per location, including the

proper allocation of aisle space. If you are currently using an overflow or off site facility, then the cost of

that facility, as well as the transportation costs, should be calculated. Don’t forget the increased cost for

mezzanine space. As noted in the following section, companies typically will develop the business case to

account for a five- year growth horizon. While you may not be out of space today, what are your growth

projections and will a WMS eliminate the need for outside storage or the need to move to a larger facility?

Inventory Savings

There are several opportunities to improve lost product depending on your business. Lost inventory,

mis-shipments, and expired stock can be easy to quantify. A WMS with RF scanning can improve bin

level inventory accuracy and improve shipping accuracy. Proper stock management rules or WMS

strategies such as FIFO and FEFO provide the tools to manage the inventory and minimize the loss

of stock due to expiration.



Using Labor Management to Help Build Your Business Case

Many organizations have adopted engineered standards or reasonable expectancies to firmly

define metrics for standard warehouse tasks. The ability to report and track allows managementto understand issues with the operation and individuals to understand where the opportunities are

and facilitate changes in best practices and training. A Labor Management solution is designed to

provide this level of detailed tracking and reporting. In addition, labor management provides the ability

to acurately schedule and balance labor. Leveraing an LMS with engineered standards typically

results in a savings of 30-40% of labor costs through reduction in head count, reduction in overtime

and better management of temporary staff. By using reasonable expectancies, a less detailed

approach resulting in lower total cost for the program typicallyresults in a 10-20% savings. These savings

should be applied in addition to or on top of the savings calculated for the benefits achieved with

the WMS functionality.

Below is a high level example of a savings calculation for an LMS.

As you can see with the example of a facility with 30 touch labor workers, an LMS can add significant

savings and is a great way to help justify your WMS implementation.

Migrating from ERP WM to SCM EWM

One of the most frequent questions is about the upgrade path from ERP WM to SCM EWM. These are

two separate products offered by SAP and it is important to understand that to convert from ERP WM

to SCM EWM is not just an upgrade, it is a new implementation as the two solutions have a different

code base and table structure. if a company is currently running SAP WM and wishes to convert to SCM

EWM, the business case will be based on functionality that exists in SCM EWM and does not exist in ERP

WM; therefore, in order to achieve the savings, process changes must be implemented as well as the

supporting functionality.

With that said, it is possible to do a “technical conversion” to implement SCM EWM with the same

processes that exist in ERP WM should you choose to approach it as more of a technical upgrade.



Warehouse Structure

In general, the warehouse structure configuration in SCM EWM is very similar to that of ERP WM.

The concept of the Warehouse Number remains unchanged. The warehouse is still divided into logicalor physical areas by Storage Types, which are further subdivided into Storage Sections and ultimately,

Storage Bins. Therefore, it is possible to replicate exactly the Warehouse/Storage Type/Storage Section/

Storage Bin structure from ERP WM to SCM EWM.

Handling Unit and Storage Unit Management

In the ERP system, two concepts exist for dealing with pallet and container management – Handling

unit (HU) Management and Storage unit (SU) Management. Handling Unit Management is a cross-

application component that is integrated with the MM, SD, PP and QM modules for identifying the hierarchical

packing structure of pallets and containers. Within WM, pallets are identified using Storage Units, a concept

that is only used in the WM application. It is possible to use Storage Units without handling units in WM;

however, using handling units also then requires the use of Storage Units if the stocks are managed in WM.

The activation of Handling Unit management applies to the Storage Location level in the ERP system.

The activation of Storage Unit management is made at the Storage Type level.

In SCM EWM, SAP has done away with the Storage Unit concept and adopted Handling Unit as the

go-forward solution for pallet and container management. Furthermore, HU management does not need

to be activated in the ERP MM module for a given storage location, but the Handling Units can still be

integrated to the SD and QM modules if needed. Also, within EWM, it is now possible to combine both HU

and non-HU stocks within the same storage type, or even within the same bin. Previously in ERP WM, the

activation of SU management at the storage type level required that all stocks within the storage type be

placed into a storage unit.

This change in the functionality makes the HU solution more flexible, eliminates some of the transactional

overhead burdens associated with using HU’s in MM-IM, and also allows for more options in material

handling and storage in the warehouse.



Below is a summary of the similarities in structure between SAP WM

and SAP SCM EWM

Developing Realizable Savings

There may be several improvements to your process; for instance, in picking, the use of RF or wireless

transactions can eliminate non-value time for travel to the office. Batch picking can greatly reduce travel,

and a labor management system can improve the overall utilization and productivity. In this case, it can be

difficult to calculate a final estimated picking rate and savings.

When all of the benefits have been identified, it is important not to “double dip” on the savings and look

at the overall savings in aggregate. For instance, a 5% savings in RF plus a 5% travel plus 10% savings

with an LMS may not equal 25% savings. In order to do the calculations, each improvement must be

accounted for based on the other factors. If the process is already improved by 5%, then another 10% savings

would only equate to a net 14.5% savings based on the subsequent calculation. One way to prove out the

benefits is by performing time studies of simulations in order to mock up the process and understand

the final potential rates.

When calculating the realizable savings for LMS or any savings, it is also important to account for

“realistic” savings. While the process may improve by 15%, only 12% may be realized as there are certain

functions that can never be removed. As an example, while the replenishment process may be greatly

improved, there may always be a fixed time for manual bin consolidation, emergency replenishments,

troubleshooting, etc.



Since it is always difficult to forecast what the realizable savings will be, the exercise of using a Sensitiity

Analysis is a great way to understand the variance or sensitivity of the calculated savings. During this

process you can calculate the savings based on multiple savings estimates to establish a

comfort level for realizable savings. If you are confident that you will be able to achieve 5% picking

savings based on the benefits, 10% is realistic and 15% may be a stretch, run the scenarios to

determine which savings will provide a conservative amount of savings while still achieving the

target return on investment or payback period.

Many companies use industry benchmarks and research reports to generalize the benefits that can

be achieved and realized through a WMS implementation. Depending on your organization, you

may need to provide more justification. This can be as much as performing simulations with time

standards to understand the improvement that can be achieved. Also, in order to understand the potential

benefits and savings it is important to know the capabilities of the system and the associated cost

for implementation and any required modifications. During this process some companies will look

at the individual improvements to justify that specific change and then look at the implementationas a whole. Partners such as LogiStar and Tom Zosel Associates can be critical in the process in

identifying the benefits and calculating the realizable return on investment.

Conclusion

As your organization matures and the scrutiny for capital expenditure tightens, the business case

becomes ever more important. It is critical that the full opportunities and benefits that a new system

can provide are understood so that an exhaustive analysis can be performed to determine the

realizable savings. SAP SCM EWM is a very robust solution and can provide many benefits; however,

you must understand which features will provide you with the benefit to transform your distribution

center into a world-class operation. Following the critical steps in this document and identifying all

possible opportunities will aid you in establishing a realistic return on investment and lay the

foundation for a successful project.

Citations

1. “The Extended Warehouse Benchmark report: new Success Strategies for Managing dock, Yard,

and Multi-Warehouse Environments,” Aberdeen Group. December 2006.

2. Gartner Magic Quadrant for Warehouse Management Systems, 6 April 2009.



Authors

Gavin Klaus

LogiStar, Inc

Tom Zosel Associates

About LogiStar Solutions

LogiStar Solutions is an SAP services and channel partner that helps clients maximize supply chain

efficiencies and distribution velocity by leveraging the SAP Business All-in-One, SAP Extended

Warehouse Management (SAP EWM) and SAP Supply Chain Management (SAP SCM) applications.

The company also offers voice-enabled automatic data collection for SAP, and SCT Software’s XPS,

a leading parcel shipping solution for use with SAP applications.

About Tom Zosel Associates

TZA is the industry’s leading provider of solutions in distribution, including warehousing and trans-

portation. For over 20 years, we have helped clients across numerous industries to save millions of

dollars in operating costs.

Our critical advantage is our hands-on operational expertise, which allows us to create and implement

innovative logistics solutions that work for even the most complex distribution problems.

We continue to be successful because of the value our clients find in our products and services, and

because we deliver the results our clients need and expect.

Today, TZA offers an exceptionally broad range of logistics consulting services and software products

in support of our manufacturing, wholesale and retail clients, servicing companies in almost all major

vertical markets. We address logistics problems and opportunities across the entire supply chain, from

strategic planning to facility design, material handling, transportation, optimized labor performance

solutions, training, labor management software and other logistics software solutions.

logistar whitepaper mw web 022012

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