Question

Lean Principles

Soft Glow, Inc. manufactures light bulbs. Its purchasing policy requires that the purchasing agents place each quarter’s purchasing requirements out for bid. This is because the Purchasing Department is evaluated solely by its ability to get the lowest purchase prices. The lowest bidder receives the order for the next quarter (90 working days).

To make its bulb products, Soft Glow requires 48,600 pounds of glass per quarter. Soft Glow received two glass bids for the third quarter, as follows:

• Mid-States Glass Company: $26.00 per pound of glass. Delivery schedule: 48,600 (540 lbs. x 90 days) pounds at the beginning of July to last for 3 months.
• Cleveland Glass Company: $26.15 per pound of glass. Delivery schedule: 540 pounds per working day (90 days in the quarter).

Soft Glow accepted Mid-States Glass Company's bid because it was the low-cost bid.

1. All of the following are ways in which Soft Glow could develop long-term partnerships with its suppliers except:

a. share research and development efforts.

b. ignore internal costs caused by delivery delays while contracting on the best price point basis.

c. share production schedules.

d. establish electronic data interchange.

e. establish supplier raw materials logistical support.

2. All of the following statements are true regarding the hidden costs beyond the price of Mid-States Glass Company's bid except:

a. They are easy to determine, yet often overlooked.

b. They ignore additional internal costs of the higher inventory imposed by Mid-States Glasses' delivery schedule.

c. The hidden costs are incurred by other parts of the organization, not purchasing.

d. The hidden costs include costs for additional space and handling.

e. The hidden costs include costs of obsolescence and financing.

3. Considering just inventory financing costs, what is the additional cost per pound of Mid-States Glass Company's bid if the annual cost of money is 8%? Round to the nearest cent.
$ per lb.

Answer 1

1. b. ignore internal costs caused by delivery delays while contracting on the best price point basis.

2. c. The hidden costs are incurred by other parts of the organization, not purchasing.

3.The financing cost is 8% so calculation of additional cost of inventory is calculated as below:

Third quarter -Balance:                   48600 pounds

Third Quarter Balance September : 0 pounds

Average pounds for the quarter :48600/2= 24300 pounds

Total Investment (24300*$26 per pound of glass) =$631800

Interest rate per quarter =(8%/4) =2%

Inventory financing per quarter =$631800*2%=$12636

No of pounds per quarter =48600

Additional cost per pound =$12636/45000

                                         =$0.26 per pound.