Question

Your company assembles five different models of a motor scooter that is sold in specialty stores in the United States. The company uses the same engine for all five models. You have been given the assignment of choosing a supplier for these engines for the coming year. Due to the size of your warehouse and other administrative restrictions, you must order the engines in lot sizes of 1,380 units. Because of the unique characteristics of the engine, special tooling is needed during the manufacturing process for which you agree to reimburse the supplier. Your assistant has obtained quotes from two reliable engine suppliers and you need to decide which to use. The following data have been collected:

   

Requirements (annual forecast)		16,560	units
Weight per engine		25	pounds
Order processing cost	$	170	per order
Inventory carry cost		20	percent of the average value of inventory per year

Note: Assume that half of lot size is in inventory on average (1,380/2 = 690 units).

Two qualified suppliers have submitted the following quotations:

ORDER QUANTITY	SUPPLIER 1 UNIT PRICE			SUPPLIER 2 UNIT PRICE
1 to 1,499 units/order	$	477		$	476
1,500 to 2,999 units/order		475			476
3,000 + units/order		474			470
Tooling costs	$	29,880		$	26,000
Distance		115 miles			100 miles

Your assistant has obtained the following freight rates from your carrier:

Truckload (53,000 lbs. each load):	$0.80 per ton-mile
Less-than-truckload:	$1.20 per ton-mile

Note: Per ton-mile = 2,000 lbs. per mile.

a-1. Calculate the total cost for each supplier. (Round your answers to the nearest whole number.)

	Supplier 1	Supplier 2
Total cost	$	$

a-2. Which supplier would you select?

  

b-1. If you could move the lot size up to ship in truckload quantities, calculate the total cost for each supplier. (Do not round intermediate calculations. Round "Required lot size for truckload" and final answers to the nearest whole number.)

HINT: Use (full) truckload cost rates and the lowest (feasible) unit cost for all calculations. For example, if there are 8.3 orders per year, don’t split the 8.3 orders into 8 full truckloads and 0.3 less-than-truckloads - use the full truckload rate for all 8.3 orders. For annual purchase cost, don’t use two different unit costs for the 8 complete orders and the 0.3 partial orders – use the lowest (feasible) unit cost for all 8.3 purchase orders based on the lot size needed for a full truckload.

	Supplier 1	Supplier 2
Total cost	$	$

b-2. Would your supplier selection change?

Answer 1

Annual demand, D	16,560	units
Weight per engine	25	pounds
Order processing cost, Co	$              170.00	per order
Inventory carry cost, Cc	20%	of the average value of inventory per year
Required lot sizes, Q	1380	units
average value of inventory/yr	690	units
ton miles	34,500	(<truckload)
ORDER QUANTITY	SUPPLIER 1	SUPPLIER 2
	UNIT PRICE	UNIT PRICE
1 to 1,499 units/order	$                    477	$                    476
1,500 to 2,999 units/order	$                    475	$                   476
3,000 + units/order	$                    474	$                    470
Tooling costs	$              29,880	$              26,000
Distance (miles)	115	100
freight rates from your carrier:
Truckload (53,000 lbs. each load):	$0.80	per ton-mile
Less-than-truckload:	$1.20	per ton-mile
Per ton-mile =	2000	lbs/mile
a-1. Calculate the total cost for each supplier.
Total cost = price*D+(D/Q)*Co+ Avg inv*Cc+frieght cost
	Supplier 1	Supplier 2
Product cost (p*D)	$ 7,899,120.00	$ 7,882,560.00
(1380<1499 units/order)
Ordering Cost [(D/Q)*Co]	$          2,040.00	$          2,040.00
Carrying Cost (p*avg inv*20%)	$        65,826.00	$        65,688.00
Transportation cost = ((Q*25lbs)/2000)*1.2*distance	$          2,380.50	$          2,070.00
(as 34500 lbs is less than truckload of 53000 lbs)
Total cost	$ 7,969,366.50	$ 7,952,358.00
a-2. Which supplier would you select?
supplier 2 should be selected as it offers lower total landing cost
b-1. If you could move the lot size up to ship in truckload quantities, calculate the total cost for each supplier.
Lot size (=full truck load lbs/25 lbs/unit)	2120	units
	Supplier 1	Supplier 2
Product cost (p*D)	$ 7,866,000.00	$ 7,882,560.00
(2120: 1,500 to 2,999 units/order)
Ordering Cost [(D/Q)*Co]	$          1,327.92	$          1,327.92
Carrying Cost (p*avg inv*20%)	$      100,700.00	$      100,912.00
Transportation cost = (53000/2000)*0.8*distance	$          2,438.00	$          2,120.00
(as 34500 lbs is less than truckload of 53000 lbs)
Total cost	$ 7,970,465.92	$ 7,986,919.92
b-2. Would your supplier selection change?
Yes, the supplier selection will change as the supplier 1 is offering lower total cost now, hence supplier 1 will be selected.

Formulae used: