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Tuesday, December 13, 2011

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Why is Logistics So Hard?

What is it about logistics? For the last 30 years we have all heard how important logistics is. Consultants have coined all manner of fancy names for logistics - supply chains, just in time manufacturing, kaizen, kanban (the Japanese are notoriously good at logistics), design for manufacturing, black belt six sigma. All of them basically make the same points. First, time is money and second, inventory is expensive. And yet for all the talking and writing, and despite the best efforts of legions of consultants and specialists, the personal care business still leaves a bunch of money on the collective table every day.

Consider the humble soap and lotion twin pack, with a lovely metal caddy and a shrink wrap label holding it together. My company might procure the ingredients, my customer sends the components. We make the products, fill and label the bottles, and pack it in shipper cases. We load the pallets onto a big truck and send it 500 miles down the road to my customer. They unpack the boxes; build and shrink wrap the sets, and pack the final boxes for shipment to the retailer’s warehouse. The retailers unload the boxes into a warehouse and reload the boxes for final shipment to the retail store. Do the math, as an industry we have packed and unpacked these bottles 5 times and loaded them onto at least 3 trucks. How much does all this extra effort cost?

I took apart one similar project and figured that we (my company, my customer, and the retailer) could reduce costs by about 15% if we could collectively consolidate the process. So why not? What prevents this from happening? I think there are 2 major barriers.

First, many companies in the personal care business do not accurately measure costs. Here’s why. Suppose I own a company that builds brands and sells product to retailers. I also own a big warehouse where I inventory my products. When I calculate the cost of producing a kit (the second step in the process described above), I only count the direct cost of hiring the labor. I do not count the cost of the warehouse or of the supervisors that manage the line. Since I already own a taper and a shrink tunnel, I do not count these costs either. But do I really need all of these costs? If branded companies are in the “intellectual side” of the business (building brands and marketing), why do they need to be involved in the “physical side” of the business (making kits, moving bottles and boxes).

The answer is that most branded companies do not. Most of the physical side of the business is already done by manufacturing companies like Mariposa Labs. So when Mariposa Labs bids on a kitting job, their price may be higher than the simple direct costs that my branded product customer looks at when she makes her calculations – because all of the warehouse, supervision, and equipment costs are ignored. The result is the inefficient process described above and underutilized physical assets. For example, both Mariposa Labs and our customers own shrink wrap tunnels that are only utilized 5% of the time. If we could eliminate one shrink wrap machine and the attendant labor, we could save a lot of money. More generally, what is required to fix the problem is a complete restructuring of the physical assets and related activities across multiple companies up and down the supply chain.

The second barrier to better logistics is a lack of trust. Branded companies simply do not trust their business partners enough to give up the control a warehouse full of inventory gives them. They are just too worried that a third party warehouse will not serve their customers well enough. There are trust issues on my part as well. Many times I am reluctant to produce small runs at sharp prices for shipment to individual retailers because I do not want to be caught with unused inventory. So I ask for larger runs than my customer can immediately sell and, presto, we create inventory! To build trust, my customer and I need to take several steps. First we need to create a common forecast for the final sales by major retailer. From there we can plan the procurement and build schedule. Second we need to agree on how we will share the risks that sales do not unfold as planned, e.g. how will unused inventory be paid for. And third, we need a common plan to optimize physical assets like warehouses, and equipment.

In short, logistics still offers our industry tremendous room for profit growth. To capture the opportunity we all need to think more carefully about what we do, what we own, and why. If we can think more clearly about our best role and combine that with trust in our partners, we can all achieve much better performance.


Milt Gillespie- President

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