Chapter2—PurchasingManagement
TRUE/FALSE
1. Purchasingcanbebroadlyclassifiedintotwocategories:merchantsandindustrialbuyers.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-1 Bloom’s:Knowledge Difficulty:Easy
2. Merchantsprimarytaskistopurchaserawmaterialsforconversionpurposes.
ANS: F PTS: 1
BUSPROG:Analytic LO: 2-1
Bloom’s:Knowledge Difficulty:Easy
3. AlowROAsuggeststhatmanagementiscapableofgeneratinglargeprofitswithrelativielysmall investments.
ANS: F PTS: 1
BUSPROG:Analytic LO: 2-1 Bloom’s:Comprehension Difficulty:Easy
4. Theproceduresforpublicprocurementdifferfromtheprivatesector.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-2
Bloom’s:Comprehension Difficulty:Easy
5. Costsavingsisanadvantageofusingane-procurementsystem.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-2
Bloom’s:Knowledge Difficulty:Easy
6. Thegoalofagoodpurchasingsystemistoensureefficientinformationtransitionsbetweenthe materialsusers,thepurchasingpersonnel,andthesuppliers.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-2 Bloom’s:Knowledge Difficulty:Easy
7. Thepurchaseorderis NOT alegallybindingcontractuntilitisacceptedbythesupplier.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-2 Bloom’s:Knowledge Difficulty:Easy
8. Amaterialrequisitionandapurchaserequisitionarethesamething.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-2 Bloom’s:Knowledge Difficulty:Easy
9. Afollow-upisconsideredareactiveapproachtospeedupanoverdueshipment.
ANS: F PTS: 1
BUSPROG:Analytic LO: 2-2
Bloom’s:Knowledge Difficulty:Easy
10. Procurementcreditcardscanbeusedforsmallpurchasesincludingmeals,lodging,andtravel expenses.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-3
Bloom’s:Knowledge Difficulty:Easy
12. Blankcheckpurchaseorders,Corporatepurchasingcards,Pettycash,andOpen-endpurchaseorders areallpossiblealternativestodealingwithsmallvaluepurchasessuchasthoseforofficesupplies.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-3
Bloom’s:Knowledge Difficulty:Easy
13. Generally,firmsoutsourcenoncoreactivitieswhilefocusingoncorecompetencies.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-4
Bloom’s:Comprehension Difficulty:Easy
14. Ifthebreak-evenpointinatypicalmake-buyscenariois19,000unitsand10,000unitsarerequiredby thefirm,thenthefirmshouldchoosetomaketheunits.
ANS: F PTS: 1
BUSPROG:ReflectiveThinking LO: 2-4
Bloom’s:Analysis Difficulty:Easy
15. Areasonformakingitemsinsteadofbuyingthemwouldincludebetterqualitycontrol.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-4
Bloom’s:Comprehension Difficulty:Easy
16. TheTotalCostofOwnershipConceptdoes NOT includequantitativefactors.
ANS: F PTS: 1
BUSPROG:Analytic LO: 2-5
Bloom’s:Analysis Difficulty:Easy
17. Thetotalcostanalysisdemonstrateshowothercostsbesidestheunitcostcanaffectpurchase decisions.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-5
Bloom’s:Knowledge Difficulty:Easy
18. Thepossibilityofeventslikestrikes,assemblylinebreakdowns,andnaturaldisastersareallreasonsa companyshouldfavorusingasinglesupplier.
ANS: F PTS: 1
BUSPROG:Analytic LO: 2-6
Bloom’s:Knowledge Difficulty:Easy
19. Decentralizedpurchasingisthepracticewhereindividual,localpurchasingdepartmentsthroughouta singlecorporationmaketheirown,individualpurchasingdecisionstofulfilltheirindividuallocal needs.
ANS: T PTS: 1
BUSPROG:Analytic LO: 2-7
Bloom’s:Comprehension Difficulty:Easy
19. NAFTAandtheWTOaretradeorganizationsseekingtoreducetariffandnon-tariffbarriersamongits membercountries.
ANS: T PTS: 1
BUSPROG:Diversity LO: 2-8
Bloom’s:Comprehension Difficulty:Easy
20. Foreignsupplierslocatedfartherawaymaybeabletodelivergoodsfasterthandomesticsuppliersdue tomoreefficienttransportationandlogisticalsystems.
ANS: T PTS: 1
BUSPROG:Diversity LO: 2-8
MULTIPLECHOICE
Bloom’s:Comprehension Difficulty:Easy
1. TheprimarygoalsofpurchasingincludeallEXCEPT:
a. Securematerialsatthelowestcost
b. Maximizecustomersatisfaction
c. Improvethequalityoffinishedgoodsproduced
d. Ensurethehighestqualityrawmaterialsarepurchased
ANS: D PTS: 1
BUSPROG:Analytic LO: 2-1
Bloom’s:Knowledge Difficulty:Easy
2. Whichofthefollowingreferstothemeasurementoftheimpactofchangeinpurchasespendona firm’sprofitbeforetaxes,assuminggrosssalesandotherexpensesremainunchanged?
a. Break-EvenAnalysis
b. Profit-LeverageEffect
c. DirectOffset
d. LeveragingPurchaseVolume
ANS: B
PTS: 1
BUSPROG:Analytic LO: 2-1
Bloom’s:Knowledge Difficulty:Easy
3. WhencalculatingReturnonInvestment,currentassetsinclude:
a. Cash,AccountsReceivable,andInventory
b. Cash,AccountsReceivable,andEquipment
c. AccountsReceivable,Equipment,andRealEstate
d. Equipment,Buildings,andRealEstate
ANS: A PTS: 1
BUSPROG:Analytic LO: 2-1
4. InventoryTurnovercanbecalculatedby:
Bloom’s:Comprehension Difficulty:Easy
a. Ratioofcostofgoodssoldoveraverageinventorycost
b. Ratioofaverageinventorycostovercostofgoodssold
c. Ratioofinventorydaysinstockoveraverageinventorycost
d. Ratioofaverageinventorycostoverinventorydaysinstock
ANS: A PTS: 1
BUSPROG:Analytic LO: 2-1
Bloom’s:Knowledge Difficulty:Easy
5. Whichtypeofrequisitionisusedformaterialsandstandardpartsthatarerequestedonarecurring basis?
a. Openrequisition
b. Blanketrequisition
c. Travelingrequisition
d. Recyclablerequisition(Cyc-Rec)
ANS: C PTS: 1
BUSPROG:Analytic LO: 2-2
Bloom’s:Knowledge Difficulty:Easy
6. Aformofpurchasingthatisplaceddirectlytothesupplierandsuitablewhenfirmsusethesame componentstomakestandardgoodsoverarelativelylongperiodoftimeisreferredtoas:
a. Materialrequisition
b. Purchaserequisition
c. Plannedorderrelease
d. Travelingrequisition
ANS: C PTS: 1
BUSPROG:Analytic LO: 2-2
Bloom’s:Knowledge Difficulty:Easy
7. Whenaproductispurchasedwhichiscomplicatedorhighlytechnicala______________maybe issuedinsteadofarequestforquotation.
a. Requestforproposal
b. Purchaseorder
c. Contractforsale
d. Salesorder
ANS: A PTS: 1
BUSPROG:Analytic LO: 2-2
Bloom’s:Knowledge Difficulty:Easy
8. Benefitsderivedfromimplementinge-procurementsystemsincludeallofthefollowingEXCEPT:
a. Allowsbuyerstosubmitbidsandsupplierstorespondtothosebidsinrealtime
b. Increasestheaccuracyincommunicationbetweenbuyersandsuppliers
c. Createsnumerousadditionaljobopportunitiesinthepurchasingdepartment
d. Trackingbidsandtransactionsiseasierandfaster
ANS: C PTS: 1
BUSPROG:Analytic LO: 2-2
Bloom’s:Comprehension Difficulty:Easy
9. Whilemostpublicprocurementisfocusedongoalslikethoseofpurchasingdepartmentsintheprivate sector,U.S.federalgovernmentpurchasesmustcomplywiththe:
a. ServicesandMaterialsAcquisitionAct
b. FairStandardsandEquitablePurchasesAct
c. FederalCodeofConductforProcurement
d. FederalAcquisitionRegulation
ANS: D PTS: 1
BUSPROG:Analytic LO: 2-2
10. Pettycashisbeingphasedoutinfavorof:
a. Hardcash
b. Ablankcheck
c. P-card
d. Score-carding
ANS: C PTS: 1
BUSPROG:Analytic LO: 2-3
Bloom’s:Knowledge Difficulty:Easy
Bloom’s:Knowledge Difficulty:Easy
11. Blanketoropen-endpurchaseordersaresuitableforbuying
a. Computers
b. Heavyequipment
c. Custombuiltcomponents
d. Officesupplies
ANS: D PTS: 1
BUSPROG:Analytic LO: 2-3
Bloom’s:Knowledge Difficulty:Easy
12. Whichofthefollowingisareasonsmallvaluepurchasesarehandleddifferently?
a. Togivethebuyeradditionalsupplierchoices
b. Toobtainahigherqualityproduct
c. Tohavebettertrackingofmaterialusage
d. Tocontrolunnecessaryadministrativecosts
ANS: D PTS: 1
BUSPROG:Analytic LO: 2-3
Bloom’s:Comprehension Difficulty:Easy
13. WhichofthefollowingillustratesForwardVerticalIntegration?
a. Microsoftstartinganewdivisionthatdesignsandmanufacturesclothing
b. Fordautomotivebuyingadditionalmachinesforproduction
c. Subwaysandwichcompanybuyingabakerytomakethebreadfortheirsandwiches.
d. Sonybuyingtruckstodelivertheirfinishedgoodsinventoriestotheircustomers' warehouses
ANS: D PTS: 1
BUSPROG:Analytic LO: 2-4
Bloom’s:Comprehension Difficulty:Easy
14. Whichofthefollowingwouldbeagoodreasontooutsource(buy)versusmaking?
a. Toutilizeexistingcapacitywithinacompany'sownfirm
b. Afirmlacksthetechnologyorexpertisetoproduceanitem
c. Tohavemoredirectcontroloverthedesignandproductionofanenditem
d. Nocompetentsupplierpresentlyproducestheneededitem
ANS: B PTS: 1
BUSPROG:Analytic LO: 2-4
Bloom’s:Knowledge Difficulty:Easy
15. Giventhefollowingmake-buyinformation,whatwouldbethebreak-evenpoint?
a. 1200units
b. 1708units
c. 800units
d. 460units
ANS: C PTS: 1
BUSPROG:Analytic LO: 2-4 Bloom’s:Application Difficulty:Moderate
16. Giventhefollowingmake-buyinformation,whatwouldbethebreak-evenpoint?
6
a. 9170units
b. 3650units
c. 1040units
d. 2750units
ANS: B
PTS: 1
BUSPROG:Analytic LO: 2-4
Bloom’s:Application Difficulty:Moderate
17. Asfirmsseektoimprovetheproductstheyoffertothemarket,companiesareseekinghelpfromtheir suppliersinnewproductdesignanddevelopmentthrough:
a. Suppliercertificationprograms
b. Manufacturercertificationprograms
c. Earlysupplierinvolvement
d. TotalCostofOwnershipinitiatives
ANS: C
PTS: 1
BUSPROG:Analytic LO: 2-4
18. Firmscanusetotalcostanalysisto:
Bloom’s:Knowledge Difficulty:Easy
a. Seehowefficientlymanagementisusingitstotalassetstogenerateprofits
b. Selectthemostcost-effectivesupplier
c. Showhowmanytimesafirm’sinventoryisutilizedandreplacedoveranaccounting period
d. Brainstormandisolatethecausesofaproblem
ANS: B
PTS: 1
BUSPROG:Analytic LO: 2-5
Bloom’s:Comprehension Difficulty:Easy
19. TotalCostofOwnershipdoes NOT considerwhichofthefollowingfactors?
a. Purchaseordercosts
b. Freightcosts
c. Paymentterms
d. Toolingcosts
ANS: A PTS: 1
BUSPROG:Analytic LO: 2-5
Bloom’s:Comprehension Difficulty:Easy
20. ThetotalcostofownershipforSupplierAis$2,670,000.ThetotalcostofownershipforSupplierBis $1,750,000.ThetotalcostofownershipforSupplierCis$2,990,000.UsingTotalCostAnalysis,it willbemorecost-effectivetouse
a. SupplierA
b. SupplierB
c. SupplierC
d. Cannotbedetermined
ANS: B PTS: 1
BUSPROG:Analytic LO: 2-5
Bloom’s:Comprehension Difficulty:Easy
21. Whichofthefollowingisareasonforfavoringsinglesourcing?
a. Encouragescompetitionamongsuppliers
b. Spreadstheriskofsupplyinterruption
c. Reducesvariabilitiesinqualitylevels
d. Reducesinformationaboutnewprocessingtechnologies
ANS: C PTS: 1
BUSPROG:Analytic LO: 2-6
Bloom’s:Knowledge Difficulty:Easy
22. Whichofthefollowingisareasonthatsinglesourcingisconsideredrisky/bad?
a. Therecouldbesupplierinterruptionsduetopoliticalinstability
b. Itcouldestablishcloserelationshipswiththesupplier
c. Largerordersmakequantitydiscountsmorelikely
d. Decreasestheitemtoitemqualityvariabilityofitemspurchased
ANS: A PTS: 1
BUSPROG:Analytic LO: 2-6
Bloom’s:Comprehension Difficulty:Easy
23. Whichofthefollowingisanadvantageofacentralizedpurchasingdepartment?
a. Lessbureaucracy
b. Morefrequentshipments
c. Specialization
d. Closercontactbetweenbuyeranduser
ANS: C PTS: 1
BUSPROG:Analytic LO: 2-7
Bloom’s:Knowledge Difficulty:Easy
24. WhichofthefollowingstatementsisFALSE?
a. Centralizedpurchasingiswhereindividual,localpurchasingdepartments,suchasatthe plantlevel,maketheirownpurchasingdecisions.
b. Electronicprocurementsystemscanaidacompanyinsavingbothtimeandmoney.
c. Morethan50%ofeachsalesdollartypicallygoestowardscoveringsupplychaincosts.
d. Ifafirmlacksthetechnologytomakearequiredcomponenttheywillneedtoconsider buying/outsourcing.
ANS: A PTS: 1
BUSPROG:Analytic LO: 2-7
Bloom’s:Bloom’s:Comprehension Difficulty:Easy
25. Whichofthefollowingis NOT apotentialchallengeforglobalsourcing?
a. Longdeliveryleadtimes
b. Costsinvolvedinselectingforeignsuppliers
c. Relaxedtradebarriers
d. Laborandlegalproblems
ANS: C
PTS: 1
BUSPROG:Analytic LO: 2-8
Bloom’s:Comprehension Difficulty:Easy
26. WhichofthefollowingisNOTaformofcountertrade?
a. Barter
b. Kaizenblitz
c. Offset
d. Counterpurchase
ANS: B
PTS: 1
BUSPROG:Diversity LO: 2-8 Bloom’s:Knowledge Difficulty:Easy
27. WhichofthefollowingNOTareasonfirmsareexpandingtheirsupplybasestoincludeforeign suppliers?
a. Lowershippingratesduetolowertariffs
b. Lowerproductcost
c. Betterproductquality
d. Overseassupplierholdingthepatenttotheproduct
ANS: A
PTS: 1
BUSPROG:Analytic LO: 2-8
SHORTANSWER
Bloom’s:Comprehension Difficulty:Easy
1. WhenusingtheTotalCostofOwnershipconcept,explainhowasupplierwithahigherunitpriceand highertoolingcostcanendupbeingmorecosteffectivethananothersupplierwithalowerunitprice andtoolingcost.
ANS: WhencalculatingtheTotalCostofOwnership,unitpriceandtoolingcostarenottheonlycriterion usedinsupplierselection.Otherqualitativeandquantitativefactors,includingfreightandinventory costs,tariffsandduties,currencyexchangefees,paymentterms,maintenanceandnonperformance costsshouldbeconsidered.Aftercalculatingtheseotherfactors,theTotalCostofOwnershipmay havebeenlowerwiththesecondsupplier.
PTS: 5
BUSPROG:CommunicationLO: 2-5
Bloom’s:Application Difficulty:Moderate
2. Usewhatyouunderstandabouttheoutsourcingdecision(Makevs.Buy)toanswerthisquestion.List andexplainthreereasonsarestaurantmightdecidetobuypre-madedessertsfromasupplierrather thanmakingthegoodsfromscratch.
ANS: Reasonsapersonmightbuyarestaurantmightdecidetobuypre-madedessertsfromasupplier.
a. Cost–Creatingahigh-qualitydessertmightrequireunusual,aswellas,alargenumber ofingredients.Theymaynotbeabletotakeadvantageofeconomiesofscale,iftheydo notsellalotofdesserts.Italsomaybequitecostlytohireaspecialisttomakethe desserts.
b. InsufficientCapacity Arestaurantmaynothavethecapacitytomakefreshdesserts dailytofulfillthedemand.Theymightnotbeabletoofferalargeselectionofdesserts.
c. Lackofexpertise Therestaurantpersonnelmaynotknowhowtomakespecialized desserts.Orperhapsitisdifficulttohireadessertspecialist.
d. Quality Whiletheymayhavethetime,money,andskilltomakedesserts,theymay notbeabletomakethemaswellasaplacewhichspecializesindesserts.
Similaranswerswithslightlydifferentrationalemayalsobeacceptable.
PTS: 5
BUSPROG:CommunicationLO: 2-4
Bloom’s:Application Difficulty:Moderate
3. Answerthequestionsthatfollow,basedonthediagramprovidedbelow
a. Whatarethefixedcostsforthebuydecision?
b. Whatisthebreakevenquantityforthetwooptionsillustrated?
c. AtQ=300,wouldyouchoosethemakeorbuyoption?Why?
d. AtQ=200,whatwillbethetotalcostassociatedwiththebestdecisionatthisquantity?
ANS:
a. What are the fixed costs for the buy decision? $500
b. What is the breakeven quantity for the two options illustrated? TheBreak-evenquantityseemstobenear250units.Usingthischart,anythingwithin 230and270wouldprobablydeemedacceptable.
c. At Q = 300, would you choose the make or buy option? Why? Themakeoptionisbettersincethetotalcostsformakingareabout$3900versusabout $4400forbuying.
d. At Q = 200, what will be the total cost associated with the best decision at this quantity? Thebestdecisionistobuy,andthetotalcostisslightlyover$3000.
PTS: 5
4. Globalsourcinghasbecomecommonplace.Manycompaniesnowconsiderexpandingtheirsupply basetoincludeforeignsuppliers.Listthreereasonswhycompanieschoosetosourceglobally.
ANS:
Lowerpriceofmaterials(andservices) Overseasproductsmaybeofhigherquality Fasterdeliverytimes
Betterarrayofservicesofferedbythematerialsupplier Favorableexchangerates
PTS: 5
BUSPROG:Diversity LO: 2-4 Bloom’s:Comprehension Difficulty:Moderate
ESSAY
1. TheBOEHMCellPhoneCompanyhasdevelopedanewseriesofphonesthatitplanstobringtothe marketinthenext18months.Managementisconsideringwhethertoproducetheproductin-houseor tocontractoutthepurchasingandmanufacturingoftheirnewcellphones.
ProvideFOURconditionsthatwouldfavoroutsourcingandFOURconditionsthatwouldfavor makingthecellphonesin-house.
ANS:
Conditionsthatfavoroutsourcing:
a. Ifotherfirmsareofferingcostadvantages.
b. IfBoehmCellPhonedoesnothavesufficientcapacitytomeettheexpecteddemandfor thenewlineofcellphones.
c. PerhapsBoehmislargelyadesigncompanythatdoesnothaveexpertiseinpurchasing andmanufacturing.Anoutsidefirmmightbebetterqualifiedtodeliverahighquality productatalowerprice.
d. Outsidecompaniesmayofferhigherqualityduetoadvantagesinareasofskill, technology,andbusinessprocesses.
Conditionsthatfavormakingthecellphonesin-house:
a. Ifthetechnologyassociatedwiththenewlinesofphonesisproprietary,itmaybeeasier tomaintainsecrecyinbothmanufacturingandinfirst-to-marketmarketing.
b. Perhapsnooneiscapableofproducingthisproductoranecessarycomponent.
c. Ifthefirmfeelsthatitsqualityprogramsaresuperiortoanypotentialbusinesspartner, theymayprefertodoitthemselvestopreservetheintegrityofthebrand.
d. Thecompanyexpectsmanufacturingcapacitytobeavailableoncetheproductgoesinto production.
e. Ifthecompanypreferstohavemorecontroloverdistributionrelatedactivities.
f. Ifthecompanyhasthecapabilitytoproducetheproductatalowercostifadvantagesin supplychaincapabilitiesand/oreconomiesofscaleexist.
PTS: 10
BUSPROG:CommunicationLO: 2-4 Bloom’s:Application Difficulty:Difficult
2. Underwhichconditionswouldyoumostlikelyutilizeacentralizedpurchasingsystem?Listtwo advantagesthatwouldbegainedbyutilizingacentralizedpurchasingsystem.
Underwhichconditionswouldyoumostlikelyutilizeadecentralizedpurchasingsystem?Listtwo advantagesthatwouldbegainedbyutilizingadecentralizedpurchasingsystem.
ANS:
Under which conditions would you most likely utilize a centralized purchasing system?
Acentralizedpurchasingsystemwouldbefavoredbyacompanythatislookingtoreducesafety stocks,increasecontrolinpurchasing,centralizedecisionmaking,avoidduplicatepurchases,centrally managesupplierrelationships,andmaximizeavailablequantitydiscounts.
List two advantages that would be gained by utilizing a centralized purchasing system.
a. Concentrationofpurchasingleadingtolowerpurchasecosts
b. Avoidingduplicationofjobfunctions
c. Buyerspecialization
d. Lowertransportationcosts
e. Easiertonegotiatecontractsandmanagerelationshipswithacommonsupplierbase
f. Nocompetitionbetweenunitswhenpurchasingthesamematerial
Under which conditions would you most likely utilize a decentralized purchasing system? Adecentralizedpurchasingsystemwouldbefavoredbyacompanythatislookingtomakequicker decisions,maintainstocksthatareclosertotheircustomers,andidentifyandrespondtochanging customerneedsatthelocallevel.
List two advantages that would be gained by utilizing a decentralized purchasing system.
a. Individualanddecentralizedbuyersoftenhaveagreaterknowledgeoftheexactneeds foreachindividualunitutilizedbyorganization.
b. Decentralizationismoreconducivetolocalsourcing.Localsourcingoffersan organizationtheopportunitytoobtainfasterdeliverytimes,morefrequentdeliveries, whilestillmaintainingveryclosesupplierties.
c. Decentralizationallowsquickerresponsebecausethedecentralizedpurchasingallows forfasterdecisionsbecauseofdecreasedbureaucracy.
PTS: 10
BUSPROG:CommunicationLO: 2-7 Bloom’s:Comprehension Difficulty:Moderate
3. ThetermSupplyManagementisusedtodescriberesponsibilitiesaboveandbeyondthoseof traditionalpurchasing.Whatarethreeofthesekeyactivitiesandwhyaretheyconsideredimportantto SupplyManagement?
ANS: Otheranswersarepossible.
a. SupplyManagementisresponsiblefortheuninterruptedflowofrawmaterials
b. SupplyManagementisresponsiblefortheacquisitionofmaterialsatlowesttotalcost
c. SupplyManagementisresponsibleforimprovingthequalityoffinishedgoodsthrough thepurchaseofhigh-qualitycomponentsand/orrawmaterials.
d. Modernsupplychainsrequireclosepartnershipswithsuppliers;SupplyManagement departmentsareveryoftenresponsibleformaintainingthoserelationships
e. Pushingsupplierstoimprovethequalityoftheirrawmaterialsand/orcomponents
f. SupplyManagementdepartmentsareoftenresponsibleforassistingincollapsing design-to-productioncycletime
g. SupplyManagementdepartmentsareoftenseenasaconduitbetweenexternalsuppliers andinternaldesignand/oroperationspeople
PTS: 10
BUSPROG:CommunicationLO: 2-1
Bloom’s:Comprehension Difficulty:Moderate
4. Usethefollowinginformationtodeterminewhichsupplierforsteeringwheelsismorecost-effective usingtotalcostanalysis.Latedeliveryofthecomponentresultsin50%lostsalesand50%backorders offinishedgoods.
Table1
Orderlotsize 400
AnnualRequirements 4,800units
Weightpersteeringwheel 20pounds
Orderprocessingcost $125
Inventorycarryingrate 20%peryear
Costofworkingcapital 10%peryear
Profitmargin 20%
Priceoffinishedgolfcart $5,000
Backordercost $15perunit
Table2
UnitPrice
1to999units/order
1000to2,999units/order
SupplierA SupplierB
$48
$47
$47
$46
Toolingcost $1000 $1000 Terms 2/10net30 1/10,net30 Distance 120miles
Hereisthefreightratesfor Truckload(TL≥40,000lbs): $0.90perton-mile
TruckloadLess-than-truckload(LTL): $1.10perton-mile
Note:perton-mile=2,000lbs.permile;numberofdaysperyear=365
Answer:
Totalcostofownership=Totalsteeringwheelcost-CashDiscount+Toolingcost+Transportation cost+Orderingcost+CarryingCost+Qualitycost+Deliveryrating(BackOrderCostandLost Sales)
SupplierA
Totalsteeringwheelcost=4800x48=$230,400
-CashDiscountA=230,400x(10%x30/365)=$1894
-CashDiscountB=230,400x(10%x10/365+2%)=$5239usethisforbiggestsavings
+Toolingcost=1000
+Transportationcost=(400x20)=80000somustuseLTLshipmentat$1.10perton-mile 120x4800x20x1.10/2000)=6336
+Orderingcost=(4800/400)x125=$1500
+CarryingCost=(400/2)x48x20%=$1920
+Qualitycost=230,400x3%=$6912
+Deliveryrating-Backordercost(50%)=4800x1%x50%x15=$360
LostSales(50%)=4800x1%x50%x5000x20%=$24,000
Totalcostofownership=230,400-5239+1000+6336+1500+1920+6912+360+24000= $267,189
SupplierB
Totalsteeringwheelcost=4800x47=$225,600
-CashDiscountA=225,600x(10%x30/365)=$1854
-CashDiscountB=225,600x(10%x10/365+2%)=$5130usethisforbiggestsavings
+Toolingcost=1000
+Transportationcost=(400x20)=80000somustuseLTLshipmentat$1.10perton-mile
100x4800x20x1.10/2000)=5280
+Orderingcost=(4800/400)x125=$1500
+CarryingCost=(400/2)x47x20%=$1880
+Qualitycost=225,600x2%=$4512
+Deliveryrating-Backordercost(50%)=4800x2%x50%x15=$720 LostSales(50%)=4800x2%x50%x5000x20%=$48,000
Totalcostofownership=225,600-5130+1000+5280+1500+1880+4512+720+48000= $283,362
ThetotalcostanalysisshowsthatSupplierAismorecost-effective,eventhoughtheunitpriceis higherthanSupplierB.SupplierAhasabettercashdiscountrate,andbetterdeliveryperformance rating.
PTS: 10
BUSPROG:CommunicationLO: 2-5 Bloom’s:Application Difficulty:Difficult