Question

Your company assembles five different models of a motor scooter that is sold in specialty stores in the United States. The company uses the same engine for all five models. You have been given the assignment of choosing a supplier for these engines for the coming year. Due to the size of your warehouse and other administrative restrictions, you must order the engines in lot sizes of 1,240 units. Because of the unique characteristics of the engine, special tooling is needed during the manufacturing process for which you agree to reimburse the supplier. Your assistant has obtained quotes from two reliable engine suppliers and you need to decide which to use. The following data have been collected:

   

Requirements (annual forecast)		14,880	units
Weight per engine		25	pounds
Order processing cost	$	190	per order
Inventory carry cost		20	percent of the average value of inventory per year

Note: Assume that half of lot size is in inventory on average (1,240/2 = 620 units).

Two qualified suppliers have submitted the following quotations:

ORDER QUANTITY	SUPPLIER 1 UNIT PRICE			SUPPLIER 2 UNIT PRICE
1 to 1,499 units/order	$	575		$	572
1,500 to 2,999 units/order		569			572
3,000 + units/order		568			565
Tooling costs	$	30,100		$	28,000
Distance		120 miles			100 miles

Your assistant has obtained the following freight rates from your carrier:

Truckload (45,000 lbs. each load):	$0.80 per ton-mile
Less-than-truckload:	$1.20 per ton-mile

Note: Per ton-mile = 2,000 lbs. per mile.

a-1. Calculate the total cost for each supplier. (Round your answers to the nearest whole number.)

	Supplier 1	Supplier 2
Total cost	$	$

a-2. Which supplier would you select?

b-1. If you could move the lot size up to ship in truckload quantities, calculate the total cost for each supplier. (Do not round intermediate calculations. Round "Required lot size for truckload" and final answers to the nearest whole number.)

HINT: Use (full) truckload cost rates and the lowest (feasible) unit cost for all calculations. For example, if there are 8.3 orders per year, don’t split the 8.3 orders into 8 full truckloads and 0.3 less-than-truckloads - use the full truckload rate for all 8.3 orders. For annual purchase cost, don’t use two different unit costs for the 8 complete orders and the 0.3 partial orders – use the lowest (feasible) unit cost for all 8.3 purchase orders based on the lot size needed for a full truckload.

	Supplier 1	Supplier 2
Total cost	$	$

b-2. Would your supplier selection change?

  

Answer 1

a-1:

Since truckload is 45,000 lbs. hence the number of engines =		1800	units
Due to physical constraints the order size can only be		1240	units
Difference (less-than-truckload)		560	units

	COST COMPARISON
	Supplier 1			Supplier 2
Units	1240			1240
Order Cost	575	713000		572	709280
Total Orders	12			12
Order processing cost		2280			2280
Inventory Cost		124			124
Tooling Cost		30100			28000
Distance	120			100
LTL	2400			2400
Transportation Cost		288000			240000
TOTAL COST	$                                                    10,33,504.00			$                                       9,79,684.00

	Supplier 1	Supplier 2
Total Cost	$                            10,33,504	$          9,79,684

a-2: I would choose Supplier 1

b-1:

	COST COMPARISON
	Supplier 1			Supplier 2
Units	1800			1800
Order Cost	569	1024200		572	1029600
Total Orders	8.3			8.3
Order processing cost		1571			1571
Inventory Cost		180			180
Tooling Cost		30100			28000
Distance	120			100
Truckload	1600			1600
Transportation Cost		192000			160000
TOTAL COST	$                          12,48,050.67			$                          12,19,350.67

	Supplier 1	Supplier 2
Total Cost	$ 12,48,050.67	$ 12,19,350.67

b-2: No, I will still go with Supplier 2