It is well known fact that
one of the goals of the trade is to buy an item at the lowest
possible cost and then to sell it at the highest
possible price. That sounds simple and obvious. The same
stands for every other activity within the company.
Every activity that can be done with less expense can
increase profitability of the Company by reducing input
costs.
But
when the organisation is large, or when people are not
aligning between each other, then the "Silo" thinking
syndrome occurs. The Silo thinking is typical for the
bigger organisations, but it can appear in every
organisation. The Silo or Functional thinking is looks
productive at first glance, effective or cost efficient from perspective
of a single function/department, but is totally opposite
for the common benefit of the whole organisation.
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Example
1:
Beverage
Company is importing sugar in a quantity and shipment
dynamics that is larger than usual. As we know, the
sugar is one of the main ingredients of the soft drinks.
The annual quantity of sugar ordered is 12% larger than
planned annual production. The Quarterly dynamics of
production and shipment dynamics is as follows:
Q1
Q2
Q3
Q4
Sugar
in Production:
14%
26%
33%
27%
Sugar
Import:
16%
33%
32%
19%
The
Sugar is bought at this quantity and shipment dynamics,
since the price was more favorite for this quantity.
Also, the sugar is more expensive in stock market in Q3
than in Q1 and Q2. So the plan is obviously OK.
But,
in this situation there is the surplus of sugar in stock
that needs to be placed in warehouse. The usual
warehouse space dedicated for sugar is up to 1.000
metric tons. With the new setup, the company will have
stock average quarterly surplus as it is shown:
Q1
Q2
Q3
Q4
Sugar
on stock ( mt ):
1.050
1.850 1.550
1.250
Obvious
that the Company needed to rent extra warehouse for
surplus sugar, what created additional costs. In fact
this situation depicts what is usual Postponement of
cost in the company that is Silo-Thinking oriented.
Fortunately, the saving on sugar was significant enough
to cover extra warehousing space. The saving on sugar
was €80 per metric ton, while warehouse and additional
cost per excessive ton was €12. So, the ultimate
saving per sugar metric ton was not €80, but it was
€68.
In
this case the company was still making more money than
before, even after a lot of internal conflicting who
should pay for the warehousing cost. Should the Supply
Chain pay the extra warehousing cost, or Procurement
that bought cheap sugar?
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Example
2:
Another
Soft Drink Company after analysing different options in
production cost saving decides to use thinner ( and
cheaper ) wrap film for packaging. The pallet of product is
composed of certain number of cases ( 6 bottles wraped
with a film ) placed on a wooden
pallet. Everything is then fixed by wrapping the plastic
film around.
Of
course, for the company that sells a millions of cases
annually the decision to use 45 nm wrap film is €1,2
cheaper per pallet than with 65 nm wrap film. This
initially meant to be a perfect example of a clever
saving.
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the problems in warehousing appeared soon. The pallets
in warehouse are placed one on top of the other. There
are other methods ( racking ), but this method is the
cheapest, since it not requires any investment. Usually,
the pallets are stored in 3 layers. But, with this
weakened wrap film the pallets lost some stability. This
was reflected by the sporadic collapsing of lowest
pallets. This was a problem from many perspectives:
safety, cost ( € 400 per pallet ), customer
satisfaction, ... Afterward, the decision was made to
store pallets in 2 layers only. After this situation is
settled, there were no more pallets collapsing.
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But,
on the other side the problem appeared. As the season
was approaching, the warehouse was quickly become full,
since the capacity was reduced by the decision to store
pallets on 2 instead on 3 layers. The solution was to
rent an extra seasonal warehouse. Finally, someone asked
about what caused this problem in first place.
Indeed,
what was the cause? It was the new wrap film that
changed procedure in storing the pallets. And what was
the result? The warehouse "shrinked" by loosing the
3rd layer of pallets.
The
Analysis of problem showed the following facts:
-
New Wrap Film saving is €1,2 pallet
-
Warehouse cost per pallet is €3 per pallet
So,
at the end the Company was loosing money by introducing
cost saving in production, because that caused increase
of warehousing costs. Saving of €1,2 caused additional
€3 through Postponement of cost. The solution was to
use old Wrap film for those products whose stability on
pallet was jeopardised by thinner film.
Note: These two examples are essentially authentic, but
figures are somewhat changed and company names are
disclosed for reasons of confidentiality
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