Formal Report – Lab Projects Inc.

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LPI needs a head office and is considering building a private warehouse alongside the head office. This endeavor will take up a lot of capital resources that a startup such as LPI might not be able to afford. However, there are advantages to a private warehousing facility that may work better than a public warehouse depending on the business model LPI decides to adopt. Advantages and disadvantages of a private warehousing facility are listed next.

Private Warehouse: Advantages

One of the biggest advantages of a private warehouse facility would be the privacy that it would allow LPI to operate with. LPI has decided to advertise shipment of the first $10,000 of product within the month received. Storing the finished goods inventory at its own warehouse will provide the secrecy LPI needs to stay competitive and avoid sabotage.

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.

There won’t be excessive month variations in the amount of orders received and good produced. Based on this storing raw and finished product in its own facility will provide a smooth flow from raw to finished good inventory. This will make sure that production unit runs at a high degree of efficiency.

It will allow LPI to maintain tight tolerances as to how raw material and finished goods inventory is stored. This will minimize defective tablets and work in improving customer satisfaction.

Having a private warehouse will also allow LPI to have a stronger market presence in Toronto. Majority of LPI’s business will be in the Toronto area. By employing staff in Toronto, shipping product out of a local warehouse, and branding the warehouse itself, LPI will be able to create a presence and reach further into the market.

It will be faster for LPI to get the finished product out to customers when the warehouse is based where majority of its business is.

Private Warehouse: Disadvantages

There are some disadvantages to using a private warehouse facility that I have listed below.

LPI will have to make a substantial capital expenditure into creating a warehouse facility. This might be a huge gamble because the product has not yet made it to the end-user and there is no guarantee if it will take-off or not. In the case that the product is not accepted by the customers, LPI will have to make investment into R&D to re-imagine the product. This takes time and money which might not be available due to the big capital investment up-front.

In addition to the up-front capital investment, staffing costs will quickly add up. LPI’s expenses will rise constricting cash flow. This will further decrease its ability to deploy assets to improve upon or address an urgent situation.

LPI will have to allocate the space between production and warehouse. There will be a trade-off between how much it can produce and how much can be stored at any given time. If the demand shifts to either extreme, the warehouse space will either become under-utilized or not sufficient enough.

As is the case with any other capital asset, LPI will have to invest regularly in maintenance and upkeep of the facilities. This will be another expense that will have to be accounted for.

Attracting competent personnel will be challenge in itself. LPI is a new company and is not well known in the market. The warehouse operation will only be as efficient as the staff running the operations. LPI will have to invest in benefits and offer salaries above the market rate to attract and keep competent employees.

Incoterms

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 option based on all the modes of transportation involved. Before recommending the Incoterm that I believe to be the most appropriate, I would like to provide a brief explanation of the four available incoterms.

CIF: Cost, Insurance and Freight

“Cost, Insurance and Freight” means that the seller is responsible for delivering the goods on board the vessel. The risk of loss or damage passes to the buyer when goods are on board the vessel. Seller also provides insurance for loss or damage. However, it is important to note that the seller only provides minimum insurance to cover the risk. It is the responsibility of the buyer to purchase additional insurance if so required.

FCA: Free Carrier

“Free Carrier” is the term used when the seller delivers the goods to the buyer at the seller’s warehouse location where the goods are being shipped out from. Buyer can appoint a carrier to pickup raw material from the seller’s warehouse. The risk is transferred from the seller to the buyer as soon as the goods are transferred over to the buyer or the carrier appointed by the buyer. Thus buyer is responsible for providing insurance to cover the loss or damage to the goods.

FOB: Free On Board

“Free On Board” is quite similar to CIF in terms that the risk of loss or damage transfers to the buyer when goods are on board the vessel. All costs and risks associated with transport beyond that point is the responsibility of the buyer. The scope of this term in limited to the marine industry and it is not preferred in contracts that cover more than one mode of transportation.

EXW: Ex Works

“Ex Works” is similar to FCA in the terms that the seller delivers the goods to the buyer at the seller’s warehouse location where the goods are being shipped out from. The major difference between the two is that seller does not need to load the goods on the vehicle appointed by the buyer. The seller is not responsible for clearing the goods for export either.

Liability

In the case of the prototypes that we lost during shipment, it is important to determine the legal liability of the parties involved. Considering that the prototypes were as expensive as they were, proper care should have been taken when shipping them. They should never have been trusted upon a third party without determining proper insurance coverage. The trade show neighbours who offered to ship the tablets were acting in good faith and didn’t have anything to gain or lose from the situation. They were the gratuitous bailee in this case. The only scenario in which they would be liable for the loss of the tablets is if LPI can prove in court