Question

Your company assembles five different models of a motor scooter that is sold in specialty 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 units. 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) 12,000 units
Weight per engine 22 pounds
Order processing cost $125 per order
Inventory carry cost 20 percent of the average value of inventory per year

Assume that half of lot size is in inventory on average (1,000/2 = 500 units).

Two qualified suppliers have submitted the following quotations:

ORDER QUANTITY SUPPLIER 1 UNIT PRICE SUPPLIER 2 UNIT PRICE
1 to 1,499 units/order $510.00 $505.00
1,500 to 2,999 units/order 500.00 505.00
3,000 + units/order 490.00 488.00
Tooling costs $22,000 $20,000
Distance 125 miles 100 miles

Your assistant has obtained the following freight rates from your carrier:

Truckload (40.000 lbs. each load): $0.80 per ton-mile
Less-than-truckload: $1.20 per ton-mile

Required:
a. Calculate the total cost for each supplier.
b. Which supplier would you select?
c. If you could move the lot size up to ship in truckload quantities, calculate the total cost for each supplier.
d. Would your supplier selection change?

Answer 1

Answer:

a. Cost of Supplier 1  : $6,214,300 per year

Cost of Supplier 2 : $6,147,840

b. Supplier 2 will be selected as it costs $66,460 less than supplier 1.

c. 1,818

d. No.

Explanation:

Supplier :     1   ;    2

Unit price : $510 ; $505

Annual Purchase cost: $6,120,000 ; $6,060,000

One time cost: $22,000 ; $20,000

Orders per year: 12 , 12

Order processing cost: $1,500 ; $1,500

Inventory carrying cost: $51,000 ; $50,500

Distance: 125 ; 100

Weight per load: 22000

Transportation: $19,800 ; $15,840

Total Cost : $6,214,300 ; $6,147,840

Annual Purchase Cost = Demand * Units price

Orders per year = Demand / Lot size

Inventory Carrying cost = [ Lot size / 2 ] * Carrying cost * unit price

Order processing cost = Number of orders * order processing cost.

c. Required lot size for truck : 40,000 / 22 ≈ 1,818