“From my local manufacturing experience, I would emphasize inventory. 70% of your [money] will be in inventory, so how do your mitigate that with local manufacturing and having your supply chain working?”
-Karl Heinz Tondo
Supply chains and manufacturing make managing working capital difficult. It’s easy to wake up and realize all of your money is tied up in parts on a boat somewhere in the Indian Ocean. Entrepreneur Karl Heinz Tondo, Founder of Africa Born 3D, addressed this problem by trading a small amount of profit on each unit in exchange for a significant decrease in lead time. The result was a massive increase in his overall profit and growth rate.
##Creating Your Manufacturing Process
“We tend to focus more on developing our product and forget to define our process.”
-Karl Heinz Tondo
What many businesses fail to see when looking at their manufacturing process as a whole are the trade offs between unit cost and lead time. They can focus too much on unit cost and lose the big picture: that monthly profits and reduced lead time are more valuable than inconsistent sales of units with good margins.
Philip Walton, Co-founder of BRCK found himself facing a common but mostly ignored problem. Inconsistent production and long lead times led to difficulties in meeting demand. Orders become erratic on a month to month basis, making it even harder to plan manufacturing around demand. BRCK developed a “great product, too bad I couldn’t buy one” reputation.
This creates a vicious cycle where to solve this problem, a company will seek larger orders which just end up tying up even more working capital and limiting new customers to those willing to pre-order or buy in bulk. Philip turned to the temporary solution of using contract manufacturing. This created some lead time and high unit cost, but it got the product off the ground for long enough to allow him to begin transitioning to local manufacturing.
Have you noticed companies with successful products that fail to grow? Poor working capital management is often the reason. They don’t see the process as a whole, they fail to see the trade offs between lead time and unit cost.
Ultimately, inventory and predictability in the supply chain ended up being key for both Philip and Karl.
##Managing Inventory
What are the monetary costs of inventory on a per-unit basis?
What are the costs of waiting an extra week to get the parts you need?
Ultimately, both are high costs, and ones which need to be looked at critically. Ask “do I need to keep my unit costs so low if I can order more quickly?”
For Karl, it made sense to spend more to get components in 2 weeks rather than 3. The value of that week exceeded the value of the cost. It also makes the supply chain more nimble, if orders increase or decrease, the amount of time Karl needs to adjust his orders is shortened, reducing the likelihood he’ll end up with too much or too little inventory. It also meant that at the end of each month, more of his money was in cash instead of tied up in inventory. That’s cash he can use to grow or to take new opportunities.
What Karl really learned here was that having a short and adaptive supply chain solved his inventory problems. But there were still some other unique ideas he used to manage his inventory and working capital.
##How to Do Local Differently
“We tend to assume it’s not locally available, so we go out there to get it when it’s next door.”
-Karl Heinz Tondo
Karl pushes his supplier concerns onto a local importers by setting up a relationship with them. This means he has to pay a bit more per unit, but it also means that local business is the entity concerned with maintaining inventory of the parts he needs. He figured out that just because those local suppliers don’t have what you need now doesn’t mean they won’t begin stocking it. If you build a relationship, a lot is possible.
Other companies may order much more than they need in order to avoid waiting for new parts, but that ties up capital in inventory. Karl orders only a little extra because his lead time is small and he can reorder quickly only when he needs to.
In the end, Karl may not make as much on each printer he sells, but a much greater percent of those profits are ready to be reinvested at the end of each month. That let’s Karl’s business grow and prosper. In the long run, he sells more printers and his overall business is more profitable.
Can you relate to the stories we told here? How is your experience different? We’d love to hear from you. Your questions and comments are what will help us make better lessons in the future.