Would you outsource your heart?

“The warehouse is the heart of the plant. It pumps blood to the production cells which are the arteries of a production facility” says Juho Nummela, CEO of Ponsse Plc. Ponsse Plc renovated its plant while also building a highly automated warehousing system during the effort. The top goals of the entire project were quality, flexibility and productivity. At the same time, however, some of the manufacturers in Finland are considering outsourcing logistics. Why? What should be considered? What are the future outlooks?

Inhouse logistics has become a talking point and development area only over the past few years. Ten years ago, production managers still often said that this is a factory, we are not involved in logistics. A reason for this may be that there is not a lot of education or research on inhouse logistics in Finland. The international models do not apply well to Finnish manufacturing. A special characteristic of Finnish manufacturing is small run quantities, which are increasingly a single unit. Logistics either enables or prevents efficiency in this type of manufacturing. It is especially important to adhere to Lean principles throughout the logistical flow from the supplier to the installer.

The approach to inhouse logistics demonstrated by Finnish assembly factories is three-fold. The first group perceives inhouse logistics to be an essential part of production. Inhouse logistics is seen as an important work phase that is used to improve efficiency and lead times, among others. The second group sees logistics as an expense that can be outsourced. The third group does not know where their components are and inhouse logistics is not seen as a function or even an area that requires management.

The first group perceives the warehouse as being the heart of the factory that pumps components into the arteries of the production facility. This group develops productivity and quality using methods such as the following:

  1. Maximizing installer productivity.
  2. Ikea quality (intended as a positive). The right parts are delivered to the installer at the right time and based on pull control.
  3. Picking efficiency. Using modern automation or group picking methods, the picking efficiency is 10-20 s/line.
  4. Minimizing balance errors and part shortages. If is a proven fact that when installers do the picking, the inventory balances will be off.
  5. Using space for production. Line inventories are highly inefficient when measured by the used space.

You can review the related list in more detail in the blog. A typical characteristic of the first group is that logistics and production are led using the same performance indicators – and not in a manner where both functions attempt to minimize their own costs by dumping their problems and challenges onto the other function.

The second group, the outsourcers, do not have clearly defined operational procedures. Some have outsourced the personnel at receiving, others outsourced the warehouse that feeds parts to the plant and yet others treat outsourcing logistics essentially as temporary labor. With outsourcing these, it is important to bear Lean principles in mind. I have seen several examples where outsourcing logistics in a factory environment has increased the number of times materials are touched. The increase in the number of SKUs and leaner material flows often require investments into warehouse automation. But these investments are omitted, because it is not possible with an outsourcing agreement lasting two to three years. Locations that have outsourced logistics also often neglect the plan-for-every-part function. For the service provider offering outsourced logistics, repackaging, for example, is good business: it generates a lot of transactions. Yet it generates very little value-add. I feel that that the best results have been achieved at locations where the plant is responsible for logistics and development and the service provider serves as the operator.

The most difficult situation is with those in the third group. The productive time of an installer in these types of plants is only 20-30%. These plants often have deficiencies in their product structures. The line inventories hide the problems and ultimately they become evident as part shortages. A typical characteristic for this type of plant is that the learning curve for new employees is long, because they need to learn a lot of tacit knowledge. In order to improve the situation, I would typically start off with separating manufacturing and logistics. After this, there are two solutions: either a transition to picking or a kanban-style line inventory or a combination thereof. The kanban inventory is replenished from the factory warehouse, which allows keeping the balances under control. The most complicated mess is created when this group attempts to outsource their problems to a 3PL service provider.

Which group does your plant belong to? What can be done to increase the productivity at your plant? Are you outsourcing your heart?

At Leanware, we have extensive experience with consulting on manufacturing and production logistics. We will help you find the right solution. And we ensure our services come from the heart.

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