Minimum volumes = high inventories

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.

 

As the cause, transport policy is reflected in the way that the vendor brought the rule that certain items are not delivered in units of less than a box, pallet, etc. This policy was adopted from certain pragmatic reasons usually related to handling costs, packaging and transport. Decision on such a policy sometimes derives from the days when a different equipment was used, or when the structure of employees (human resources) was different. Check with some decision makers in the vendor’s company why such decision was made and you may be surprised when they mention the reason that is not applicable any more.

If it is the matter of transport costs, solution is somewhat simpler. The vendor probably calculated that its handling and transport accounts for a major share of the product cost and decided not to sell in smaller quantities. If this is the case, then you need to make a calculation to see whether it is worth paying extra premium on delivery of a smaller quantity than a pallet or a box. Here I urge you to make a calculation of total cost of ownership,i.e. how much keeping a whole pallet during a whole year would actually cost you (funding, handling, counting, obsolescence, write-off, breakage ...) compared to paying a slightly higher price at the beginning. Here are some solutions:

  • Successive delivery - one of solutions could be purchasing larger quantities, but with successive delivery
  • Own transport – might be worth it to you to pick up the goods smaller than defined because you have a vehicle available nearby.
  • Courier service – if you made a good calculation that shows high margin and that parcel delivery for certain goods is profitable for you, do it.

The third reason we mentioned, can be caused by production limitations. It means that the vendor produces a certain batch size which is only profitable and does it for you at certain times of the year. Also in the pharmaceutical and chemical industry there are substances that cannot be stable for a long time unless they are incorporated in a (your) product and must be immediately delivered to the customer. If that’s the case I recommend two things:

  • In the case ofraw materials I suggestbuyingthe whole lot andposting onthe cost centre(or production order) the quantityyou needand expect toproduce. This is truein thecaseif the calculationshowsthat the quantityyouintend toproduce has a buyerand can withstandthe total cost ofthe material.
  • In case ofmerchandisegoodsI would consider in details whether itpays at all to keepit in my portfolio.

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