Question

In: Accounting

If the standard cost for a pound of direct material 'X' for Company Zeta is $2.50,...

If the standard cost for a pound of direct material 'X' for Company Zeta is $2.50, but the purchasing manager found a source of 'X' outside the company's normal supply chain for $2.00 per pound. Discuss any pros and cons you may foresee from the purchasing manager sourcing the $2.00 per pound material.

Solutions

Expert Solution

There are many pros and cons of sourcing the $2 per pound material , we can discuss those one by one.

Pros :

1. The major plus is the possible reduction in Direct Materials and Product cost by $0.5 per pound.

2. This will be a major ground for possible price re-negotiation with the existing supplier.

3. The new supplier can be added to supplier list with the existing supplier to ensure continuity of supply in case the existing supplier fails to deliver or faces quality issue.

4. Zeta may introduce Just in Time supply method more easily with two suppliers in hand .

However , there will be some cons that need equal attention like ;

1. The ability of the supplier to maintain Quality of the material X is to be tested before giving a sizable contract.

2. The payment terms and conditions may be prohibitive and against the rule of the company.

3. The financial strength and  working capital condition of the supplier should be sufficient to ensure long term un interrupted supply.

4. The engagement with new supplier may antagonize the current supplier and create a supply continuity issue.


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