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Home » Capex versus Opex when considering intra-logistics and storage

Capex versus Opex when considering intra-logistics and storage

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Image credit: Logistics Systems Engineering

Image credit: Logistics Systems Engineering

By Fred Albrecht, chief executive officer of Logistics Systems Engineering

Over recent years rapid progress in technology has enabled the design of warehouse facilities that for as little as a 20% increase in capital expenditure (capex), vastly reduce and in some cases almost eliminate lifecycle costs. Top of that list of technologies is automation.

Operational expenditure (opex) reduces by means of a higher upfront investment in technology – and this applies not just with an automated system, but through the entire design of the warehouse facility. For example, if you design a warehouse with a better fire sprinkler system or new specialised insulation panels which might cost 20% more upfront, your insurance costs will drop and this will reflect in lower opex.

Any single poor design choice for a warehouse can drive up opex by 5%, and aggregating these mistakes may make a facility no longer competitive. For instance, there are few good refrigeration engineering firms around, and a company which chooses the wrong one may lose money in the blink of an eye. If a consulting firm cannot tell you in advance what your monthly opex will be on the facility or its full lifecycle cost, then you should walk away. That is what will determine your competitiveness and your bottom line – which after all is why you are in business.

While the capex may be more – it can pay for itself within 17 months and thereafter add to the bottom line return. Some technologies like solar panel energy previously had a payback of 20 years and still represented a solid business case. Today they cost a fraction of the price, magnifying its business case with a three to four year payback – and are projected to reduce further to one year within about 12 months’ time. Not only does this represent an excellent business case just in terms of payback, but creates a competitive edge.

No business owner should ever look solely to have the most leading edge design, as it all too often results in an over-designed facility. Each case must be appropriate to its need with a design benchmarked against competitors – not just for the capex but even more so for the opex. Benchmarking is rarely done at the moment but should be part of the strategic decision-making process with an entire lifecycle cost estimate for the entire warehouse – in order to be more competitive than your competitors. Using a professional team is how to avoid costly mistakes.

Nor should one have just a single design on the table, but a number of ‘what-if’ scenarios offering varied options. At this engineering stage, it is an old but true adage that the cheaper option is usually the more expensive one ultimately.

The optimal investment will cater not just to today’s bottom line, but the long term return on investment and longevity of the system, for instance achieving lower long term opex through choices such as a 40-year lifespan panel with a 25-year guarantee.

One facility I’ve seen had a refrigeration plant design boasting enormous longevity potential, but massively expensive to maintain – a typical mistake when one fails to consider the full lifecycle cost. If a competitor can run their facility for half your variable cost – customers will choose a supplier by looking primarily at how much they are going to pay rather than how solid the structure is.

Automation in the cold chain

Globally, automation is seen as the only way to go because of its efficiencies especially as regards the use of people in a frozen environment. Among other things, people have to be allocated ‘thaw’ periods – notwithstanding all the PPE available, bodies still freeze. It’s highly inefficient – not by choice, but by the harsh conditions which people’s bodies have to endure.

The cold environment is extremely hostile to life and equipment. It drains phone batteries just as it drains stamina from a person. Glasses mist up and staff have to wear thick gloves adding to an inefficient clumsiness. People work slower and the smallest toe stub is incredibly painful.

Something similar applies to equipment such as forklifts which also freeze. Notwithstanding tremendous improvements in technology, the manner of working in a cold environment in the absence of automation hasn’t fundamentally changed for the last 100 years: it’s still about people, loads and handling equipment. The overall efficiency drive brought about by technology is constrained by the continued reliance on meat-body people, who are also any company’s biggest cost.

That’s what automation can address. Skilled workers in the cold chain remain as irreplaceable as ever, but automation would lower the head count and create the potential to upskill those semi-skilled workers who do the physical work and to redeploy them elsewhere. This simultaneously improves the bottom line and the individual’s career expectations. With automation, a company is still as reliant on its people, but with fewer staff they now rely on the intelligence of their people – such as employees who may take 30 hours to do what they used to take on average 80 hours to.

Automation is also a means for companies in the cold chain to differentiate themselves. At the moment, many warehouses are designed exactly the same according to an identical blueprint. All they can do to compete is to buy cheaper or pay their staff less – instead of creating efficiencies by looking at the design of the facility and going for more automation. With a lower headcount, instead of paying staff less they could rather pay them more for a more satisfied employee, and be more competitive.

The point of automation is not to retrench people but convert them into competitively-skilled persons working in other areas of the business as the benefits of automation kicks in and the company grows. That is the secret to China’s success – but is South Africa’s failing. In South Africa we have a fear that automation is simply a process of removing people from the equation through retrenchment rather than making our people more intelligent and skilled.

The immediate benefit of automation is increased profitability. However, there is a limit – the level of production has to be sufficiently high to justify the capex. There are instances where full automation is not appropriate – but one should nonetheless look at becoming partially-automated wherever possible.

Automation equipment in a freezer has to be robust enough that it can remain frozen constantly. Other equipment can be removed but the automation cannot as it most likely is operating 24/7. Lighting has to be different for semi-automated spaces and also for maintenance.

Can I afford not to automate my warehouse?

With semi-automated and automated systems, the capex is slightly higher but the saving is entirely due to the reduced opex over the lifespan of the facility, which is proven by a full lifecycle costing. For instance, a company that doesn’t have to increase its opex by 10% each year (because of labour increases for instance) can use that money to either invest in the business or take as profit.

Automated systems have an extremely low maintenance requirement because they have become so well designed and engineered over recent years. It’s unbreakable. It eliminates the risk of damage to forklifts and from forklifts. This is one of the major contributors to damages in a warehouse that we see today, and is typically also extremely expensive to repair in a freezer store when an upright is knocked. A shuttle system totally removes the risk of forklift damage – the fewer the people the fewer the accidents.

As I mentioned in my previous columns, if the facility is designed properly, it can be designed more densely – the land useage for instance can be increased to 70% from the usual 50% limit according to regulations. This makes another exponential saving possible as many other cost factors can also be lowered.

Reduced energy bills are another benefit as a refrigeration system’s energy consumption is the second biggest cost after labour. Automated facilities typically operate with less-energy demanding machines and other technologies designed to reduce energy bills and this is particularly important in facilities that operate 24 hours a day, again, which is something humans cannot do.

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