ASSIGNMENT 2

You are responsible for the Procurement department in My Company, a producer of high tech machines in great demand. They are used in the retail marketplace for automation of stocking shelves.

One of the key components for our product is currently purchased from a supplier that worked with us in the development stage. Although we have utilized this supplier for the startup period, we have no long term arrangement with them.

We are under pressure to reduce our costs, as is normal. Your staff has accumulated the following information to aid you in the analysis.

We use 20 units per month (5 per week)

We have a 3% carrying cost (opportunity cost of cash in our company is high).

The product is selling at a steady rate and is not seasonal. As long as we do not drop the ball, the marketplace is ours. No other competitors have any foothold.

Option 1. Our current supplier who is local. Unit cost is $4350. They ship weekly (5 units) which gives us an average monthly inventory of 2.5 units. ! day of transit from their facility to ours. FOB their dock. Freight cost is $100 each unit.

Option 2. West coast supplier. Well known company. Unit cost is $4125. They ship every 2 weeks (10 units per shipment). Average inventory is 5 units. 5 days transit time. FOB our dock. Freight cost is $200 each.

Option 3. Off shore supplier, Farwayplace, Inc. Freight shipped by container ship and truck. The country is fairly stable, but corruption does exist there. Unit cost is $3500. They ship monthly (20 units.) Average inventory in house is 10 units plus the 20 units in transit. They ship FOB their dock. Shipping costs are $635 each unit. Transit time from their shipping to our receiving is 4 weeks.

Expect-

1+ Pages paper answering the following questions.

What is the total cost per supplier for our company?

What risks do we have with each supplier?

How do we strategically minimize our risk?

What additional options might you pursue with the potential suppliers above to try to negotiate a lower overall cost?

Make sure you understand the FOB.