Widget Cost Modelling Case (an individual assignment) Exercise Key Questions 1 What is the total and unit cost structure for each of the suppliers? - Who is lowest \& highest cost? - What would you guess to be the key cost drivers? 2 What is the capacity and utilization for each supplier? - Lowest \& highest utilization? 3 How would the unit costs change if each supplier ran at capacity (I.e. 100\% utilization)? Hint: figure out fixed and variable costs; Unit cost = VC + (FC / Volume) - Now who is lowest \& highest cost? 4 Why does Supplier C have the higher direct labor cost per unit than Supplier D even though Supplier C's direct labor wage + fringe is lower? 5 Given what you have learned from the above, who is the lowest cost supplier and what sourcing strategy might you consider? Widgets Cost Modeling Case Study Cynthia was impressed. As she thumbed through the pages of tables and spreadsheets spread all over her desk, she realized her team had done a tremendous job in collecting the supplier information she had charged them with just two weeks ago. She knew that the backbone of performing cost modeling was accurate and complete data. The question she had now was how to take the mass of data and use it to make decisions for her and the purchasing group to reduce total costs to the company. It all seemed straight-forward enough several weeks ago in the training course she and her team had participated in. She understood that cost modeling was all about understanding the drivers of suppliers costs and then engaging in a cooperative arrangement with a reduced number of suppliers to save costs, and thus capture benefits, for both parties. But which data told her what the right answer was? As one of the managers in the Purchasing organization, Cynthia had been tasked with developing a Strategic Sourcing Plan on one of their commodities, widgets, as part of an overall Sourcing Program. Cynthia had long thought that given sufficient data, she and her team could make better purchasing decisions and save her company real money. Now she had data - lots of it! She remembered the old saying, "Be careful what you ask for - you just might get it!" Now it was up to her and her team to apply what they had learned in training with actual supplier data. While quickly scanning the data she noticed that a few of the suppliers appeared to stand out as being low-cost providers. This was certainly encouraging. However, as she had learned in the training course, there were many factors to consider before jumping into a decision, not to mention the fact that with her company's rather sizable purchase volume, her and her team's choice of suppliers could also affect the suppliers economics. Her team was getting together the first thing tomorrow morning and they would be expecting her to give them some direction on how to proceed. She knew she had to pull together some of the data to at least put some structure around the analyses they would need to perform. She sat down at her desk and started sifting through the pages. She started by mapping out the actual production of the "Grand 11" - the selfproclaimed title of the 11 largest widget manufacturers which collectively made up 90% of the worldwide market. She then graphed her group's 10,000 Widget spend by the "Grand 11" manufacturers. Looking at these numbers she quickly realized that while her company's total spend represented less than 5% of the worldwide industry's production, it represented up to half or more of any single "Grand 11" manufacturer. She remembered from her training that supplier consolidation, while not necessarily a means to decreased purchased costs, generally was an end result of strategic sourcing practices. But if she and the team could consolidate their purchasing, which supplier should they select? She continued by compiling all of the unit-cost data she had by each of the suppliers. \begin{tabular}{|c|c|c|c|c|r|r|r|c|} \hline G & $267 & $66 & $21 & $214 & $166 & $152 & $315 & $1,201 \\ \hline H & $211 & $65 & $15 & $157 & $18 & $231 & $21 & $718 \\ \hline I & $277 & $43 & $15 & $190 & $32 & $216 & $60 & $833 \\ \hline J & $255 & $55 & $9 & $176 & $85 & $217 & $112 & $909 \\ \hline K & $301 & $33 & $44 & $195 & $54 & $227 & $72 & $926 \\ \hline \end{tabular} In a similar manner she tabulated the supplier wage and salary data her team had collected. Her first impulse was to look at the unit cost numbers and give all of the Widget spend to the one with the lowest unit cost. But, remembering her training, she recalled that the short-term unit price didn't always indicate the best long-term strategy. She decided to press on by summarizing the capacity and utilization data her team had collected. Seeing the large spread in production utilization by the various manufacturers, Cynthia guessed that she would need to know something about the fixed/variable nature of each of the cost components to understand what changes in production volume would do to the overall cost structure. She assumed that Utility costs, Taxes, Salaries and Other Overhead would be fixed costs and that Direct Labor would be variable. She got information from one supplier that Maintenance and Other Indirect Wages were typically 35% fixed and 65% variable so she planned to use these numbers for all the suppliers. She rubbed her eyes. It was well past six and Cynthia was getting tired and ready to head for home. She knew she was going to have a big day ahead of her tomorrow. She didn't know what the outcome would be but she felt like she had given her team enough structure to get them started. She had even begun to formulate a few preliminary hypotheses on her own. She had a great team and was anxious to start bouncing some of her ideas off them as well as to get their ideas. As she headed out of her office she checked to make sure she had plugged her calculator into the recharger. She had a feeling she was going to need a full charge for tomorrow. Capacity and Utilization Widget Cost Modelling Case (an individual assignment) Exercise Key Questions 1 What is the total and unit cost structure for each of the suppliers? - Who is lowest \& highest cost? - What would you guess to be the key cost drivers? 2 What is the capacity and utilization for each supplier? - Lowest \& highest utilization? 3 How would the unit costs change if each supplier ran at capacity (I.e. 100\% utilization)? Hint: figure out fixed and variable costs; Unit cost = VC + (FC / Volume) - Now who is lowest \& highest cost? 4 Why does Supplier C have the higher direct labor cost per unit than Supplier D even though Supplier C's direct labor wage + fringe is lower? 5 Given what you have learned from the above, who is the lowest cost supplier and what sourcing strategy might you consider? Widgets Cost Modeling Case Study Cynthia was impressed. As she thumbed through the pages of tables and spreadsheets spread all over her desk, she realized her team had done a tremendous job in collecting the supplier information she had charged them with just two weeks ago. She knew that the backbone of performing cost modeling was accurate and complete data. The question she had now was how to take the mass of data and use it to make decisions for her and the purchasing group to reduce total costs to the company. It all seemed straight-forward enough several weeks ago in the training course she and her team had participated in. She understood that cost modeling was all about understanding the drivers of suppliers costs and then engaging in a cooperative arrangement with a reduced number of suppliers to save costs, and thus capture benefits, for both parties. But which data told her what the right answer was? As one of the managers in the Purchasing organization, Cynthia had been tasked with developing a Strategic Sourcing Plan on one of their commodities, widgets, as part of an overall Sourcing Program. Cynthia had long thought that given sufficient data, she and her team could make better purchasing decisions and save her company real money. Now she had data - lots of it! She remembered the old saying, "Be careful what you ask for - you just might get it!" Now it was up to her and her team to apply what they had learned in training with actual supplier data. While quickly scanning the data she noticed that a few of the suppliers appeared to stand out as being low-cost providers. This was certainly encouraging. However, as she had learned in the training course, there were many factors to consider before jumping into a decision, not to mention the fact that with her company's rather sizable purchase volume, her and her team's choice of suppliers could also affect the suppliers economics. Her team was getting together the first thing tomorrow morning and they would be expecting her to give them some direction on how to proceed. She knew she had to pull together some of the data to at least put some structure around the analyses they would need to perform. She sat down at her desk and started sifting through the pages. She started by mapping out the actual production of the "Grand 11" - the selfproclaimed title of the 11 largest widget manufacturers which collectively made up 90% of the worldwide market. She then graphed her group's 10,000 Widget spend by the "Grand 11" manufacturers. Looking at these numbers she quickly realized that while her company's total spend represented less than 5% of the worldwide industry's production, it represented up to half or more of any single "Grand 11" manufacturer. She remembered from her training that supplier consolidation, while not necessarily a means to decreased purchased costs, generally was an end result of strategic sourcing practices. But if she and the team could consolidate their purchasing, which supplier should they select? She continued by compiling all of the unit-cost data she had by each of the suppliers. \begin{tabular}{|c|c|c|c|c|r|r|r|c|} \hline G & $267 & $66 & $21 & $214 & $166 & $152 & $315 & $1,201 \\ \hline H & $211 & $65 & $15 & $157 & $18 & $231 & $21 & $718 \\ \hline I & $277 & $43 & $15 & $190 & $32 & $216 & $60 & $833 \\ \hline J & $255 & $55 & $9 & $176 & $85 & $217 & $112 & $909 \\ \hline K & $301 & $33 & $44 & $195 & $54 & $227 & $72 & $926 \\ \hline \end{tabular} In a similar manner she tabulated the supplier wage and salary data her team had collected. Her first impulse was to look at the unit cost numbers and give all of the Widget spend to the one with the lowest unit cost. But, remembering her training, she recalled that the short-term unit price didn't always indicate the best long-term strategy. She decided to press on by summarizing the capacity and utilization data her team had collected. Seeing the large spread in production utilization by the various manufacturers, Cynthia guessed that she would need to know something about the fixed/variable nature of each of the cost components to understand what changes in production volume would do to the overall cost structure. She assumed that Utility costs, Taxes, Salaries and Other Overhead would be fixed costs and that Direct Labor would be variable. She got information from one supplier that Maintenance and Other Indirect Wages were typically 35% fixed and 65% variable so she planned to use these numbers for all the suppliers. She rubbed her eyes. It was well past six and Cynthia was getting tired and ready to head for home. She knew she was going to have a big day ahead of her tomorrow. She didn't know what the outcome would be but she felt like she had given her team enough structure to get them started. She had even begun to formulate a few preliminary hypotheses on her own. She had a great team and was anxious to start bouncing some of her ideas off them as well as to get their ideas. As she headed out of her office she checked to make sure she had plugged her calculator into the recharger. She had a feeling she was going to need a full charge for tomorrow. Capacity and Utilization