4. The Doright Door Company is considering outsourcing production of its door to

Question

4. The Doright Door Company is considering outsourcing production of its door to Mexico. Use the weighted scor- ing method to evaluate the costs and risks of the offshore supplier, Perfect Door Company (Puertas Perfectos). The Mexican company has quoted a price of $83.00 for a standard door in order quantities of 5000 units that will fill demand for a year. The doors can be transported in a semi that holds 250 doors and costs $825 to make the trip from Mexico to the Doright warehouse. It will cost $5,000 to send engineers to prequalify the plant and $1,000 to negotiate and administer the contract. The in- ventory is carried for an average of 6 months during the year with a 20 percent carrying charge. The company has been producing the doors for $119 in the U.S. The weights and ratings for the order are as follows. Mexican Supplier In-house Weight Rating Score Rating Score Criteria Quality and Price 16% 4 delivery 60% 5 4 Social 7% 2 responsibility Currency risk 17% 3 Totals 100%

Explanation / Answer

Total cost of importing the doors from Mexican company = Puchasing cost + Ordering cost + Inventory Holding cost = 83*5000 + (5000+1000) + (5000/2)*83*0.20 = $ 462,500

Total cost of producing the doors in-house = 119*5000 = $ 595,000

Total cost of importing from Mexican is much lower as compared to in-house production.

Weighted score of Mexican supplier is lower. However, the difference is only marginal.

Considering the benefit of cost savings, Mexican supplier should be selected.

Mexican Supplier In-house Criteria Weight Rating Score Rating Score Quality and Delivery 16% 3 0.48 4 0.64 Price 60% 5 3 4 2.4 Social responsibility 7% 2 0.14 5 0.35 Currency risk 17% 3 0.51 5 0.85 Total 100% 4.13 4.24

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