Automating your warehouse is a big investment. Before you commit, it’s important to clearly understand the costs, expected savings, and how long it will take to pay off.
Key financial metrics like ROI, payback period, and internal rate of return help you see whether an AutoStore system makes sense for your operation.
In this post, I’ll break down what these metrics mean and how to use them to evaluate an AutoStore installation.
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Investing in warehouse automation can be a game-changer for e-commerce companies, third-party logistics providers, omnichannel retailers, or any business that operates out of a warehouse. But understanding the financial impact is crucial before making such a decision. When evaluating warehouse automation like AutoStore, three key financial metrics often come up: Return on Investment (ROI), Payback Period, and Internal Rate of Return (IRR).
Let’s break these down using a practical example:
Example Investment:
You decide to purchase an AutoStore system for $1,000,000. After implementing the system, you find that it saves you $300,000 per year in labor and operational costs. Over five years, these savings total $1,500,000.
ROI is one of the simplest and most common ways to evaluate an investment. It tells you how much profit you can expect to make from your investment relative to its cost. In other words, it’s a way to measure how effectively your money is being used.
Calculating the net profit:
Net Profit = Total Savings – Investment Cost
Net Profit = $1,500,000 - $1,000,000
Net Profit = $500,000
Calculating the ROI:
ROI = Net Profit / Investment Cost x 100
ROI = $500,000 / $1,000,000 x 100
ROI = 50%
ROI Summary:
This means the ROI for this investment example is 50%, showing that you're making back your original money plus an extra 50% in profit.
The payback period tells you how long it will take to recover the initial investment from the cash savings or profit generated by the investment. It’s essentially the amount of time it takes for your investment to "pay for itself."
Using the same AutoStore investment example from above, remember that the system saves you $300,000 per year. So, let's calculate how long it will take for the investment to pay for itself.
Calculating the payback period:
Payback Period = Investment Cost / Annual Savings or Profit
Payback Period = $1,000,000 / $300,000
Payback Period = 3.33 years
Payback Period Summary:
Continuing with our example, it would take just over 3.33 years (3 years and 4 months) to recover your initial investment.
IRR is a bit more complex but extremely useful. It measures the annualized rate of return expected from an investment over a specific period. IRR is like asking:
"If my AutoStore savings were an interest rate, what rate would make it a fair trade for my upfront cost?"
How IRR Works:
IRR is the interest rate that makes the net present value (NPV) of all your cash flows (both the cost and the savings over time) equal to zero.
Calculating IRR:
IRR isn't calculated with a simple formula like ROI. Instead, you typically use:
These tools iterate to find the exact rate that balances your investment cost and all expected cash flows.
Continuing with our example, the AutoStore system costs $1,000,000 upfront and saves $300,000 each year for 5 years. By plugging these cash flows and the initial investment into an IRR formula, you find that the IRR is 18%. This means that the investment in the ASRS yields an 18% annual return over the five years.
IRR Summary:
In the example, the AutoStore system costs $1,000,000 upfront and saves $300,000 each year for 5 years
These metrics each provide a different perspective, helping you understand the profitability, risk, and timeline of your investment. When combined, they give a fuller picture, ensuring that your decision to invest in warehouse automation aligns with your financial goals.
It's important to note that the cost of an AutoStore system widely varies across use-cases. For example, a small system in the back of a retail store might cost $1,000,000 whereas a complex setup supporting omnichannel fulfillment for a multi-national distribution center could cost upwards of $50,000,000. On average, I'd say that many AutoStore systems cost between $3,000,000 - $6,000,000.
Investing in an AutoStore system means understanding what you need to build AND what it takes to deploy it successfully. Factors that impact the cost generally break down into two main categories: system requirements and implementation costs.
You may be wondering, "OK, so what would it cost to put AutoStore into my facility?"
Good news! There's a free, online tool you can use to calculate your AutoStore cost: StoreX Calculator.
Simply enter a few of your operational metrics (building height, SKU count, orders per day, etc.) and it will generate an estimated system size, cost (system + implementation), projected return on investment, and more.
A well-designed AutoStore system typically delivers a positive ROI with a payback period of just 2–3 years.
In some cases, many third-party logistics providers can see a return on investment from day one by leveraging a leasing strategy.
Below, I'll detail a combination of predictable initial costs and substantial long-term savings that contribute to the ROI.
AutoStore delivers significant savings that pay back the initial investment within 2-3 years. These savings come from clear, measurable factors like labor, space utilization, and operational efficiency, but also from less obvious advantages that further boost ROI.
The obvious, quantifiable factors are:
Did you know?
A recent study found that distribution centers in the United States are losing an average of nearly $390,000 per year due to mispicked orders.
And the less-obvious factors that have significant impact are:
Want to see how AutoStore’s ROI stacks up against other ASRS technologies? Check out our complete guide to ASRS cost and ROI comparisons. We break down cube-based systems, AMR solutions, and aisle-based ASRS so you can choose the best fit for your operation.
I understand that choosing to automate your storage and retrieval processes is a huge decision and large investment, and my goal is to help you decide which solution is right for your operation. I don't sell a solution for the sake of selling a solution..I sell a solution if the business case makes sense for you. To better understand if AutoStore (or other Kardex solutions) are right for you, contact us.