CLA Episode 6: A Capital Efficient Approach to Low Volume Production with Erik Gildemeister

Full Transcript:

Brandon: Welcome to the Capital Light Assembly podcast brought to you by Edison Manufacturing and Engineering. Edison is your low-volume contract manufacturing partner focused on the capital-light assembly of complex mobility and energy products. I’m Brandon Bartneck, joined today by Erik Gildemeister. Erik, thanks for coming on the podcast!

Erik: Absolutely, thanks for having me!

Brandon: Yeah, so, Erik, for introduction, Erik is the finance director at Wallbank Industrial, which includes Edison as well as our sister company, PJ Wallbank Springs. Erik, your perspective from the finance side is really interesting, as your experience comes from a high-volume automotive supplier in the manufacturing world. I'm really interested to get your thoughts on kind of how what we do is similar and different and, like, yeah, how really the differences between high-volume production and low-volume production. So maybe we start with similarity. So based on what you've seen in your previous life and now you're working with Edison, what do you’ve seen as kind of the core fundamental ideas and similarities in execution for high-volume production as well as what we're doing in the low-volume complex assembly space?

Erik: Yeah, sure, so in my prior life, I was in a large-scale capital-intensive tier-one automotive supplier manufacturing plant, serving in a controller capacity. When I compare and contrast, on the comparison side, with that large-scale manufacturing environment versus Edison, things that we do the same or things that we're motivated the same to do, is we want to deliver a quality product in a timely manner that meets or exceeds our customers' expectations. Along the way, we want to be motivated to be receptive to customer inputs as best we can. That's on a customer-facing side, you know, inwardly looking. Edison and large-scale manufacturers are going to be motivated to produce exceptional products in a repeatable manner in the most efficient way possible. In both situations, we're going to be hyper-focused on capital deployment. We want to be the best stewards of our capital resources. So, I think that's, you know, producing quality, repeatable products to the customers' timeline and expectations, and aiming to exceed their expectations is really where I see, you know, the most similarities.

Brandon: So, the foundations of running a good business and executing is being customer-centric, being smart with the capital deployment. As you know from being on the finance side, that's kind of the purpose of business is to make a great return on the deployed capital. Yeah, it makes sense that there’s a lot of overlap there. So, then the obvious kind of second end of that - where are the biggest differences you see between that high-volume, capital-intensive world and what we're doing?

Erik:  Yeah, I think there's going to be more differences on the operational side between the two versus similarities. And I'll start, so, you know, in my experience, the large-scale manufacturing plants that are capital intensive, which most seem to be, are, you know, the name of the game, economies of scale. Two driving forces in economies of scale are volume, right, making sure there's a sufficient amount of volume, and then that volume is at an appropriate variable margin. So those two forces have to work very hard together to cover a very heavy capital asset base that supports it. You know, that business model works well. It's tried and true. There are plenty of examples of that working, you know, efficiently, but it works when there is a fixed product portfolio, meaning the products that those environments produce are consistent. The mix doesn't necessarily change all that often, so the product portfolio is fixed, more or less, and the volumes are predictable. There's a good forecast that can be applied to that product portfolio, you know, that environment. You know, if you think about, you know, new launches, or R&D efforts, or low-volume ideas, those have no home in large-scale manufacturing plants. And so, how is Edison different? So, we're not bound by the heavy capital asset base. We describe ourselves as being capital light - and what does that mean? It means, you know, we deploy a semi-automated process complemented by technology to our people team to achieve a repeatable process, and we try to do that in a dynamic environment. And like, what is that? What does dynamic mean? What does that mean in our instance? It means that we can be receptive, and we can respond to the changes that our customers have along the way. So, as I mentioned in my opening comments, I think both Edison and others would say we're both motivated to be receptive to customer input, so, you know, if at the start of production or late in the life cycle, we want to be receptive to their needs and adjust more accordingly. Edison's better positioned to do that in practice due to being capital-light due to the nature of our business.

Brandon: Yeah, it's interesting comparing the internal and external perspective here, right, of being Capital light. That defines, to some extent, the way that we do business, and we're not eager to spend many millions of dollars on automation or significant capital expenditures, and that impacts the way that we're running our internal business, but we're not doing that just or even primarily for our own doing. We're doing it because it allows us to serve our customers in a different way. The finance perspective, I think, is really interesting. So, if you put yourself in the shoes of a customer who has, you know, this complex product that needs to be built in often low volumes, or whatever reason, it doesn't fit well in this profile of having capital-intensive, highly automated production. What would you care about, from the finance side, and how does our approach play into that?

 Erik: Yeah, that's a good question. So, I'll put myself in the shoes of being, you know, a controller again and at a large plant, and if I had a team come to me with a new idea - it's going to disrupt the core business. So, the likelihood that the business case makes sense to test or trial a low-volume idea is likely just not going to pass the numerical check, right? The numbers aren't going to make sense for the reasons we said before. So, what does that mean? What does Edison mean for somebody in that position? Edison is an option, you know, we create a path for those low-volume opportunities to get trialed, to happen, and to even exist. So, you know, we're going to produce a quality product, we're going to do it on time, oh and by the way, we're going to have minimal upfront capital requirements. So, the business case is a little bit different than it would be if you try to do it in a legacy, large-scale plant, and along the way because, you know, maybe it’s an early-stage product, we can respond and receive changes, and it's not going to be all that disruptive. So, when I think about risk management in terms of capital allocation, we really help mitigate risk in proving out smaller volume opportunities that don't have a home in the big manufacturing plants.

Brandon: Yeah, this is something that I've been thinking about a lot from, you know, talking with various customers, and it seems like, I mean, there's definitely the change in phases of production and the opportunity, I mean, you mentioned a large volume plant, maybe we give the opportunity for them to explore a product that maybe starts lower-volume. But there's also a whole class of products that are going to be low volume or aren't going to fit well in a capital-intensive production facility, like possibly for the life of that product from 5, 10, or 20 years, however long it might be. I’d appreciate your thoughts here, but it seemed like those types of products, kind of historically, never get off the ground because there's not a business case that can close in an environment where you have one approach that works, that’s used often for production, and that doesn't fit well for this type of product. Essentially one of the things that we might be offering is the opportunity for those products to come to life, come to market, and allow the customers, our customers, to enter markets that maybe they couldn't otherwise, based on their internal limitations. Is that a reasonable thing way to think about it?

Erik: Yeah, that's correct. It's things that I've experienced in my past, and if I think about the options available to, say, other organizations that have a new product that they want to trial, they want to maybe test and do a market study on, your options are to consume high volume capacity, which is likely not going happen, or you're left with, you know, two other options which aren't all that attractive. One is building a prototype division, sometimes that's bolted onto a plant to realize some synergies, but still a capital-intensive undertaking nonetheless, or two, it's dedicating a line that's going to run, I’ll say, service low volume prototypes, advanced manufacturing, Etc. and it's going to be the cats and dogs line if you will. It's also not that attractive of an option because it's limited in its ability to respond to change, and it's usually capacitated, and they're usually not the most advanced capital asset line. So, there are limitations to those with new product ideas in the Legacy business environment on how to do a proof of concept, and Edison fits that need nicely.

Brandon: Yeah, cool. I think that's a good place to leave it. Again, I really appreciate you joining this episode of the Capital Light Assembly podcast. I always appreciate your thoughts. I mean, coming from an engineering background, I tend to think about things a certain way, and I appreciate how you always have the financial lens to put on things and frame discussions, decisions, values, and all that type of thing. So, it was a lot of fun. I appreciate the input.

Erik: Yeah, thank you for the time I appreciate it.