Wire-Harness-Decision (case 2)

Sheila Austin, a buyer at Autolink, a Detroit-based producer of subassemblies for the automotive market, has sent out requests for quotations for a wiring harness to four prospective suppliers. Only two of the four suppliers indicated an interest in quoting the business: Original Wire (Auburn Hills, MI) and Happy Lucky Assemblies (HLA) of Guangdong Province, China. The Global Sourcing Wire Harness Decision Case study solution Submitted to: Dr. Nadeem Kureshi Submitted by: Rida Munir Khan Enrollment No. 01-296161-014 MS SCM Dated: April 7, 2016

WIRE HARNESS DECISION Total cost per unit of purchasing from Original Wire Cost Basis Calculation Per Unit ($) Unit Price 30.00 Packing costs 0.75 Tooling 1 $6000 one-time fixed charge $6000/60000 0.10 Freight cost 2 $5.20 per 100 pounds $5.20/10 0.52 Cost per unit purchasing 31.37 1. Calculate the total cost per unit of purchasing from Original Wire. WORKINGS:  1 T OOLING :  Let’s suppose Austin enters a one-year contract  Demand per month: 5000 units  Demand per year: 5000*12 = 60000 units  Tooling cost spread over 60000 units = $6000/60000 units = $0.10 per unit  2 F REIGHT COST :  Freight cost/100 pounds =$5.20  Freight cost/1 pound =$5.20/100 =$0.052  Each unit weighs 10 pounds approx. hence per unit cost =$0.052*10 =$0.52 The total cost per unit of wiring harnesses purchased from Original Wire is $31.37. 2. Calculate the total cost per unit of purchasing from Happy Lucky Assemblies. Total cost per unit of purchasing from Happy Lucky Assemblies Cost Basis Calculation Per unit ($) Unit Price 19.50 Tooling 3 $3000 one-time fixed charge $3000/60000 0.05 Packing costs 2.00 Inland transportation 200/ container ($200*3)/5000 0.12 Freight forwarder's fee $100/shipment $100/5000 0.02 Cost of ocean transport $4000/container ($4000*3)/5000 2.40 Marine Insurance 4 $0.50 per $100 of shipment $487.5/5000 0.10 U.S. port handling charges $1200/container ($1200*3)/5000 0.72 Customs duty 5% of unit cost 0.05*19.50 0.98 Customs broker fees $300/shipment $300/5000 0.06 Transportation (Seattle to Detroit) 5 $1.86/hundred pounds $0.186*10 1.86 Warehousing 6 $1.00/cubic foot per month $1.00*1 1.00 1

harness from the local firm Original Wire costs $ 31.37 which is $2.13 less than Original Wire’s cost per unit, despite all the costs involved in importing the harnesses from China. 4. Are there any other issues besides cost that Sheila should evaluate? Ans: Sheila must assess the pros and cons of both the options carefully. While the cost incurred from purchasing wire harnesses from Original wire maybe greater but Autolink and Original Wire have the opportunity to collaborate and take steps for cost reduction as they are passionate and hungry for business, they are likely to be willing to go the extra mile to cut costs with Autolink. Secondly, Sheila should also consider proximity as one of the factors while evaluating both the options, Original Wire is located just 20 miles away from Autolink headquarters, which means delivery could be made daily, shorter lead times and also minimal inventory and risk, but Original Wire is charging a higher price. On the other hand, Happy Lucky Assemblies’ harness costs less but factors other than cost should be considered to arrive at an optimal decision such as currency risk (foreign exchange), hidden costs that haven’t been included in the unit price, political and geographical risks, the need to keep safety stock because of longer lead time and also consider the multiple stop shipping (harnesses travel from Guangdong province to the port in Shanghai, then travel via container ship to Seattle and then inland transportation to Detroit) process. 5. Based on this case, do you think international purchasing is more or less complex than domestic purchasing? Why? Is it worth the additional effort? Ans: It is definitely more complex than domestic purchasing as a host of costs and risks are involved including warehousing cost, cost to maintain safety stocks, unit prices do not include international shipping costs, political risk, the risk of natural disasters. Also, international purchasing may lack cultural concurrence between the buyer and seller which might hinder relationship in the long run. Since, major players in the world market such as China have emerged as low-cost suppliers, business owners have discovered their profit margins can widen colossally, hence the shift from domestic to international markets for purchasing. Also, the instantaneous access to information between buyers and sellers worldwide has made it possible for buyers to meet the right supplier who meets all the specifications effectively and efficiently, therefore making it worth the buyers’ while to scour international supply markets in their respective industries and select the right supplier.