You have been hired as a consultant by an auto parts manufacturing company. The company is currently dealing with an issue with production of defective components costing them loss of customers and sales. Company has identified that the main issue lies with a component supplier. The company has already gathered some information but unable to make a decision. You have been provided with this information, the company can purchase the components in question from two suppliers, existing supplier A or new Supplier B. The price quoted by Supplier A is 18.00 per 100 numbers of the components and it is found that on an average 5% of the total receipt from this supplier is defective. The corresponding quotation from Supplier B is 15.00 per 100 numbers of the components but the defectives would go up to 10% for the total supply. If the defectives are not detected, they are utilized in production causing a damage of 18 per 100 components. The company intends to introduce a system of inspection for the components on receipt which would cost 5.00 per 100 components. The new inspection system will be able to detect only 90% of the defective components received. No payment will be made for defective components in inspection. Assume total requirements of components to be 25,000 numbers. (Hint: Use total cost for your analysis and recommendation.

You are asked to advice company management on:

a. Whether inspection at the point of receipt is justified? (5 Marks)

b. Which of the two suppliers should be asked to supply? (5 Marks)