Logistical decisions are ultimately economic decisions. This applies, for example, to major investments in warehousing and materials handling technology. Once all possible technical, informational, and organizational issues have been clarified, managers in logistics and supply chain management must choose between two or more investment alternatives based on economic considerations. The prerequisite for any economic decision must therefore be that all open technical questions in the broader sense of the word have already been clarified. But how do you go about making the right economic choice between (competing) investment alternatives – for example, between packing station A and packing station B? Are there rational rules for this? Or is it a subjective decision? Is it gut feeling that ultimately decides? Let’s take a closer look:
Strategy for investment decisions
Decisions for or against a particular investment alternative are typically multi-stage, i.e. “strategic”:
(1) Of two alternatives with the same capital requirement, the one with the highest return is the more economical investment.
(2) Of two alternatives with the same return, the one with the lower capital requirement is the more economical solution.
(3) Based on points (1) and (2), the decisive factor in favor of an investment is therefore not the absolute return value, but the relative return value.
(4) The investment alternative with the highest expected relative return value is therefore the most economical solution.
Minimized risk – decisive for investment?
In the practice of logistics management and logistics controlling, the return on investment (ROI) is included in the decision-making process for evaluating investments in warehouse and materials handling technology. After the rate of return, the payback period is therefore an additional evaluation criterion that allows the risk to be taken into account in the investment decision. The following considerations may be useful in this regard:
(5) If two investment projects have the same rate of return, the one with the shorter payback period has the lower risk and is therefore preferable.
(6) If two investment projects have the same payback period, the risk is the same and the investment with the higher return is the most economical solution.
(7) For two investment projects with the same useful life and the same return, the payback period is the same and the ROI is not an additional selection criterion.
This leads to the general investment strategy of maximizing returns while limiting risk (according to Timm Gudehus):
“Investments should be made in order of decreasing return and, if the return is the same, in order of increasing payback period…”
The time trap
The risk minimization management strategy observed in many companies, according to which investments with a shorter payback period are given priority and only projects with an ROI below a specified threshold (target value) of, for example, 3 or 5 years are carried out, often leads to the most profitable investments in the medium and long term no longer appearing on the “radar.” Companies that focus purely on risk minimization thus fall behind their competitors in the medium and long term, who make investment decisions primarily based on returns and only consider ROI as a secondary factor.
The originally intended strategy of risk minimization can thus backfire. The permanent short-term focus of investments – for example in warehouse and materials handling technology – thus leads to short-term optimization due to the exclusion of “low-hanging fruit” that is further away in time. Terms such as “quick wins” and “low-hanging fruit,” which are so popular in consulting jargon, sound attractive but are ultimately—not infrequently—the cause of the “time trap” described above in logistics and supply chain management.
For more information on optimization strategies, see the article Optimization through process chain management.
