Question
Emma, a buyer at William A Smith Engineering, a Mississippi-based purveyor of transits for surveyors, was doing some number crunching. William A Smith Engineering was
Emma, a buyer at William A Smith Engineering, a Mississippi-based purveyor of transits for surveyors, was doing some number crunching. William A Smith Engineering was reevaluating its suppliers for a key component of the transit, the stand. After some extensive evaluation, Emma had narrowed it down to two suppliers and she was comparing them. Jackson Castings, Inc. was a regional company and Shanghai Metals was based in Guangdong Province, China. Given the following information that Emma compiled, use total cost analysis to determine which supplier is more cost-effective for William A Smith Engineering. Late delivery of the stand results in either a lost sale (thus lost profit) or a customer backorder (each time there is a backorder, it costs $395). Assume for the cost comparison that the company orders 12 times per year, the order quantity is 7,833 units, and that the annual requirement (forecast) is 94,000 units. Each time that she orders from a domestic supplier, Emma estimates that it costs the company $ 708 and each time she orders from international suppliers, it costs about $1,160. For purposes of calculating quality problems and declaring the value for customs and insurance, Emma uses the expected invoice amount (purchase cost + packing/packaging) as a base. Emma also knows that additional factory inspection trips will need to be made to the China facility to support the companys environmental, social, and quality goals.
What should Emma do? Taking in consideration procurement rules of thumb regarding international sourcing and based on the analysis below, should she source globally or domestically?
Enter Global or Domestic.
Important! Round each entry to the nearest whole number. Enter as ###,###. Enter negative numbers as -###,###.
Product Weight | 5 | pounds |
Cost of working capital | 9% | per year |
Profit margin | 12% | annual |
Price of finished transit | $ 560 | per unit |
Percent of late deliveries that result in backorders | 42% | of late deliveries |
Percent of late deliveries that result in lost sales | 58% | of late deliveries |
Jackson Castings | Shanghai Metals | |
Quoted unit price | $37.00 | $28.00 |
Packing cost (+ packing for international shipping) | $ 1.48 | $3.25 |
Tooling cost | $3,000 | $5,000 |
Invoice Terms | 2/10, net 30 | 2/15, net 30 |
Domestic delivery distance (in miles) | 122 | 400 |
Supplier quality rating (% problems) | 2.00% | 3.00% |
Supplier delivery rating (% problems) | 1.00% | 2.00% |
Number of forty-foot equivalents (FEU) per order | 1 | |
China inland freight and freight forwarding (per FEU) | $418 | |
Ocean transport (per FEU) | $2,591 | |
Marine cargo insurance (% declared value) | 1.4% | |
U.S. Customs duty and fees (% declared value) | 5.0% | |
U.S. port handling and brokerage fees (per FEU) | $1,449 | |
Factory inspection trips to China | $30,000 | |
Domestic U.S. Transportation Costs | ||
Full truckload (TL>40,000 lbs.) | $0.89 | per ton-mile |
Less-than-truckload (LTL) | $1.14 | per ton-mile |
Note: per ton mile = 2,000 pounds per mile |
FILL OUT ALL SHANGAI METALS COLUMN
Description | Jackson Castings | Shanghai Metals |
Purchase Cost | $ 3,478,000 | $ |
Packing Cost | 139,120 | |
Effective Invoice Amount | $ 3,617,120 | $ 2,937,500 |
Effect of Discount Terms | ||
Cash Discount | -72,342 | |
Cost of Capital Savings | -9,043 | |
Tooling Cost | 3,000 | |
Ordering Cost | 8,496 | |
Domestic Transportation Cost | 32,684 | |
China Inland Freight and Freight Forwarding | ||
Ocean Transport | ||
Marine Cargo Insurance | ||
U.S. Customs Duty and Fees | ||
U.S. Port Handling and Brokerage Fees | ||
Quality Cost | 72,342 | |
Cost of Late Delivery | ||
Backorders | 155,946 | |
Lost sales | 36,637 | |
China Factory Inspection Trips | ||
TOTAL COST | $ 3,844,840 | $ 3,738,602 |
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