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Material handling economics 101

June 27, 2003
Optimizing material handling systems can reduce downtime-related productivity losses and decrease capital expenditures.

Under pressure to cut costs but still maintain output, many plant managers are rediscovering that necessity is, indeed, invention's dear sweet mother. One area that yields significant cost savings is optimizing existing material handling systems and equipment. By implementing a few simple strategies, many plants are extending product lifecycles, reducing downtime-related productivity losses and decreasing capital expenditures. These strategies comprise reducing, reusing and recyclingthree simple concepts with a powerful impact on cost.


It's a matter of reducing system inefficiencies and embracing preventive, not reactive, maintenance. A foremost concern for many enterprises is squeezing the best performance out of existing material handling systems and equipment without increasing wear and tear or maintenance costs. The most effective, yet least used, tool to determine how well systems are functioning is a performance audit that answers specific questions.

Is the equipment working properly or does it need fine tuning? How well is the system performing overall? Does it still fit the plant's needs? How well are the system operators fulfilling their duties? Is extra training warranted?

A thorough performance audit that answers each question quickly is an invaluable benchmarking tool. Highlighting system strengths and weaknesses, an in-depth assessment uncovers hidden productivity drains. Material handling areas subject to evaluation may include equipment and system functionality, picking, queuing, staging, sorting rates and operator effectiveness. A complete audit includes both an operational and a functional analysis, with a final report outlining recommended corrections, such as maintenance needs, capacity optimizations and additional operator training. By finding and correcting system and equipment inefficiencies proactively, companies can achieve cost savings from higher productivity rates and optimized system performance.

In tight economic times, many companies are tempted to skimp on equipment maintenance and overhauls. While putting off needed maintenance offers an immediate short-term financial gain, it often results in an offsetting loss of productivity and significant long-term costs. Delaying maintenance can result in shortened equipment life, more downtime for emergency repairs and greater replacement costs for nonrepairable components. One effective way to keep maintenance on track while reducing costs is to move from a reactive to a predictive maintenance cycle.

Predictive maintenance helps companies get ahead of the parts and equipment repair curve by forecasting when equipment will fail. Companies can establish baseline failure rates over time and implement corrective action before components fail. In short, using predictive maintenance offers a reliable, cost-effective method for preserving capital and reducing expenditures.

Predictive maintenance keeps material handling systems at peak efficiency.


Retrofitting makes old things new again. Many operations have older material handling equipment and systems that can't provide the productivity levels found in newer models. These plants are faced with the possibility of a large capital outlay for expensive new equipment that can keep up with increased demand. There is however, a solution that not only helps minimize replacement costs, but also can improve efficiency by 15 percent to 20 percent, or moreretrofitting.

Retrofitting enables companies to modernize, adjust and adapt existing equipment to meet new production conditions. Adding new technology, upgrading parts and equipment and optimizing capacity often permits systems to operate beyond the original capacity limitations.

Many new product technologies are backward-compatible with older models, enabling these advances to integrate seamlessly with existing equipment. Proposals for retrofitting usually include several solutions from which to select, providing maximum flexibility. Examples of retrofits include installing adaptive control systems, extending access to real-time operational data, adding volume and weight data for checking and invoicing, using advanced induction and sorting functions such as the ability to sort items that normally can't be sorted by machine, and installing upgraded parts. A retrofit or overhaul also provides the opportunity for parts standardization, reducing cost and increasing the availability of replacement parts.

Retrofit options include outsourcing the work to factory-trained service professionals or doing it in-house using detailed, visual step-by-step instructions.

Retrofitting and repurposing equipment rather than replacing it can provide substantial bottom-line savings. Overhauling and retrofitting older equipment completely often can be done for less than 60% of the cost of a new machine. The savings extend beyond replacement costs: equipment retrofitting and modernization offers renewed operational life with minimal expenses, increased production cycle times, reduced maintenance and operating expenses and improved reliability. Retrofitting can bring equipment into line with current federal and state safety regulations, which in turn can reduce work-related accidents and injuries and help reduce insurance premiums, including workers' compensation.

System upgrades can include access to real-time operational data or other advanced functionality.


Remanufacturing saves money and preserves resources. Maximizing the return on investment in capital machinery is important to every enterprise. Many times, however, a company's existing system and machines can't handle changes in production requirements, such as increased demand, new products, different pattern requirements or changes in speed. That's when most operations begin thinking about new equipment.

The bulk of the new equipment purchase price is the aggregate value-added costs, such as raw and processed materials needed to manufacture the equipment, labor and energy for assembly and the logistics expense of transporting and installing it. The plant absorbs these expenses in the hope of recouping them over the product's lifecycle. Remanufacturing, however, eliminates a large portion of this overhead, as it retains much of the value-added equity of the original product. It takes fewer resources, labor and energy to dismantle, clean, replace broken and worn parts, refinish and reassemble equipment than to buy new machinery. Often, the remanufactured equipment carries the same warranty as new equipment, extending not only its lifecycle, but also the value.

Beneficial legislation

Soon there may be another incentive favoring remanufactured equipment over new equipmentif the Remanufacturing Institute, a leading remanufacturing industry organization, has its way. The Institute is working with Congress to pass legislation granting tax credits of as much as 20 percent to companies that purchase remanufactured equipment. With the successful passage of bills now working their way through the House of Representatives, the tax savings could be quite substantial. In certain cases, the total could amount to millions of dollars per year.

Beyond the significant financial and potential tax benefit to the bottom line, purchasing remanufactured equipment helps the environment as well. Purchasing remanufactured rather than new products helps keep valuable raw materials from entering the waste disposal stream, reduces cost associated with material disposal and reduces the volume of industrial solid waste bound for a shrinking number of landfills.

According to the U.S. Department of Energy and remanufacturing industry experts, each pound of new material used in remanufacturing conserves five to nine pounds of original materials. In addition, studies performed at Germany's Fraunhofer Institute show the yearly energy savings from remanufacturing efforts worldwide equals the electricity generated by five nuclear power plants or 10.7 million barrels of crude oil, which would require a fleet of more than 200 oil tankers to carry. It also found the yearly volume of raw materials reclaimed by remanufacturing efforts would fill 155,000 railroad cars, forming a train 1,100 miles long.

Remanufacturing offers solid benefits in terms of lower capital equipment costs, renewed product lifecycles and the potential for significant tax-related gains. It also helps the economy and the environment, offering companies the opportunity to be good corporate stewards at no additional cost.

The simple concepts of reduce, reuse and recycle are giving companies much-needed cost savings, as well as increasing ROI from material handling systems. As long as managers understand that the strategies outlined here can't fend off the need for new capital expenditures forever, they can make a critical contribution to cost savings during these challenging times. By reducing, re-using and recycling carefully, a plant manager can buy months or even years of extended operation at reduced cost.

John Woodrick is Vice President, Customer Service & Support at FKI Logistex Alvey Systems. He can be reached at (877) 935-4564.

Figures: FKI Logistex Alvey Systems

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