Question
James, a buyer at EZ Tech, a Alaska-based purveyor of generators for people in remote areas, was doing some number crunching. EZ Tech was reevaluating
James, a buyer at EZ Tech, a Alaska-based purveyor of generators for people in remote areas, was doing some number crunching. EZ Tech was reevaluating its suppliers for a key component of the generator, the generator frame. After some extensive evaluation, James had narrowed it down to two suppliers and he would source from the one with the lowest total cost, everything else held equal. Given the following information, use total cost analysis to determine which supplier, is more cost-effective for EZ Tech. Late delivery of the generator frame results in either a lost sale (thus lost profit) or a customer backorder (each time there is a backorder, it costs $195). Assume for the cost comparison that order quantity is 2,800 units and that the annual requirement (forecast) is 74,000 units. For purposes of calculating quality problems, James uses the expected invoice amount as a base. What should James do? Enter as ###,###. Enter negative numbers as -###,###.
| Product Weight | 20 | pounds |
| Cost of working capital | 10% | per year |
| Profit margin | 17% | annual |
| Price of finished generator | $1,400 | per unit |
| Percent of late deliveries that result in backorders | 22% | of late deliveries |
| Percent of late deliveries that result in lost sales | 78% | of late deliveries |
| Supplier 1 | Supplier 2 | |
| Quoted unit price | $57.00 | $55.00 |
| Packing cost | $2.28 | $2.10 |
| Tooling cost | $3,000 | $5,000 |
| Terms | 2/10, net 30 | 2/15, net 30 |
| Delivery distance (in miles) | 102 | 452 |
| Supplier quality rating (% problems) | 2.00% | 1.00% |
| Supplier delivery rating (% problems) | 2.00% | 3.00% |
| Transportation Costs | ||
| Full truckload (TL>40,000 lbs.) | $0.87 | per ton-mile |
| Less-than-truckload (LTL) | $1.12 | per ton-mile |
| Note: per ton-mile = 2,000 pounds per mile |
| Description | Supplier 1 | Supplier 2 |
| Purchase Cost | $4,218,000 | $ |
| Packing Cost | 168,720 | |
| Total Invoice Amount | 4,386,720 | 4,225,400 |
| Effect of Discount Terms | ||
| Cash Discount | -87,734 | |
| Cost of Capital Savings | -12,185 | |
| Tooling Cost | 3,000 | |
| Transportation Cost | 65,668 | |
| Quality Cost | 87,734 | |
| Cost of Late Delivery | ||
| Backorder | 63,492 | |
| Lost Sales | 274,747 | |
| Total Cost | $4,781,442 | $4,968,89 |
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