A buyer receives bids and other relevant information from three suppliers for a
ID: 2776548 • Letter: A
Question
A buyer receives bids and other relevant information from three suppliers for a vital component part for its latest product. Given the following information, use total cost analysis to determine which supplier should be chosen. Late delivery of the components results in 70 percent lost sales and 30 percent back orders of finished goods.
Order lot size
Requirement (annual forecast)
240000 units
Weight per engine
40 pounds
Order processing cost
200/order
Inventory carrying rate
20% per year
Cost of working capital
10% per year
Profit margin
Price finished goods
Back order cost
$120 per unit
Unit Price
Supplier 1
Supplier 2
Supplier 3
1 to 999 unit/order
1000 to 2999 unit/ order
Tooling Cost
2/10, Net 30
1/15, Net 30
1/10, Net 20
120 miles
100 miles
150 miles
Supplier Quality Rating
Supplier Delivery Rating
Truckload (TL >=40,000 lbs.): $0.95 per ton mile
Less than truckload (LTL): $1.20 per ton mile
Note: per ton mile= 2000lbs per mile; number of days per year= 365
Order lot size
2000Requirement (annual forecast)
240000 units
Weight per engine
40 pounds
Order processing cost
200/order
Inventory carrying rate
20% per year
Cost of working capital
10% per year
Profit margin
15%Price finished goods
$10500Back order cost
$120 per unit
Explanation / Answer
Keeping Selling price and other abnormal factors as stagnant, Supplier B is recommendable because of following calculation :-
In the above calculation, and per the question, order size remain same as 2000 units and ordering cost as 200/order.
In making Inventory decisions, other factors like terms of contract with supplier, quality of material, and rating of suuplier is also taken care off while making decision.
Total Requirement 240000 240000 240000 Engine Cost 195 190 192 Total Cost of Inventory 46800000 45600000 46080000 Ordering Cost 24000 24000 24000 Tooling cost 12000 10000 15000 Transportation Cost 228000 190000 285000 Total Cost 47064000 45824000 46404000 Inventory Carrying Rate@20% 9412800 9164800 9280800 Total cost 56476800 54988800 55684800Related Questions
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