Calculating The Total Costs of International Purchasing at Fresh Foods

James DeWalp is a senior buyer of fruit products for Fresh Foods, a major U.S. multina tional food processing company. This company, based in California, uses a wide variety of fruit concentrates, purees, flavors, and extracts in many of its popular food products. One of James's responsibilities is to negotiate annual purchase contracts for these ingredi ents. One such ingredient, guava puree, is grown and harvested on a seasonal basis in var ious countries around the world James is currently examining the costs associated with using one of his existing sup- pliers, a Philippine grower/processor. Fresh Foods has used this supplier's high-quality product for a number of years. Farmers grow the product in a remote part of the Philip pines and transport it to the processing plant where it is pureed and packaged for transoceanic shipment. This particular variety of guava is highly prized for its flavor which the aseptic method of processing used by the supplier helps maintain. Unfortu nately, guerilla activity by rebels has recently caused some problems for growers in this part of the Philippines The supplier aseptically packages the guava puree (currently priced at $0.29/pound, FOB vessel) in foil bags, each containing 50 pounds of product, which workers then place into corrugated boxes. The boxes are stacked on wooden pallets, 40 to a pallet, for load ing into overseas containers. Each container holds 20 pallets and arrives via ocean freighter. The ocean freight charge is $2,500 per container. Once the containers reach the U.S. port, a trucking company moves each container to a local warehouse for storage at a charge of $250 per container. U.S. Customs calculates import duties to be 15 percent of the shipment's original purchase price excluding freight charges. Fresh Foods requires one container load per month. Fresh Foods warehouses each container in a public warehouse until needed for pro cessing (average storage is one month). The monthly storage charge is $6.50 per pallet. In addition, the warehouse charges a one-time in/out fee of $6.25 per pallet to cover admin istrative costs. Fresh Foods inventory carrying charge is 24 percent, which it applies against the unit price of material in storage at the warehouse (but not in-transit from the Philippines). The reason why the company does not apply the carrying charges to in transit inventory is that Fresh Foods typically does not have to pay the invoice for the guava puree until it reaches the local U.S warehouse. Material planners assume the de- mand for guava puree to be relatively constant over the year. en a container of guava puree is required at the plant, a local freight company moves the container from the warehouse, which costs $175 per container. The company es timates that incoming receiving and quality-control procedures cost $4 per pallet. Because of the nature of the product and the distance involved in purchasing and storing the guava puree, the company estimates it incurs a loss of 3 percent of the total puree purchased James DeWalp is a senior buyer of fruit products for Fresh Foods, a major U.S. multina tional food processing company. This company, based in California, uses a wide variety of fruit concentrates, purees, flavors, and extracts in many of its popular food products. One of James's responsibilities is to negotiate annual purchase contracts for these ingredi ents. One such ingredient, guava puree, is grown and harvested on a seasonal basis in var ious countries around the world James is currently examining the costs associated with using one of his existing sup- pliers, a Philippine grower/processor. Fresh Foods has used this supplier's high-quality product for a number of years. Farmers grow the product in a remote part of the Philip pines and transport it to the processing plant where it is pureed and packaged for transoceanic shipment. This particular variety of guava is highly prized for its flavor which the aseptic method of processing used by the supplier helps maintain. Unfortu nately, guerilla activity by rebels has recently caused some problems for growers in this part of the Philippines The supplier aseptically packages the guava puree (currently priced at $0.29/pound, FOB vessel) in foil bags, each containing 50 pounds of product, which workers then place into corrugated boxes. The boxes are stacked on wooden pallets, 40 to a pallet, for load ing into overseas containers. Each container holds 20 pallets and arrives via ocean freighter. The ocean freight charge is $2,500 per container. Once the containers reach the U.S. port, a trucking company moves each container to a local warehouse for storage at a charge of $250 per container. U.S. Customs calculates import duties to be 15 percent of the shipment's original purchase price excluding freight charges. Fresh Foods requires one container load per month. Fresh Foods warehouses each container in a public warehouse until needed for pro cessing (average storage is one month). The monthly storage charge is $6.50 per pallet. In addition, the warehouse charges a one-time in/out fee of $6.25 per pallet to cover admin istrative costs. Fresh Foods inventory carrying charge is 24 percent, which it applies against the unit price of material in storage at the warehouse (but not in-transit from the Philippines). The reason why the company does not apply the carrying charges to in transit inventory is that Fresh Foods typically does not have to pay the invoice for the guava puree until it reaches the local U.S warehouse. Material planners assume the de- mand for guava puree to be relatively constant over the year. en a container of guava puree is required at the plant, a local freight company moves the container from the warehouse, which costs $175 per container. The company es timates that incoming receiving and quality-control procedures cost $4 per pallet. Because of the nature of the product and the distance involved in purchasing and storing the guava puree, the company estimates it incurs a loss of 3 percent of the total puree purchased