Funding Considerations for Automation System Projects

Everyone knows supply chain management continues to become more complex. The last few years have brought to light the need for further optimization and efficiency—not just for procurement, but also in distribution and fulfillment processes. Yet while a business case may be clear from an operational aspect for warehouse automation systems, getting the finance team’s sign-off is not always a walk in the park. Just as supply chains have seen challenging times recently, so too have recent and ongoing events had an impact on capital expenditure budgets. Market uncertainty, the election cycle, geopolitical risks, along with the impact and volatility of inflation on pricing and order volumes, are all causing companies to slow down on major supply chain investments.

This is why it is important to know the funding options that exist. From our experience, too few companies are aware of the pros and cons to financing through a lease arrangement, and how it may actually be the preferable route for balance sheets.

Besides owning the warehouse building and the automation inside, these are some of the different options currently available:

• Lease building, lease automation
• Lease building, own automation
• Own building, lease automation
• Building or automation leaseback (existing or new purchase)

The easiest way to distill what these really mean is to look at the pros and cons of owning vs. leasing. On the owning side, the biggest benefits include full control for expanding, reducing, and/or selling later and the potential for the lowest total cost of ownership over life of use. But the biggest benefits of leasing are the money isn’t tied up in an initial investment (allowing it to be invested in other opportunities), matching the timing of expenditure to benefit period, and the potential for highest ROI over life of use. The graph below shows on a high-level the cash implications over time for leasing vs. owning:

For companies that prioritize Net Present Value and ROI/IRR over total cost of ownership, leasing can be a highly attractive avenue. With the right approach and planning, companies can overcome financial hesitancies towards warehouse automation system projects and fully leverage the benefits of automation for their supply chain operations.

At TGW Logistics, we have recently walked alongside a few customers as they have explored these various options. While we are not able to provide leasing options at this time, we do have three types of financial partners we can connect our customers to:

• Builder: full turnkey general contractor that would finance the construction of the building and automation, then lease it back
• Private equity: using the general contractor of your choice, would finance the construction of the building and automation, then lease it back
• Financial institution: would facilitate a lease for only the automation

If you’d like to see some example financial models for what owning vs. leasing could mean for your business and learn more about our partners, please contact us on our website: https://www.tgw-group.com/us/contact.