Logistics for Start-ups

Nov. 16, 2011
Any new venture needs to master these supply chain basics to win and keep customers.

Logistics plays a pivotal role in any start-up operation and can play a critical part in the firm’s profitability. When it comes to the movement of goods from supplier to end customer, many logistical elements must be considered. This article lists some of the more important ones and how they should be treated.

Supplier Base Profile

The size and location of the supplier base can help determine such things as transit time to destination(s), which carriers are to be used and inbound product size, weight, terms of trade (FOB & INCO Terms).

If complete control of shipping costs is necessary, FOB Origin Freight Collect for U.S. domestic shipments, and EX Works for international shipments, will bring all freight, duty, tax charges, customs fees, and risk of loss to the start-up. Conversely, the burden can be placed on the supplier(s) to deliver shipments to your dock on or shortly before the due date.

Shipments to a job site are critical as even short-term storage is not practical in many cases. Within budget constraints, accepting the responsibility for inbound shipment costs and delivery times is preferable when sufficient notice to good, trusted carriers is given. At the end of the day a late delivery is a late delivery no matter who is at fault.

Outbound Shipments

Smaller start-up companies whose products are fewer in number and carry some value can elect not to carry the burden of freight and related charges by either utilizing the customer’s carrier or stating the delivery terms of FOB Origin freight collect and EX Works in the terms of sale as part of the company purchase order.

However, these terms may not be acceptable to customers of larger shipments of high value such as machinery. In addition, these customers may not have the negotiating power to obtain favorable freight rates. In these cases the freight charges can be added to the invoice for the goods.

Drop shipments should be exploited within the firm as they reduce or eliminate excess transportation, handling, storage, and exposure to the hazards of transportation, all of which can affect the bottom line. Utilization of lowest cost labor rates to pick and pack orders allows freight saving consolidation opportunities to worldwide destinations.

Logistics of Online

Nearly all businesses set up a website as soon as possible, but the logistics aspect of the site is not always obvious. Online purchasing, via a “Buy Now” tab or from a catalog of items, can reduce, or in some cases, eliminate store inventory and the resultant transportation and inventory carrying costs. Excess or prior year inventory are examples of merchandise that can be offered on-line at reduced prices.

Capturing the customer demographics and buying habits can be used to offer accessories or similar lines which could increase sales, increase inventory turns, lower per-order fill rates, and lower cost per pound shipping costs when freight is prepaid.

Cargo Insurance

A new contract under an existing corporate structure carries the advantage of having many insurance requirements already in place. Always meet with the risk management staff and the insurance underwriter and compare the current cargo insurance coverage limits with the values of the material under the new contract. Paying particular attention to shipment values, transportation requirements, packaging, or other aspects of shipment preparation (blocking and bracing and use of dunnage) and carrier equipment requirements (for overweight or excessive length or width shipments), may have an effect on coverage requirements.

Single piece shipments to destinations carry one value, but if shipping the entire system is more cost effective, the total system value must be considered for cargo insurance purposes. Many times the premium to increase cargo coverage on single shipments is minimal.

Staffing Requirements

From a resource standpoint, the operative word is lean. Third-party logistics companies (3PLs) may be able to handle shipment scheduling and on-time deliveries less expensively than direct and indirect labor costs. If 3PLs are used someone internally must track contract terms and metrics. Contractual key performance indicators (KPIs) should form the basis of metrics pushed to the company by the 3PL. Verification of the source of the metrics will insure their integrity when brought before the quality organization. On-time delivery ratio metrics should include all late delivery causes. Airport closures and other weather related delays can then be reported separately.

Carrier Selection

If the existing company carrier base can handle the new business, leveraging the additional tonnage to gain cost or service advantages could help the entire company. If more than one existing carrier can handle the business from the new contract, a winner-take-all negotiation could yield greater benefits and also reduce the carrier base.

Many projects, treated as a start-up operation within an existing company or as a standalone start-up, require specialized transportation equipment. Within the electronics industry, air-ride suspension and specialized equipment to transport structures housing sensitive electronics may be necessary. In these cases, use of a specialized carrier that could handle much existing business also could improve service and reduce costs.

Facility Requirements

Thoroughly reviewing the business plan or contract will be necessary to determine facility requirements. Coordinate with purchasing to determine inbound volume and WIP storage requirements. Whether internal or external storage or warehousing is necessary, many factors must be considered in determining space requirements. Receiving and staging, shipping staging, aisle width, storage rack requirements, picking and packing space, and kitting areas must all be totaled to determine overall space requirements.

Finally, things change. Changes in volume due to increased sales and supplier locations affect many of the items mentioned here. Detailed documentation of all analysis and costing is necessary to determine future increases in resources, space requirements and logistics budget changes.

Richard G. Ward is director of quality and logistics for Alliance Memory ( Before Alliance he spent ten years in public warehousing and retail distribution as well as several years at Unisys and Lockheed Martin heading the logistics operation for the NEXRAD Weather Radar program.

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