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Logistics: The Over-looked Essential
A thought piece by HSSMI’s John Buchanan.
The majority of start-ups are based on three key ingredients – an idea for a product, a perceived market and a potential source of funding.
It is very easy to become wrapped up in the excitement of these elements and to press ahead in the belief that other aspects can be sorted out as the venture proceeds.
One essential additional ingredient, that can have a critical impact on capital investment, cash flow and long-term profitability, is the often-overlooked discipline of logistics. ‘Logistics’ encompasses a wide variety of topics. Here I plan to look at those that have most impact on the initial success of a project.
Firstly- material costs, or more precisely the costs of shipping materials to the manufacturing site and finished goods out. Here, the choice of manufacturing site is paramount. There are a myriad of aspects to consider. Location of company HQ, customer locations, supply base locations, workforce availability, labour rates, tariffs. Short term pain may be required.
Henry Ford understood this. He was prepared to build his Dagenham factory on a marsh in order to secure excellent transport routes. With a jetty onto the Thames, still in use today for vehicle and parts shipments, and easy access to rail, road and an available workforce in East London. In its heyday, rocks (iron ore) were arriving by cargo ship via the jetty, to be transformed into steel and then cars assembled, all on one site- the epitome of vertical integration.
When considering site selection, we have seen a number of recent projects that have struggled through seizing an opportunity apparently too good to miss. Sometimes a regional authority may offer a significant grant linked to the use of a specific vacant lot. Or a building may be already erected and ‘good to go’. However, if the size/ structure will force compromises to an efficient layout, and adequate transport routes are not available, then an expensive relocation may be needed soon after launch. Building in an area not designated for heavy industry may mean that planning permissions prove difficult (shift patterns may be constrained and trucks may only be allowed access during specific days of the week).
A further aspect to consider is customs duty. Of course, as I write this, who knows what is happening to global tariffs and what the turmoil will lead to. Flexibility will be important and it seems likely that there will be a significant shift in the location of many major supplier footprints. One result of this uncertainty is that the use of Free Trade Areas is likely to become more attractive.
Complex supply chains can be simplified by the use of supplier parks. Choosing a manufacturing site that might be attractive for your major suppliers to set up sub-assembly and sequencing operations in can have many advantages. Investment by suppliers can help spread costs, both operational and inventory, and will also reduce your own factory space requirements. In the automotive industry it is the norm for complex assemblies, such as seats and wiring harnesses, to be handled in this way. It may well be that during initial start-up and launch, suppliers may be reluctant to commit to this kind of investment, however it is well worth discussing the opportunities with them for when production volumes ramp up, and space protecting space accordingly.
Material costs need to be considered from a total cost perspective. Buyers of production parts can have a tendency to over-look the packaging and freight costs that result from their decisions. A particular danger is, in an eagerness to source parts quickly to support a product launch, they fail to confirm precise delivery terms and packaging responsibilities and do not ask for costs to be itemised within the contracts. This means that if there are future changes (which are likely) then the supplier will have the upper hand during price negotiations. During prototype and launch phases it may be expedient to have the supplier arrange shipments to the manufacturing site. Later on, however, a managed freight network, using a specialist logistics services provider, can greatly improve costs by combining loads and optimising routings, and can provide much better control of material arrivals, thus avoiding production stoppages and reducing the need for safety stock.
This last point touches on my last topic for now: inventory cost. All industries vary in terms of where their value is generated. Some assemblers will be spending most of their money on purchased materials. Others may turn low-cost raw materials into high value finished goods. What is for sure, is that material simply sitting around is not generating any money for anyone.
Two aspects of inventory can significantly scupper new starters when it comes to funding requirements. Firstly, the cost of prototype material and, in particular, the additional costs required to order repeat material due to test failures and necessary design changes. Prototype parts can be extremely expensive and a large proportion may end up as obsolete and end up being scrapped. If these costs are not adequately planned for then difficult conversations may be needed with the project’s financial controller.
The second factor is cost of system fill. It is self-evident that no material will truly be paid for until product is sold. What is not always obvious, however, is the amount of stock needed to be procured and held around the site simply to support the manufacturing system before product can be made. Hoppers must be filled, line-feeding systems stocked up, stocks required to support different product variations and significant buffer stock required to support the delivery frequency of parts on to site along with contingency stock to protect against transit time variability. All this stock requires purchase, warehousing and management. The initial cash flow required to provide these essential requirements can be enough to provide a scare to potential investors. They will expect their money to be spent on manufacturing facilities and saleable product, not to just fill up stock yards and warehouses.
Companies overlook logistics at their peril. To avoid the fate of those who have, it is vital to begin considering the issues early, right from the planning / design stage, to ensure risks are understood, and necessary decisions made, ahead of funds being committed.
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HSSMI has a team of experienced logistics personnel that can support throughout all phases of a product launch, whether by guiding an existing team, or acting directly, to ensure the right systems are in place from the ground up before the long-term team is in place.
John worked for over thirty years at Ford Motor Company, where he held a range of management positions in supply chain and logistics, including responsibilities for programme launches, international freight networks and day to day material planning and handling operations for a wide variety of plants and products. He now works for sustainable manufacturing consultancy HSSMI supporting manufacturers in delivering new product launches and improving their manufacturing and supply chain footprints.
For all press, media or general enquiries, please contact David Stewart on david.stewart@hssmi.com
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