Question

Lean Principles

Bright Night, Inc., manufactures light bulbs. Its purchasing policy requires that the purchasing agents place each quarter’s purchasing requirements out for bid. This is because the Purchasing Department is evaluated solely by its ability to get the lowest purchase prices. The lowest bidder receives the order for the next quarter (90 working days).

To make its bulb products, Bright Night requires 61,200 pounds of glass per quarter. Bright Night received two glass bids for the third quarter, as follows:

• Central Glass Company: $23.00 per pound of glass. Delivery schedule: 61,200 (680 lbs. x 90 days) pounds at the beginning of July to last for 3 months.
• Ithaca Glass Company: $23.15 per pound of glass. Delivery schedule: 680 pounds per working day (90 days in the quarter).

Bright Night accepted Central Glass Company’s bid because it was the low-cost bid.

1. A manufacturing company gets quotes from each supplier and allocates the purchase order to the company which quotes the lowest price with the expected quality. Is this process effective in long run? Identify reason that supports the answer.

1. Yes
2. No

b

Reason:

1. The policy is effective as it lowers the cost of purchase.
2. The policy considers the quoted price and the quality of the product is ignored.
3. The policy of the company is not practically viable as it is not building long-term relationships with its suppliers. The reputation of the company may be affected.
4. Supplier relationships are not required as the products are purchased for the quarter alone.

c

2. A manufacturing company gets quotes from each supplier and allocates the purchase order to the company which quotes the lowest price with the expected quality. Are there any additional costs that are involved in bulk purchase for the quarter? Identify reason that supports the answer.

1. Yes
2. No

a

Reason:

1. The cost of storage, obsolescence, material management and wastages are ignored in this concept.
2. The cost of storage, obsolescence, material management and wastages are included in the purchase cost computation.
3. The cost related to quality can be compensated as the price of the material is low.
4. The responsibility of the manager is to get the lowest bid for the product and all other information is irrelevant.

a

3. Considering only inventory financing costs, what is the additional cost per pound of Central Glass Company’s bid if the annual cost of money is 8%? (Hint: Determine the average value of glass inventory held for the quarter and multiply by the quarterly interest charge, then divide by the number of pounds.) Round to the nearest cent.
$ per lb.

Answer 1

1. (b) No

Reason : (c) The policy of the company is not practically viable as it is not building long-term relationships with its suppliers. The reputation of the company may be affected.

Explanation: The policy is considering only lowest price and ignoring many other important factors like long term relationship.

2. (a) Yes

Reason : (a) The cost of storage, obsolescence, material management and wastages are ignored in this concept.

Explanation: Allocating the contract to the lowest price bid may not be good enough as there are many other costs involved. Hence, only bid price is not sufficient to award the contract to any company.

3. Cost per pound = $23

Annual Cost of Money = 8%

Quarterly Cost of Money = 8%/4=2%

Material Received at beginning of quarter = 61,200 pounds

Average Inventory Held for the Quarter = Material Received for the quarter / 2

= 61,200 / 2

=30,600 pounds

Average value of Inventory for the quarter = Average Inventory * Cost per pound

= 30,600 * $23

= $703,800

Additional Cost per pound = (Average Value of Inventory * Quarterly cost of money) / Number of pound

= ($703,800 * 2%) / 61,200

= $0.23 per pound

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