Question

Lean Principles

Soft Glow, 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, Soft Glow requires 45,000 pounds of glass per quarter. Soft Glow received two glass bids for the third quarter, as follows:

Mid-States Glass Company: $28.00 per pound of glass. Delivery schedule: 45,000 (500 lbs. x 90 days) pounds at the beginning of July to last for 3 months.

Cleveland Glass Company: $28.20 per pound of glass. Delivery schedule: 500 pounds per working day (90 days in the quarter).

Soft Glow accepted Mid-States Glass Company's bid because it was the low-cost bid.

Required:

1. All of the following are ways in which Soft Glow could develop long-term partnerships with its suppliers except:

a. share research and development efforts.

b. ignore internal costs caused by delivery delays while contracting on the best price point basis.

c. share production schedules.

d. establish electronic data interchange.

e. establish supplier raw materials logistical support.

b

2. All of the following statements are true regarding the hidden costs beyond the price of Mid-States Glass Company's bid except:

a. They are easy to determine, yet often overlooked.

b. They ignore additional internal costs of the higher inventory imposed by Mid-States Glasses' delivery schedule.

c. The hidden costs are incurred by other parts of the organization, not purchasing.

d. The hidden costs include costs for additional space and handling.

e. The hidden costs include costs of obsolescence and financing.

a

3. Considering just inventory financing costs, what is the additional cost per pound of Mid-States Glass Company's bid if the annual cost of money is 10%? Round to the nearest cent.
$ per lb.

Please answer part 3 of the question with step by step explanation. Thanks

Answer 1

Answer:1 ignore internal costs caused by delivery delays while contracting on the best price point basis.

Answer:2 The hidden costs beyond the price include the costs associated with the higher inventory required by Mid-State’s delivery schedule. These inventory costs include additional space, handling, obsolescence, financing, and materials management costs. These costs were not considered because they are not obvious. They are also difficult to determine. The price is obvious, so it is easy to build a purchasing policy around “getting the best price.” This policy ignores the additional internal costs of the higher inventory imposed by Mid-State’s delivery schedule. These are costs incurred by other parts of the organization, not purchasing. In a functional organization, purchasing would respond by saying that the additional internal inventory costs are notits problem. Those are costs incurred in another manager’s responsibility center. Of course, this is part of the problem of such simple “low-price bid” policies.

1. Average Inventory for 3 months of Mid-States Glass Company = (45000+0)/2= 22500.

Cost per Unit $28.00

Total cost = 28 * 22500 = $630000

Finance cost = (630000*.1)/(3/12) = $15750.

Additional cost per pound of Mid-States Glass Company's bid = $15750/45000 = $0.35 per lb.