Question

James, a buyer at EZ Tech, a Alaska-based purveyor of generators for people in remote areas, was doing some number crunching. EZ Tech was reevaluating its suppliers for a key component of the generator, the generator frame. After some extensive evaluation, James had narrowed it down to two suppliers and he would source from the one with the lowest total cost, everything else held equal. Given the following information, use total cost analysis to determine which supplier, is more cost-effective for EZ Tech. Late delivery of the generator frame results in either a lost sale (thus lost profit) or a customer backorder (each time there is a backorder, it costs $195). Assume for the cost comparison that order quantity is 2,800 units and that the annual requirement (forecast) is 74,000 units. For purposes of calculating quality problems, James uses the expected invoice amount as a base. What should James do? Enter as ###,###. Enter negative numbers as -###,###.

Product Weight	20	pounds
Cost of working capital	10%	per year
Profit margin	17%	annual
Price of finished generator	$1,400	per unit
Percent of late deliveries that result in backorders	22%	of late deliveries
Percent of late deliveries that result in lost sales	78%	of late deliveries

	Supplier 1	Supplier 2
Quoted unit price	$57.00	$55.00
Packing cost	$2.28	$2.10
Tooling cost	$3,000	$5,000
Terms	2/10, net 30	2/15, net 30
Delivery distance (in miles)	102	452
Supplier quality rating (% problems)	2.00%	1.00%
Supplier delivery rating (% problems)	2.00%	3.00%
Transportation Costs
Full truckload (TL>40,000 lbs.)	$0.87	per ton-mile
Less-than-truckload (LTL)	$1.12	per ton-mile
Note: per ton-mile = 2,000 pounds per mile

Description	Supplier 1	Supplier 2
Purchase Cost	$4,218,000	$
Packing Cost	168,720
Total Invoice Amount	4,386,720	4,225,400
Effect of Discount Terms
Cash Discount	-87,734
Cost of Capital Savings	-12,185
Tooling Cost	3,000
Transportation Cost	65,668
Quality Cost	87,734
Cost of Late Delivery
Backorder	63,492
Lost Sales	274,747
Total Cost	$4,781,442	$4,968,89

Answer 1

	Supplier 1	Supplier 2
Purchase price $	57	55
packing price/unit	2.28	2.1
solution:
	Supplier 1	Supplier 2
Purchase cost	4,218,000	4,070,000	(74000* purchase price)
Packing cost	168,720	155,400	(74000* packing cost)
Total Invoice amount	4,386,720	4,225,400
Effect of Discount terms:
Cash discount (2% on inv amt)	(87,734)	(84,508)
Cost of capital savings	(12,185)	(17,606)
Tooling cost	3,000	5,000
Transportation cost	65,668	290,998
Quality cost	87,734	42,254	(inv amount * problme %)
Cost of late delivery
Back order	63,492	95,238
Lost sales	274,747	412,121
Total cost	4,781,442	4,968,896
As cost is cheaper, supplier 1 is preferred

	Working Notes:
1	cost of capital savings
	Total Invoice amount	4386720	4225400
	Credit period for discount	10 days	15 days
	Capital saved for credit period	121853.333	176058.3	(Invoice amt/360*15=176058)
	Interest savings (10%)	12185.3333	17605.83
2	Transportation cost:
	product weight	20 pounds
	Distance in mile	102	452
	Total weight (pounds)	1480000	1480000	(74000*20)
	PER TON	740	740	(total pounds/2000)
	TOTAL TON MILE	75480	334480	(per ton * distance)
		65667.6	290997.6
3	Total quantity	74000	74000
	late delivery (qty *% late)	1480	2220	(74000*3%=2220)
	late deliveries leading to backorder	325.6	488.4
	Cost of 1 back order	195	195
	total back order cost	63492	95238
4	Total quantity	74000	74000
	late delivery (qty *% late)	1480	2220	(74000*3%=2220)
	late deliveries leading to lost sale	1154.4	1731.6	=K35*78%
	late delivery qty * price of fin good	1616160	2424240	(1731.6*$1400)
	cost of loss of sale (17% of above)	274747.2	412120.8