Criteria used by Fast Lane to determine whether or not supplier contracts would be renewed. For each criterion, suggest two performance measures that Fast Lane might use to evaluate supplier's performance.

Supplier selection; supplier costs; supplier performance measures; JIT systems: manufacturer

Fast Lane Ltd manufactures motorbikes and is located in Brisbane. More than 70 per cent of the cost of the company's motorbikes consists of material and components, which are purchased from Australian suppliers. About three years ago, Fast Lane introduced a comprehensive supplier evaluation system to monitor the performance of its suppliers. Each supplier was given a three-year contract that guaranteed large orders as long as it performed according to Fast Lane's strict requirements. Each supplier's performance was measured by considering its adherence to delivery schedules (Fast Lane works on a just-in-time 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 Fast Lane 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 Fast Lane.

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 non-financial 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 supplier-related activities and costs have been identified:

Activity

Total cost

Number of activities

Order components from supplier

$1 800 000

6000 orders

Receive order

9 000 000

10 000 deliveries

Return reject components to supplier

38 500

55 returns

Receive late deliveries

260 000

130 late deliveries

Production downtime due to late delivery

2 400 000

800 hours

Production downtime due to defective material

3 600 000

3000 hours

Process invoice and pay supplier

1 050 000

3000 invoices

Dispute invoiced amount

40 000

50 disputes

Quality audit of suppliers

500 000

10 audits

Fast Lane obtains its exhaust systems from two suppliers: Hot Exhausts and Chrome Manufacturers. Last year, Fast Lane purchased 3000 units from Hot Exhausts at $100 per unit, and 4000 units from Chrome Manufacturers at $90 per unit. Both suppliers provide an identical component.

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

Activity

Hot Exhausts

Chrome Manufacturers

Order components from supplier

90 orders

130 orders

Receive order

90 deliveries

150 deliveries

Return reject components to supplier

15 returns

16 returns

Receive late deliveries

6 late deliveries

28 late deliveries

Production downtime due to late delivery

45 hours

59 hours

Production downtime due to defective material

20 hours

29 hours

Process invoice and pay supplier

12 invoices

130 invoices

Dispute invoiced amount

3 disputes

3 disputes

Quality audit of supplier

1 audit

2 audits

Required:

5

Describe the changes that the purchasing manager and financial controller could implement to minimise supplier-related costs.

6

Consider the various criteria used by Fast Lane to determine whether or not supplier contracts should be renewed. For each criterion, suggest two performance measures that Fast Lane might use to evaluate suppliers' performance.