Ultimate Cost - Purchasing An Item At The Ultimate Cost
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 organization 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 organizations, but it can appear in every organization. The Silo or Functional thinking seems productive, effective or cost efficient from perspective of a single function/department, but is totally opposite for the common benefit of the whole organization.
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
Sugar in Production:
Q1-14% Q2-26% Q3-33% Q4-27%
Sugar Import:
Q1-16% Q2-33% Q3-32% Q4-19%
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:
Sugar in stock ( mt ):
Q1-1.050 Q2-1.850 Q3-1.550 Q4-1.250
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
