Question

Emma, a buyer at William A Smith Engineering, a Mississippi-based purveyor of transits for surveyors, was doing some number crunching. William A Smith Engineering was reevaluating its suppliers for a key component of the transit, the stand. After some extensive evaluation, Emma had narrowed it down to two suppliers and she was comparing them. Jackson Castings, Inc. was a regional company and Shanghai Metals was based in Guangdong Province, China. Given the following information that Emma compiled, use total cost analysis to determine which supplier is more cost-effective for William A Smith Engineering.

Late delivery of the stand results in either a lost sale (thus lost profit) or a customer backorder (each time there is a backorder, it costs $395). Assume for the cost comparison that the company orders 12 times per year, the order quantity is 7,833 units, and that the annual requirement (forecast) is 94,000 units.

Each time that she orders from a domestic supplier, Emma estimates that it costs the company $ 708 and each time she orders from international suppliers, it costs about $1,160. For purposes of calculating quality problems and declaring the value for customs and insurance, Emma uses the expected invoice amount (purchase cost + packing/packaging) as a base. Emma 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 Emma do? Taking in consideration procurement rules of thumb regarding international sourcing and based on the analysis below, should she source globally or domestically?

Enter Global or Domestic.

Important! Round each entry to the nearest whole number. Enter as ###,###. Enter negative numbers as -###,###.

Product Weight	5	pounds
Cost of working capital	9%	per year
Profit margin	12%	annual
Price of finished transit	$ 560	per unit
Percent of late deliveries that result in backorders	42%	of late deliveries
Percent of late deliveries that result in lost sales	58%	of late deliveries

	Jackson Castings	Shanghai Metals
Quoted unit price	$37.00	$28.00
Packing cost (+ packing for international shipping)	$ 1.48	$3.25
Tooling cost	$3,000	$5,000
Invoice Terms	2/10, net 30	2/15, net 30
Domestic delivery distance (in miles)	122	400
Supplier quality rating (% problems)	2.00%	3.00%
Supplier delivery rating (% problems)	1.00%	2.00%
Number of forty-foot equivalents (FEU) per order		1
China inland freight and freight forwarding (per FEU)		$418
Ocean transport (per FEU)		$2,591
Marine cargo insurance (% declared value)		1.4%
U.S. Customs duty and fees (% declared value)		5.0%
U.S. port handling and brokerage fees (per FEU)		$1,449
Factory inspection trips to China		$30,000
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

FILL OUT ALL SHANGAI METALS COLUMN

Description	Jackson Castings	Shanghai Metals
Purchase Cost	$ 3,478,000	$
Packing Cost	139,120
Effective Invoice Amount	$ 3,617,120	$ 2,937,500
Effect of Discount Terms
Cash Discount	-72,342
Cost of Capital Savings	-9,043
Tooling Cost	3,000
Ordering Cost	8,496
Domestic Transportation Cost	32,684
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	72,342
Cost of Late Delivery
Backorders	155,946
Lost sales	36,637
China Factory Inspection Trips
TOTAL COST	$ 3,844,840	$ 3,738,602

Answer 1

Description	Shanghai Metals
Purchase cost (94000 x $28)	2632000
Packing cost (94000 x $3.25)	305500
Effective invoice amount	2937500
Effect of discount terms:
Cash discount (2% x $2937500)	-58750
Cost of capital savings	-11016
Tooling cost	5000
Ordering cost (12 x $1160)	13920
Domestic transportation cost [(94000 x 5 x 400)/2000 x $1.14]	107160
China inland freight and freight forwarding (1 x 12 x $418)	5016
Ocean transport (1 x 12 x $2591)	31092
Marine cargo insurance (1.4% x $2937500)	41125
U.S Customs duty and fees (5% x $2937500)	146875
U.S. Port handling and brokerage fees (1 x 12 x $1449)	17388
Quality cost (3% x $2937500)	88125
Cost of late delivery:
Backorders (94000 x 42% x 2% x $395)	311892
Lost sales (94000 x 58% x 2% x $67.20)*	73275
China factory inspection trips	30000
TOTAL COST	3738602

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 = ($3844840 - $3738602)/$3844840 = $106238/$3844840 = 2.76%

Emma should source - DOMESTIC