| It is well known fact that one of the goals of the | | | | In this case the company was still making more |
| trade is to buy an item at the lowest possible cost | | | | money than before, even after a lot of internal |
| and then to sell it at the highest possible price. That | | | | conflicting among departments about who should pay |
| sounds simple and obvious. The same stands for | | | | for the warehousing cost. Should the Supply Chain |
| every other activity within the company. Every | | | | pay the extra warehousing cost, or Procurement |
| activity that can be done with less expense can | | | | that bought cheap sugar? |
| increase profitability of the Company by reducing | | | | Example 2: |
| input costs. | | | | Another Soft Drink Company after analyzing |
| But when the organization is large, or when people | | | | different options in production cost saving decides to |
| are not aligning between each other, then the "Silo" | | | | use thinner ( and cheaper ) wrap film for pallet. The |
| thinking syndrome occurs. The Silo thinking is typical | | | | pallet of product is composed of certain number of |
| for the bigger organizations, but it can appear in | | | | cases placed on a wooden pallet. Everything is then |
| every organization. The Silo or Functional thinking | | | | fixed by wrapping the plastic film around. |
| seems productive, effective or cost efficient from | | | | Of course, for the company that sells a millions of |
| perspective of a single function/department, but is | | | | cases annually the decision to use 45 nm wrap film is |
| totally opposite for the common benefit of the | | | | EUR1,2 cheaper per pallet than with 65 nm wrap film. |
| whole organization. | | | | This initially meant to be a perfect example of a |
| Example 1: | | | | clever saving. |
| Beverage Company is importing sugar in a quantity | | | | Unfortunately, the problems in warehousing appeared |
| and shipment dynamics that is larger than usual. As | | | | soon. The pallets in warehouse are placed one on top |
| we know, the sugar is one of the main ingredients of | | | | of the other. There are other methods ( racking ), |
| the soft drinks. The annual quantity of sugar ordered | | | | but this method is the cheapest, since it not requires |
| is 12% larger than planned annual production. The | | | | any investment. Usually, the pallets are stored in 3 |
| Quarterly dynamics of production and shipment | | | | layers. But, with this weakened wrap film the pallets |
| dynamics is as follows | | | | lost some stability. This was reflected by the sporadic |
| Sugar in Production: | | | | collapsing of lowest pallets. This was a problem from |
| Q1-14% Q2-26% Q3-33% Q4-27% | | | | many perspectives: safety, cost ( EUR 400 per pallet |
| Sugar Import: | | | | ), customer satisfaction, ... Afterward, the decision |
| Q1-16% Q2-33% Q3-32% Q4-19% | | | | was made to store pallets in 2 layers only. After this |
| The Sugar is bought at this quantity and shipment | | | | situation is settled, there were no more pallets |
| dynamics, since the price was more favorite for this | | | | collapsing. |
| quantity. Also, the sugar is more expensive in stock | | | | But, on the other side the problem appeared. As the |
| market in Q3 than in Q1 and Q2. So the plan is | | | | season was approaching, the warehouse was quickly |
| obviously OK. | | | | become full, since the capacity was reduced by the |
| But, in this situation there is the surplus of sugar in | | | | decision to store pallets on 2 instead on 3 layers. The |
| stock that needs to be placed in warehouse. The | | | | solution was to rent an extra seasonal warehouse. |
| usual warehouse space dedicated for sugar is up to | | | | Finally, someone asked about what caused this |
| 1.000 metric tons. With the new setup, the company | | | | problem in first place. |
| will have stock average quarterly surplus as it is | | | | Indeed, what was the cause? It was the new wrap |
| shown: | | | | film that changed procedure in storing the pallets. And |
| Sugar in stock ( mt ): | | | | what was the result? The warehouse "shrinks" by |
| Q1-1.050 Q2-1.850 Q3-1.550 Q4-1.250 | | | | loosing the 3rd layer of pallets. |
| Obvious that the Company needed to rent extra | | | | The Analysis of problem showed the following facts: |
| warehouse for surplus sugar, what created additional | | | | - New Wrap Film saving is EUR1,2 pallet |
| costs. In fact this situation depicts what is usual | | | | - Warehouse cost per pallet is EUR3 per pallet |
| Postponement of cost in the company that is | | | | So, at the end the Company was loosing money by |
| Silo-Thinking oriented. Fortunately, the saving on | | | | introducing cost saving in production, because that |
| sugar was significant enough to cover extra | | | | caused increase of warehousing costs. Saving of |
| warehousing space. The saving on sugar was EUR80 | | | | EUR1,2 caused additional EUR3 through Postponement |
| per metric ton, while warehouse and additional cost | | | | of cost. The solution was to use old Wrap film for |
| per excessive ton was EUR12. So, the ultimate saving | | | | those products whose stability on pallet was |
| per sugar metric ton was not EUR80, but it was | | | | jeopardized by thinner film. |
| EUR68. | | | | |