Lean Principles

Ceiling Stars, Inc., manufactures light bulbs. Its purchasing policy requires that the purchasing agents place each quarter's purchasing requirements out for bid. This is because the Purchasing Department is

evaluated solely by its ability to get the lowest purchase prices. The lowest bidder receives the order for the next quarter $(90$ working days$).$

To make its bulb products, Ceiling Stars requires $54,000$ pounds of glass per quarter. Bright Night received two glass bids for the third quarter, as follows:

Provo Glass Company: $$27\mathrm{.}00$ per pound of glass. Delivery schedule: $54,000(600lbs.90$ days$)$ pounds at the beginning of July to last for $3$ months.

Orem Glass Company: $$27\mathrm{.}15$ per pound of glass. Delivery schedule: $600$ pounds per working day $(90$ days in the quarter$).$

Ceiling Stars accepted Provo Glass Company's bid because it was the low$-$cost bid.

A manufacturing company gets quotes from each supplier and allocates the purchase order to the company which quotes the lowest price with the expected quality. Is this process effective in long run? Identify

reason that supports the answer.

a$.$ Yes

b$.$ No

Reason:

a$.$ The policy is effective as it lowers the cost of purchase.

b$.$ The policy considers the quoted price and the quality of the product is ignored.

c$.$ The policy of the company is not practically viable as it is not building long$-$term relationships with its suppliers. The reputation of the company may be affected.

d$.$ Supplier relationships are not required as the products are purchased for the quarter alone.

in bulk purchase for the quarter? Identify reason that supports the answer.

a$.$ Yes

b$.$ No

Reason:

a$.$ The cost of storage, obsolescence, material management and wastages are ignored in this concept.

b$.$ The cost of storage, obsolescence, material management and wastages are included in the purchase cost computation.

c$.$ The cost related to quality can be compensated as the price of the material is low.

d$.$ The responsibility of the manager is to get the lowest bid for the product and all other information is irrelevant.

Considering only inventory financing costs, what is the additional cost per pound of Provo Glass Company's bid if the annual cost of money is $8\%?($Hint: Determine the average value of glass inventory held for

the quarter and multiply by the quarterly interest charge, then divide by the number of pounds.$)$ Round to the nearest cent.

per lb $.$