Question

Joseph, a buyer at Taggart & Smith, a Georgia-based purveyor of custom stereos for auto enthusiasts, was doing some number crunching. Taggart & Smith was reevaluating its suppliers for a key component of the custom stereo, the sub-woofer. After some extensive evaluation, Joseph had narrowed it down to two suppliers and he was comparing them. PeachTree SpeakerWorks was a regional company and China Sound was based in Guangdong Province, China. Given the following information that Joseph compiled, use total cost analysis to determine which supplier is more cost-effective for Taggart & Smith. Late delivery of the sub-woofer results in either a lost sale (thus lost profit) or a customer backorder (each time there is a backorder, it costs $275). Assume for the cost comparison that the company orders 12 times per year, the order quantity is 6,833 units, and that the annual requirement (forecast) is 82,000 units. Each time that he orders from a domestic supplier, Joseph estimates that it costs the company $ 593 and each time he orders from international suppliers, it costs about $1,413. For purposes of calculating quality problems and declaring the value for customs and insurance, Joseph uses the expected invoice amount (purchase cost + packing/packaging) as a base. Joseph also knows that additional factory inspection trips will need to be made to the China facility to support the company’s environmental, social, and quality goals.

What should Joseph do? Taking in consideration procurement rules of thumb regarding international sourcing and based on the analysis below, should he source globally or domestically?

Enter Global or Domestic.

Product Weight	8	pounds
Cost of working capital	9%	per year
Profit margin	12%	annual
Price of finished stereo	$1,500	per unit
Percent of late deliveries that result in backorders	30%	of late deliveries
Percent of late deliveries that result in lost sales	70%	of late deliveries

	PeachTree SpeakerWorks	China Sound
Quoted unit price	$54.00	$41.00
Packing cost (+ packing for international shipping)	$2.16	$4.75
Tooling cost	$3,000	$5,000
Invoice Terms	2/10, net 30	2/15, net 30
Domestic delivery distance (in miles)	110	300
Supplier quality rating (% problems)	1.00%	3.00%
Supplier delivery rating (% problems)	2.00%	3.00%
Number of forty-foot equivalents (FEU) per order		1
China inland freight and freight forwarding (per FEU)		$364
Ocean transport (per FEU)		$2,501
Marine cargo insurance (% declared value)		1.3%
U.S. Customs duty and fees (% declared value)		5.6%
U.S. port handling and brokerage fees (per FEU)		$1,358
Factory inspection trips to China		$25,000
Domestic U.S. Transportation Costs
Full truckload (TL>40,000 lbs.)	$0.89	per ton-mile
Less-than-truckload (LTL)	$1.14	per ton-mile
Note: per ton mile = 2,000 pounds per mile

Purchase Cost	$ 4,428,000	$
Packing Cost	177,120
Effective Invoice Amount	$ 4,605,120	$ 3,751,500
Effect of Discount Terms
Cash Discount	-92,102
Cost of Capital Savings	-11,513
Tooling Cost	3,000
Ordering Cost	7,116
Domestic Transportation Cost	32,111
China Inland Freight and Freight Forwarding
Ocean Transport
Marine Cargo Insurance
U.S. Customs Duty and Fees
U.S. Port Handling and Brokerage Fees
Quality Cost	46,051
Cost of Late Delivery
Backorders	135,300
Lost sales	206,640
China Factory Inspection Trips
TOTAL COST	$ 4,931,723	$ 4,731,919

Answer 1

Description	China Sound
Purchase cost (82000 x $41)	3362000
Packing cost (82000 x $4.75)	389500
Effective invoice amount	3751500
Effect of discount terms:
Cash discount (2% x $3751500)	-75030
Cost of capital savings	-14067.5
Tooling cost	5000
Ordering cost (12 x $1413)	16956
Domestic transportation cost [(82000 x 8 x 300)/2000 x $0.89]	87576
China inland freight and freight forwarding (1 x 12 x $364)	4368
Ocean transport (1 x 12 x $2501)	30012
Marine cargo insurance (1.3% x $3751500)	48769.50
U.S Customs duty and fees (5.6% x $3751500)	210084
U.S. Port handling and brokerage fees (1 x 12 x $1358)	16296
Quality cost (3% x $3751500)	112545
Cost of late delivery:
Backorders (82000 x 30% x 3% x $275)	202950
Lost sales (82000 x 70% x 3% x $180)*	309960
China factory inspection trips	25000
TOTAL COST	4731919

*Profit margin = $1500 x 12% = $180

Considering the procurement rule of thumb for international sourcing, if the international sourcing does not generate minimum cost savings of 15% over the domestic sourcing, then domestic sourcing should be opted for.

International saving/domestic cost = ($4931723 - $4731919)/$4931723 = $199804/$4931723 = 4.05%

Joseph should source: DOMESTIC