Formal Report – Lab Projects Inc.

Formal Report – Lab Projects Inc.

Executive Summary

Lab Projects Inc. (LPI) has managed to get to a platform which most technology startups dream of. The journey from creative vision to a working device is challenging and full of surprises. However, it is only the beginning. Procuring raw material, establishing storage facilities, and managing risk during the movement of product are areas that are the backbone of any successful operation. My goal is to outline challenges, provide options, and recommend the best procedures to make this operation as efficient as it can be.

As LPI moves into production of the new Tablet, storing the product will be one of the biggest undertakings. Company has decided to advertise shipment of the first $10,000 of product within the month received. To make sure that LPI can follow through on its aggressive sales/delivery guarantee policy, having a private warehousing facility that the final product can be moved to from the production line will work to LPI’s advantage. It will allow LPI the level of control needed over its finished goods inventory to reach delivery targets. As LPI will be advertising its sales/delivery guarantee, it will become important to keep the shipping and delivery information private from competitors. Using a public warehouse will give competitors easy access to the stock-on-hand information and they might even be able to get access to who the biggest customers are. Having a private warehouse in Toronto will eliminate such challenges and provide LPI the privacy required to be competitive in the market.

LPI will be buying raw material from international suppliers. As LPI and its suppliers will be governed by different laws, it becomes extremely important to use the correct legal terms when writing the contracts. Using the correct Incoterms will establish the transfer of “risk” during the shipment of raw material from the supplier to LPI. As mentioned by the previous consultant, Incoterms on inbound materials should be changed from FOB. Although it is a valid Incoterm, it might not be the best one based on the modes of transportation that will be used. It will create ambiguity when determining the transfer of risk in case of loss/damage. Based on the options that the suppliers have provided, FCA (Free Carrier) is the most appropriate Incoterm to use. This will allow LPI to self-insure the goods from the seller’s warehouse. The risk of loss or damage will pass to LPI as soon as the raw material is loaded on to the vehicle appointed by LPI. It will be easier to determine exactly what is covered until which location and means of transport, allowing the formation of a more comprehensive contract that covers all foreseeable challenges. Most of the raw material is being sourced from within Canada, thus using FCA, LPI will be able to minimize transportation costs and purchase appropriate insurance at cheaper rates.

Preventing loss/damage to product during transportation will be one of the biggest challenges for the logistics department. However, it is reasonably foreseeable that there will be some loss of inventory during transport due to various external factors. LPI has decided to self-insure the finished product in transport to the customers as a method of reducing freight costs. In majority of cases, self-insuring the product is a lot cheaper and a better alternative to the insurance provided by carrier. Given that LPI is able to get a cheaper insurance rate from its own insurance company than the carrier, the only concern I have is related to the relatively high deductible of $25,000. Based on the $900/tablet retail price, it will only be worth it for LPI to avail insurance for a loss of 28 or more tablets.

This in-house insurance will only be feasible when LPI is shipping in bulk to third-party distributors. LPI is shipping directly to customer and there are no plans of selling only in bulk. Therefore before using its own insurance provider on shipments to customers, LPI should re-negotiate a deductible based on its new business demands.

Table of Contents

Introduction​6

Warehousing​6

Private Warehouse​7

Advantages​7

Disadvantages​8

Incoterms​9

CIF​9

FCA​9

FOB​10

EXW​10

Liability​10

Insurance​11

Carrier​11

Self-Insurance​11

Conclusion​12

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Introduction

Lab Projects Inc. (LPI) is moving to the productions and distribution of the tablet that is has developed. There is demand for this rugged tablet in the industrial sector and LPI has identified potential customers and initial markets to target. Suppliers have been identified and production is ready to begin. This is a very critical stage as the decisions made now will impact every aspect of the business process. It is important to establish where the product will be stored and the kind of warehousing facilities that will be used. Contracts with suppliers will be signed based on the proper understanding of the transfer of risk during all phases of movement of the raw material. Liabilities and transfer of title and ownership need to be understood so that sound business decisions can be made. In addition to all this, LPI needs to make a decision on how it will insure shipments from its distribution facilities to the customer. In my report, I have analyzed various challenges faced by LPI and have recommended the best options/scenarios that are available.

Warehousing

When it comes to storing the raw material required for production and the finished goods inventory, there are two main options that are available to LPI. The company can either use the services of a private warehouse or invest in building a private warehouse facility.