The Global Sourcing Decision at Matsicon

Katrina Wolf, a buyer at Matsicon, an Indianapolis-based producer of subassemblies for the material handling and warehouse industry, has sent out requests for quotations for a gear motor to three prospective suppliers. Only two of the three suppliers indicated an interest in quoting the business: Original Automation (Noblesville, IN) and ADI Industrial Assemblies of Guangdong Province, China. The estimated demand for the motors is 3200 units a month. Both suppliers will incur some costs to retool for this particular gear motor. The motors will be prepackaged in 24 x 24 x 18-inch cartons. Each packaged unit weighs approximately five pounds.

Quote 1

The first quote received is from Original Automation. Noblesville is about 40 miles from Matsicons corporate headquarters, so the quote was delivered in person. When Katrina went down to the lobby, she was greeted by the sales agent and an engineering representative. After the quote was handed over, the sales agent noted that engineering would be happy to work closely with Matsicon in developing the unit and would also be interested in future business that might involve finding ways to reduce costs. The sales agent also noted that they were hungry for business, as they were losing a lot of customers to companies from China. The quote included unit price, tooling, and packaging. The quoted unit price does not include shipping costs. Original Automation requires no special warehousing of inventory, and daily deliveries from its manufacturing site directly to Matsicons assembly operations are possible.

Original Automation Quote:

Unit price = $83.00

Packing costs = $2.25 per unit

Tooling - $11,000 one-time fixed charge

Freight cost = $4.30 per hundred pounds

Quote 2

The second quote received is from ADI Industrial Assemblies of Guangdong Province, China. The supplier must pack the motors in a container and ship via inland transportation to the port of Shanghai in China, have the shipment transferred to a container ship, ship the material to Seattle, and then have material transported inland to Indianapolis. The quoted unit price does not include international shipping costs, which the buyer will assume.

ADI Quote:

Unit price = $58.00

Shipping lead time = Eight weeks

Tooling = $6300 one-time fixed charge

In addition to the suppliers quote, Katrina must consider the additional costs and information before preparing a comparison of the Chinese suppliers quotation:

Each monthly shipment requires eight 40-foot containers.

Packing costs for containerization =$2 per unit

Cost of inland transportation to port of export =$250 per container.

Freight forwarders fee = $150 per shipment (letter of credit, documentation, etc.).

Cost of ocean transport = $2,800 per container. This has risen significantly in recent years due to a shortage of ocean freight capacity.

Marine insurance = $.50 per $100 of shipment (based on unit cost + packing cost only).

U.S. port handling charges = $1,100 per container. This fee has also risen considerably this year, due to increased security. Ports have also been complaining that the charges may increase in the future.

Customs duty = 4% of unit price

Customs broker fees per shipment = $375

Transportation from Seattle to Indianapolis = $12.60 per hundred pounds.

Need to warehouse at least four weeks of inventory in Detroit at a warehousing cost of $1.00 per cubic foot per month, to compensate for lead time uncertainty.

Katrina must also figure the costs associated with committing corporate capital for holding inventory. She has spoken to some accountants, who typically use a corporate cost of capital rate of 12% (cost of capital = the sum of all of the above costs excluding tooling).

Cost of hedging currency broker fees = $400 per shipment

Additional administrative time due to international shipping = 6 hours per shipment x $25 per hour (estimated)

At least two five-day visits per year to travel to China to meet with supplier and provide updates on performance and shipping = $20,000 per year (estimated).

The international sourcing costs must be absorbed by Katrinas organization, as the supplier does not assume any of the additional estimated costs and invoice Katrina later, or build the costs into a revised unit price. Katrina feels that the U.S. supplier is probably less expensive, even though it quoted a higher price. Katrina also knows that this is a standard technology that is unlikely to change during the next three years, but which could be a contract that extends multiple years out. There is also a lot of hall talk amongst the engineers on her floor about next-generation automation electronics, which will nearly eliminate the need for gear motors, and will be replaced by electronic components that are smaller, lighter, and more reliable. She is unsure about how to calculate the total costs for each option, and she is even unsure about how to factor these other variables into the decision.

ASSIGNMENT

1. In Excel, calculate the itemized cost per unit of purchasing from Original Automation, as well as the itemized annual cost. Include work (formulas) for full credit. (12 pts)

2. In Excel, calculate the itemized cost per unit of purchasing from ADI Industrial Assemblies, as well as the itemized annual cost. Include work (formulas) for full credit. (48 pts)

Note: Although it is a one-time charge, tooling needs to be annualized for both suppliers in order to calculate per unit costs.

Based on the total cost per unit, which supplier do you think Katrina should recommend? Why?

Are there any other issues besides cost that Katrina should evaluate? If so, what other issues should she evaluate? I recommend discussing a minimum of four additional issues specific to this situation.

In general, do you think international purchasing is more or less complex than domestic purchasing? Why? Discuss at least six specific aspects that are more complex. Is it worth the additional effort?

please help me with this. help me find the cost covered in black with accurate responses thank you

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