"Mike [Watkins], this is Bill Simpson from engineering. What's going on with the prices of the common capacitors this year for the braided heating element (project HE123): part numbers 541, 234, 567, and 876? At this rate, we're spending the department's budget twice as fast as we did last year using Hot Sun Electronics." "Look, Bill, we got an excellent price on several solenoid parts from a new supplier, but we had to accept higher prices for your components. Overall, the company will save more than 60 percent on more expensive components." "Thanks for the lesson in purchasing. For your information, we don't use solenoids. Furthermore, I can get better prices online from eCapacitors.com since these part numbers are common amongst manufacturers. Besides, my supply manager, Janet Johnson, always recommends Hot Sun Electronics and I always sign off on her request since the specifications for standard capacitors don't reflect quality. We haven't had to reject a lot from the previous supplier. I thought the purchasing department was supposed to save us money." "Bill, you are correct. Purchasing must look at the overall budget, not just yours." Bill hangs up sarcastically I am sure Rex Smith (Chief Financial Officer) realizes this when he sees your POs.

Swisher Systems has annual revenues of approximately $20 million. Of that $20 million, $8 million, 40 percent of revenue, goes into the purchasing of material items. Another 20 percent of the revenue goes to direct labor. Overhead takes up the majority of the potential profit margin: 20 percent for direct overhead and 5 percent for indirect overhead, which includes selling and administration. The high overhead is a concern but appears to be unavoidable for a small company trying to grow. A sales call center was implemented over a year ago, which adds 10 more members to the payroll along with a marketing person who creates all of the written literature and designs marketing campaigns. This leaves a margin of about 15 percent for profit. This number can fluctuate due to negotiations with customers. Swisher Systems keeps approximately $12,000,000 of supply inventory on hand at any given point. This gives Swisher Systems approximately two inventory turns.

Mike is the only person who handles purchasing at Swisher Systems, sending out approximately 50 purchase orders a day. This means a purchase request for a previously ordered part takes two days before a purchase order can be sent to a supplier with an existing contract a week if a new contract needed. To simplify his purchase order tracking, Mike orders quantities on a monthly basis.

Mike first began reducing costs by using a volume discount. Then he began researching and found another reliable supplier that was less expensive. He used this information to negotiate an even more favorable price with the current supplier. The result was a huge cost saving while still keeping the reliability of the current supplier. This is precisely what happened in the case of Bill Simpson's situation earlier today. Total annual usage of the solenoid last year amounted to $120,000. The total usage of capacitors was $32,000. A new low-cost supplier, B&B, was selected to supply the solenoid component starting in January 2017. Mike also agreed to add the capacitor requirements to the deal. The annual total for the combined purchase contract was $150,000 [$100,000 (solenoid) +$50,000 (capacitors)]. The company also will receive a 10-percent rebate at the end of the year.

Assumptions:

Capacitors ordered in the same quantities every month. Unit price stays the same for the entire year. Total number of capacitors: 32,000 (8,000 for each type) per year.

Swisher operates on a Monday Friday schedule. All references to days are working (business) days. Vendors process the purchase order the day after Swisher sends it.

When parts arrive at Swisher's warehouse, the receiving process and stocking of parts bins takes two days.

Companies, like Swisher, use profit centers to determine the profitability of a product line.

The monthly variation in demand and the limitations of the accounting system means a purchase order needed every time parts are requested by engineering every month. Swisher sends a Request for Quotation (RFQ) that requires year-long pricing and the selected quotation referenced for all subsequent purchase orders made that year with the vendor.

For cloth heating jackets (% of price): materials 20%, labor 40%, overhead/margin - same %.

Mike Watkins has read about global outsourcing. A few months later Bill Simpson approaches him to help write a proposal, responding to a Request for Information, for a Northern Europe pipeline project that wants cloth heating jackets for the controls on an oil pipeline. The RFI asks for 1000 heating jackets that Swisher normally prices at US$1 million plus delivery charges. Bill says that seamstresses in central Asia are 60% cheaper than in the US.

1) Should swisher outsource from china or not ? ( All information needed is added above , read the case carefully) ?

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