ABC Ltd manufactures mountain bikes and is located in Wollongong. More than 70 per cent of the cost of the company's mountain bikes consists of material and components, which are purchased from local suppliers.

About three years ago, ABC introduced a comprehensive supplier evaluation system to monitor the performance of its suppliers. Each supplier was given a threeyear contract that guaranteed large orders as long as it performed according to ABC's strict requirements. Each supplier's performance was measured by considering its adherence to delivery schedules (ABC works on a justintime (JIT) system), accuracy of orders delivered, number of components rejected on delivery, and its achievements in reducing its production costs (and, therefore, its material and component prices) over the contract period. Performance in all of these areas will determine whether ABC renews the supplier's contract or offers the contract to another supplier. The suppliers are aware that there are many alternative component suppliers who would be eager to enter into a long term contract with ABC.

After holding discussions with the purchasing manager, as part of the review process, the financial controller has conducted a study to determine the full cost of dealing with suppliers. While the company uses a series of nonfinancial performance measures to measure most aspects of supplier performance, the financial controller believes that the calculation of the total cost of ownership will provide an additional perspective to viewing supplier performance. For the most recent year, the following supplierrelated activities and costs have been identified:

Activity total cost no.of activities

order components from supplier 2,160,000 7,200 order

Receive order 10,800,000 12,000 deliveries

Return reject components to suppliers 46,200 66 returns

Receive late deliveries 312,000 156 late deliveries

production downtime due to late delivery 2,880,000 960 hours

production downtime due to defective materials 4,320,000 3,600 hours

process invoice and pay supplier 1,260,000 3,600 invoices

Dispute invoiced amount 48,000 60 disputes

Quality audit of suppliers 600,000 12 audits

ABC obtains its handlebars from four suppliers, the two most important of which are New Ventures and Mount Ltd.

Last year, ABC purchased 6,000 units from Mount Ltd. at $400 per unit, and 10,000 units from New Ventures at $380 per unit. Both suppliers provide an identical component.

The analysis revealed that last year the following activities related to the two key suppliers:

Activity new ventures Mount ltd

order components from supplier 260 orders 180 orders

Receive order 300 deliveries 180 deliveries

Return reject components to suppliers 32 returns 30 returns

Receive late deliveries 56 late deliveries 12 late deliveries

production downtime due to late delivery 90 hours 68 hours

production downtime due to defective materials 58 hours 40 hours

process invoice and pay supplier 260 invoices 24 invoices

Dispute invoiced amount 6 disputes 2 disputes

Quality audit of suppliers 4 audits 2 audits

Requirements:

1) A report for management comparing the two suppliers in which you:

oProvide a detailed supplier cost analysis and calculate the supplier performance index (SPI);

oIdentify the key drivers of SPI - that is, the factors to which SPI is more responsive to;

oConsider the various criteria used by ABC to evaluate suppliers and for each criterion propose two performance measures that the company might use to evaluate suppliers' performance.

oEvaluation of the current situation and advise whether contracts should be renewed with New Ventures and Mount Ltd.;

2) Drawing on your analysis above, but not limited by it, make a set of appropriately justified recommendations to management regarding ways of managing suppliers that would be beneficial to the company.

3)Discuss how accounting and performance measurement systems may create challenges to supplier management. What recommendations would you make to their design to enable effective supplier management?