Material handling involves moving, loading, unloading, pushing, pulling, storing, lifting, picking, placing, and retrieving products or goods in a factory or warehouse. It has been a critical part of supply chains and manufacturing processes worldwide.
With globalization, however, the demand for advanced material handling equipment and systems has increased. Manufacturers and suppliers are using these advanced solutions to reduce excess inventory, lower the risk of workplace injury, increase productivity, and minimize delivery time.
However, setting up an automated material handling system comes with a few challenges. Although they will help you save money in the long run, the automated lifting or handling material systems often lead to higher expenses, making it necessary to calculate the costs and ROI before making the big purchase.
Here’s how you can determine the cost of material handling systems or equipment.
Seven fundamental factors often determine the cost of a material handling system. Here they are:
Although there is no alternative to investing in modern lifting or handling material, there are ways to drive your overall material handling costs down. You will need to continuously optimize various areas of your material handling system to make it more efficient, resulting in a quicker ROI.
Here’s what you can do:
If you can’t afford to buy material handling equipment, you can rent or lease the required equipment. These options will help you reduce your upfront spending considerably.
1) Rental: Renting is suitable for short-term and high volume applications. For example, you can think of renting a few dozen forklifts during a peak holiday season to handle the extra material flow. However, renting material handling equipment is not economical in the long run. You can use this option as an experiment before going for the leasing option.
It offers you the flexibility to add or remove items from your list as per the changing freight volume. However, this flexibility comes at a high premium. Plus, the monthly charges may or may not include maintenance and repair costs. You also don’t get a buyout option at the end of the rental period.
2) Lease: If you are not buying the equipment right away, leasing is probably your best option. You should lease the equipment if your material handling requirement is growing steadily, and it is not likely to have sudden spikes in your freight volume.
The upfront cost is significantly lower than buying the equipment outright. Leasing also offers tax benefits as it is a tax-deductible operating expense in most states. As maintenance is usually included in your contract, you don’t have to pay extra except the fixed monthly service fee.
You have the following leasing options.
a) Fair Market Value (FMV) Lease: Also called an operating lease, an FMV is the most affordable leasing option. FMV leasing can result in Present Value (PV) savings of up to 14% over an outright purchase. It allows the lessee to buy the leased equipment at the market price. If not, you can return the equipment or upgrade to the new one. It comes with a fixed monthly payment. However, you need a good credit score to qualify for an FMV.
b) $1 Buyout Lease: Also called capital lease, a $1 buyout lease allows you to purchases the equipment for $1 at the end of the contract term. It is a suitable option if you are planning to lease the equipment for a longer period. It comes with a set lease term and fixed monthly payments.
c) TRAC (Terminal Rental Adjustment Clause) Lease: A TRAC lease adds more flexibility to a $1 buyout lease. It allows you to negotiate your residual, monthly payments, and sometimes even term lengths. At the end of the term, you can buy the equipment for the predetermined residual value or the lessor can sell it. However, if the lessor sells it for more than the residual value, you will get the difference. If not, you will need to reimburse the lessor for the loss.
However, leasing also comes with a few drawbacks. Unlike an outright buyout, you can’t use leased equipment for company valuation or as collateral for business loans. In the long run, you may also end up paying more than the initial cost of the equipment. In short, you need to weigh in all of your options before making the final decision.
Although advanced lifting and handling equipment solutions can increase your productivity and efficiency, you have to pay a hefty upfront cost for modern material handling equipment. Hopefully, this post will not only help you understand the various aspects of material handling system costs but also cast light on the possible alternatives to an outright purchase. We will be happy to take this conversation forward. Feel free to share your doubts or concerns in your comments, and we will get back to you as quickly as possible.