Question

You are the purchasing manager of a company and are responsible for ensuring that necessary inputs are available to keep your factory operating. For each of the three types of purchases identified below, recommend whether your company should use spot purchases, contract purchase, or internal production. Support your answer using economic concepts from this course. To what extent is your decision and any contract terms affected by the variability in the demand for your product and thus your need for the product purchased?

1. A subsystem that is similar to but not exactly the same as subsystems used by competitors; several large companies offer to make modifications to the subsystem to fit your requirements.
2. A part that is unique to your company and requires significant capital investment in order to produce. Your company is the only one using this part but several vendors have offered to manufacture it for you.
3. Light fixtures and light bulbs used to illuminate the factory floor.

Answer 1

Solution:-

Given that

You are the purchasing manager of a company and are responsible for ensuring that necessary inputs are available to keep your factory operating. For each of the three types of purchases identified below, recommend whether your company should use spot purchases, contract purchase, or internal production. Support your answer using economic concepts from this course

a) A subsystem that is similar to but not exactly the same as subsystems used by competitors; several large companies offer to make modifications to the subsystem to fit your requirements.

For this subsystem a spot purchase would be the most suitable type of purchase. This is because the other companies have agreed to make the product with the required modifications that are needed. Internal production would likely be a bad idea as it would require a much greater initial investment in developing just the machinery or buying it in order to produce the subsystems when those other companies could just cover the costs for you thus preventing an unnecessary expenditure and taking time and resources from other more important goals the company must achieve. This is similar to need a lamp to study, however it would be highly impractical to produce it yourself as opposed to just buying it.

b) A part that is unique to your company and requires significant capital investment in order to produce. Your company is the only one using this part but several vendors have offered to manufacture it for you.

In this scenario the best idea would be to create a contract purchase with these companies willing to make this custom product that you need. The main reason a contract purchase would be better than a spot purchase is quite simply because it may break again in the future and you may be required to purchase it again. This contract would ensure that the company would continue to produce it for you just in case it were to break down.

c) Light fixtures and light bulbs used to illuminate the factory floor.

For light fixtures and light bulbs used to illuminate the factory floor, the most ideal solution would be a spot purchase. Unless the bulbs and the light fixtures have some unique features about them that simply cannot be found in any other products at the stores or online then purchasing directly on spot would probably be your best bet. Producing them or entering into a contract agreement over them would prove to be more of a hassle than a benefit and thus a spot purchase would be much more suitable.

My decision is affected by the demand of the product as we know that when the demand of a product goes up so does it price usually. This would make me more likely to consider producing the product at my own company rather than purchasing externally. More often than not however producing the products yourself usually tends to be more expensive than actually buying it from other more experienced vendors who know how to produce it efficiently and already have the machinery ready and running, unless of course the product you are producing is what your business sells which in almost all situations in usually not the case.

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