QUALITY FOODSTOTAL LANDED COST CASE Randall Cox is a senior buyer at Quality Foods, a major U.S. multinational food processing company. This company, based in Los Angeles, uses a wide variety of fruit concentrates in many of its popular food products. One of Randall's respon- sibilities is to negotiate purchase contracts for Vitamin C fruit concentrate. Ran- dall is undertaking an analysis to determine the total cost of doing business with one of his existing suppliers, a Chinese producer of Vitamin C concentrate. Qual- ity Foods has used this supplier's product for a number of years and is gener- ally satisfied with the supplier. However, since Vitamin C concentrate is available from various sources, and since it is a commodity item with minimal differenti- ation, the need to understand total costs is vital to ensure that Quality Foods is working with the lowest total cost supplier. 203 priced at $0.38/pound, the pounds of product, whid ind bag goes into one lets. 20 to a pallet, for loadin d arrives via Octan it charge is $3,000 per con rucking company movese of S350 per container, US ment's original purchase container load per month house until needed for mpany's version of main- The supplier packages the concentrate (currently priced vessel') in sterilized bags, with each bag containing 60 pou workers then place into corrugated boxes. (One 60 pound b rugated box.) The boxes are stacked on wooden pallets, 20 to containers. Each container holds 24 pallets and arri into overseas containers. Each container hol freighter at the port of Long Beach. The ocean freight charo tainer. Once the containers reach the U.S. port, a trucking co ainer to a local warehouse for storage at a charge of $350 per Customs calculates import duties to be 20% of the shipment's orie price Quality Foods has a demand requirement of one container la Quality Foods stores each container in a public warehouse until processing (average storage is one month). This is the company's versio taining safety stock. The monthly storage charge is $7.50 per pallet. In ada the warehouse charges a one-time transfer fee of $6.50 per pallet to cover admin istrative costs. The inventory carrying charge at Quality Foods is 22%, which applies against the unit prices of material in storage at the warehouse, but for material in-transit from China. Material planners assume that, for plannin purposes, the demand for Vitamin C concentrate will be relatively constant over the year. When a container of concentrate is required at the plant, a local freight com- pany moves the container from the warehouse, which costs $200 per container The company estimates that receiving and quality control procedures for incom ing products cost $5 per pallet. Because of the nature of the product and the distance involved in purchasing and storing the concentrate, supply chain pa ners estimate they lose 2% of the total concentrate purchased. Manufacturing engineers calculate the budgeted factory yield of the concentrate when bien into company products is 98%; this means the company wastes another product by volume during production. This is not recoverable. Occasionally, quality-related issues, such as spoilage, will require product completely from production. Out-of-pocket costs typically for each incident; these costs are not recoverable from the supplier will require removing the sis typically total $30,000 the supplier. On avera such incidents with this supplier occur twice a year. In addition to the costs noted here, accounting requires add a 15% assessment to the concentrate's unit cost to cover gene trative overhead costs at Quality Foods when working with inte ers. (The assessment when working with domestic suppliers is equires that cost estimators ver general and adminis 8 with international suppu- stic suppliers is 10%) Case Assignment Management has requested that Randall develop a cost est true total cost of buying Vitamin C concentrate from the C estimate to identify the om the Chinese supplier Worldwide Sourcing-Applying Financial Techniques 205 eate a total landed cost model that (a) provides a logical build-up of costs as the concentrate flows across the supply chain, (b) identifies the costs for each cost element and its expected per unit cost, and (c) identi- fies the total estimated landed cost per pound of the concentrate. 2. Graphically map the supply chain for this item, including where different costs are incurred. Identify ways to take costs out of the supply chain. 3. Are there any costs missing from your model? If so, what are those costs? QUALITY FOODSTOTAL LANDED COST CASE Randall Cox is a senior buyer at Quality Foods, a major U.S. multinational food processing company. This company, based in Los Angeles, uses a wide variety of fruit concentrates in many of its popular food products. One of Randall's respon- sibilities is to negotiate purchase contracts for Vitamin C fruit concentrate. Ran- dall is undertaking an analysis to determine the total cost of doing business with one of his existing suppliers, a Chinese producer of Vitamin C concentrate. Qual- ity Foods has used this supplier's product for a number of years and is gener- ally satisfied with the supplier. However, since Vitamin C concentrate is available from various sources, and since it is a commodity item with minimal differenti- ation, the need to understand total costs is vital to ensure that Quality Foods is working with the lowest total cost supplier. 203 priced at $0.38/pound, the pounds of product, whid ind bag goes into one lets. 20 to a pallet, for loadin d arrives via Octan it charge is $3,000 per con rucking company movese of S350 per container, US ment's original purchase container load per month house until needed for mpany's version of main- The supplier packages the concentrate (currently priced vessel') in sterilized bags, with each bag containing 60 pou workers then place into corrugated boxes. (One 60 pound b rugated box.) The boxes are stacked on wooden pallets, 20 to containers. Each container holds 24 pallets and arri into overseas containers. Each container hol freighter at the port of Long Beach. The ocean freight charo tainer. Once the containers reach the U.S. port, a trucking co ainer to a local warehouse for storage at a charge of $350 per Customs calculates import duties to be 20% of the shipment's orie price Quality Foods has a demand requirement of one container la Quality Foods stores each container in a public warehouse until processing (average storage is one month). This is the company's versio taining safety stock. The monthly storage charge is $7.50 per pallet. In ada the warehouse charges a one-time transfer fee of $6.50 per pallet to cover admin istrative costs. The inventory carrying charge at Quality Foods is 22%, which applies against the unit prices of material in storage at the warehouse, but for material in-transit from China. Material planners assume that, for plannin purposes, the demand for Vitamin C concentrate will be relatively constant over the year. When a container of concentrate is required at the plant, a local freight com- pany moves the container from the warehouse, which costs $200 per container The company estimates that receiving and quality control procedures for incom ing products cost $5 per pallet. Because of the nature of the product and the distance involved in purchasing and storing the concentrate, supply chain pa ners estimate they lose 2% of the total concentrate purchased. Manufacturing engineers calculate the budgeted factory yield of the concentrate when bien into company products is 98%; this means the company wastes another product by volume during production. This is not recoverable. Occasionally, quality-related issues, such as spoilage, will require product completely from production. Out-of-pocket costs typically for each incident; these costs are not recoverable from the supplier will require removing the sis typically total $30,000 the supplier. On avera such incidents with this supplier occur twice a year. In addition to the costs noted here, accounting requires add a 15% assessment to the concentrate's unit cost to cover gene trative overhead costs at Quality Foods when working with inte ers. (The assessment when working with domestic suppliers is equires that cost estimators ver general and adminis 8 with international suppu- stic suppliers is 10%) Case Assignment Management has requested that Randall develop a cost est true total cost of buying Vitamin C concentrate from the C estimate to identify the om the Chinese supplier Worldwide Sourcing-Applying Financial Techniques 205 eate a total landed cost model that (a) provides a logical build-up of costs as the concentrate flows across the supply chain, (b) identifies the costs for each cost element and its expected per unit cost, and (c) identi- fies the total estimated landed cost per pound of the concentrate. 2. Graphically map the supply chain for this item, including where different costs are incurred. Identify ways to take costs out of the supply chain. 3. Are there any costs missing from your model? If so, what are those costs