The vendor sometimes determines what the minimum quantity of an order for a certain item shall be. Such minimum quantity can be determined by transport packaging or size of the series produced by the vendor. Such determination or restriction is not a problem for products that are selling well, but when we want to order some less attractive item, we could face with the order size that we actually do not need or that covers even annual need for that product or raw material.
As usual, the tactics to solve this limitation is determined by the actual underlying cause. We have mentioned three main reasons for this vendor’s limitation: transport policy, transport costs and the size of production lot.
A friend of my wife admitted that her pantry is full of softeners (surely enough for the next two years under the current wash rhythm), but she cannot refrain when she enters the store and see a special offer (action) for “1 + 1 free”.
A professional in procurement reacts similarly when receives an offer for a much better price if he takes a double quantity of a material for production. Why is that? The answer is simple. Professionals in procurement are programmed (usually due to the remuneration system applied) and easy to see through them. If a vendor wants to sell a larger amount of a product it simply makes the scale of volume discounts and a buyer will get caught by "the best price" although it does not need such a quantity at that moment.
We all know that the Italians are known for spaghetti and nice cars. However, all of us who are coping how to be more efficient and productive, i.e. how to achieve more with less, should express due gratitude to one Italian, who was neither a chef nor a designer of sports cars. Vilfredo Pareto was an economist and sociologist who lived at the turn of the 19th and 20th century who, based on his research of the world wealth distribution, concluded that 20% of population owned 80% of the world wealth. This equation is now known as the Pareto’s law or Pareto’s rule applicable beyond the economy as well, so this rule has spread to all areas of human activities (80% of criminal offenses is committed by 20% of criminals, 20% of drivers cause 80% of traffic offenses and accidents, 20% of your customers account for 80% of your income, 20% of your time makes 80% of money ... ). (ovdje nedostaje dio: Kako je Pareto bio stravstveni vrtlar, čak i u njegovom vrtu...) Even in the Pareto’s garden 80% of peas is derived from 20% planted stems. In general, we can say that 80 percent of consequences arise from 20 percent of causes.
Similarly to procurement, the production has an inherent need to produce as cheaply as possible (so they were told) and then its product will be better and easier sold. The issue is that the production quantity must be large enough to make a product at lower price (with fixed production costs). In fact, this amount (or batch) is not "big" - it is optimal. For this there is a mathematical formula as proof. Why is it a problem then?
If you ask production, they say it is not a problem, because at the price the product will be sold like hot cakes. However, problems may arise at storing such quantity, and then at sale. Perhaps the price is really overwhelming, but when we look at a customer, we see it is very hard to please and does not want always to buy the model that we have just produced but wants a newer model or a model in a different colour, or rather, some variation that is planned for production not until next week or month. Here we return to the mentioned problem of storage. If we continuously produce new series of products in the amounts calculated and according to our planned schedule and place them at the warehouse - it is a safe formula for excessive inventories.
Many of my clients and participants in workshops and seminars often told me that one of the biggest issues in their logistics was too little warehouse space. After the global crisis knocked on the door, warehouses began to empty because their owners realized that they might have slightly excess stock. The third phase was to find the right stock structure, because equal reducing all stocks led to the inability to make deliveries and thus loss of income. All in all, it turned out that the real question was: What are actual (final, root) causes of excess stock?
If we knew actual causes, it would be much easier to eliminate or reduce only those stocks that are actually excess (redundant). Through experience in various companies, through talks with responsible people from various departments and sectors, and on the basis of surveys that I carried out in companies, the list of causes and catalogue of causes of the stock) has been developed that will be analyzed in this chapter. In fact, there are not many new things under the sun, and all the causes of the stock can be classified into several categories. The first category relates to the procurement and relations with vendors. The second category of causes relates to the production and the materials properties. Furthermore, there is the group of causes generated through sales activities and relations with customers. Some causes are connected with the market while the last category relates to strategy, policy and organization of the company.