Question

supplier? Your company assembles five different models of a motor scooter that is sold in specialty 2 stores in the United States. The company uses the same engine for all five models. You have been given the assignment of choosing a supplier for these engines for the coming year. Due to the size of your warehouse and other administrative restrictions, you must order the engines in lot sizes of 1,000 each. Because of the unique characteristics of the engine, special tooling is needed during the manufacturing process for which you agree to reimburse the supplier. Your assistant has obtained quotes from two reliable engine suppliers and you need to decide which to use. The following data have been collected: Requirements (annual forecast) Weight per engine Order processing cost Inventory carry cost 12,000 units 22 pounds $125 per order 20 percent of the average value of inventory per year Note: Assume that half of lot size is in inventory on average (1,000/2 = 500 units). Two qualified suppliers have submitted the following quotations: SUPPLIER 2 SUPPLIER 1 UNIT PRICE UNIT PRICE ORDER QUANTITY $505.00 $505.00 $510.00 1 to 1,499 units/order 1,500 to 2,999 units/order 3,000+ units/order 500.00 488.00 490.00 SuM $20,000 $22,000 Tooling costs 100 miles 125 miles Distance Your assistant has obtained the following freight rates from your carrier: $0.80 per ton-mile $1.20 per ton-mile Truckload (40,000 lbs. each load): Less-than-truckload: Note: Per ton-mile 2,000 lbs. per mile. a. Perform a total cost of ownership analysis and select a supplier. b. Would it make economic sense to order in truckload quantities? Would your supplier selection change if you ordered truckload quantities?

Answer 1

Consider the following data regarding both the suppliers (51 and 52): Requirement (annual forecast) Weight Order processing cost ($) Inventory carrying cost Lot size (order quantity) 12000 units 22 pounds per engine 125 per order 20% 1000 units Perform the total cost of ownership analysis for both suppliers using given formulas: Annual Purchase cost = Demand UnitPrice Inventory Carrying Cost = -otsizexCarrying CostxUnitPrice Orders per year Demand Orders per year Lot Size

Order Processing Cost = Number of orders x order processing cost Supplier Unit price ($) Annual purchase cost ($) One time tooling cost ($) Orders per year Order processing cost ($) Inventory carry cost ($) Distance (miles) Weight per load Transportation (less-than-truckload) $1.20 per 2000 lbs. per mile Total cost ($) $510 $6,120,000 $22,000 12 $1,500 $51,000 125 22000 $505 $6,060,000 $20,000 12 $1,500 $50,500 100 19800 6,214,300 15840 $6,147,840 From the above calculations, it is clear that total cost of ownership for supplier 2 is $66,460 less than that of supplier 1. Therefore, supplier 2 should be selected. Perform the total cost of ownership analysis using truckload quantities as shown below: 40.000 Required lot size for trucks = 22 = 1.818.18 1.818