a
Interpretation:
Total annual parts and logistics cost for each supplier.
Concept Introduction:
The lot sizing rule consists of lot-for-lot, Fixed order quantity and Fixed period quantity. Out of all lot sizing rule, lot-for-lot rule results in least inventory because the order is planned and released according to net requirement of that particular week. A fixed order quantity is an inventory system in which a firm orders a fixed lot size i.e. the order quantity remains the same when ordered every time.
a
Explanation of Solution
Data | Supplier A | Supplier L |
Procurement cost/ unit, P | $11.80 | $10.85 |
Tariff cost/ unit, | $0.00 | $0.46 |
Unit transportation cost, | $0.90 | $1.25 |
Order cost/ order, | $155 | $195 |
Holding cost per unit, | $1.45 | $1.10 |
Lead time, L | 45 | 100 |
The different cost components that are involved in this case are:
Compute these costs for all the three suppliers and select based on the least total cost of the supply chain.
The following formulae will be used:
Total procurement cost = D.P
Total tariff cost =
Total transportation cost =
Annual ordering cost =
Annual carrying cost =
Annual pipeline inventory cost =
Where, D= annual demand, P= procurement cost per unit,
Note the computations done in the following Excel format.
Total supply chain cost analysis | ||
Data | Supplier A | Supplier L |
Procurement cost/ unit, P | $11.80 | $10.85 |
Tariff cost/ unit, | $0.00 | $0.46 |
Unit transportation cost, | $0.90 | $1.25 |
Order cost/ order, | $155 | $195 |
Holding cost per unit, | $1.45 | $1.10 |
Lead time, L | 45 | 100 |
Order quantity | 50000 | 100000 |
Average number of orders/ year (D/Q) | 20 | 10 |
Annual demand, D | 1000000 | |
No. of days in a year, d | 340 | |
Average daily demand (D/d) | 2941 | |
Cost calculations | ||
Total procurement cost | $11,800,000.00 | $10,850,000.00 |
Total management oversight cost | $0.00 | $460,000.00 |
Total annual transportation cost | $900,000.00 | $1,250,000.00 |
Annual order cost | $3,100 | $1,950 |
Annual holding cost | $36,250.00 | $55,000.00 |
Average annual pipeline Inventory cost | $191,911.76 | $323,529.41 |
Total supply chain cost | $12,931,261.76 | $12,940,479.41 |
The following is the formulated excel sheet calculations as shown below:
b
Interpretation:
Recommendation on order quantity
Concept Introduction:
The lot sizing rule consists of lot-for-lot, Fixed order quantity and Fixed period quantity. Out of all lot sizing rule, lot-for-lot rule results in least inventory because the order is planned and released according to net requirement of that particular week. A fixed order quantity is an inventory system in which a firm orders a fixed lot size i.e. the order quantity remains the same when ordered every time.
b
Explanation of Solution
Based on the minimum total cost, the correct choice should be the Supplier A with Q = 50,000.
c
Interpretation:
Criteria for choosing supplier and quantity
Concept Introduction:
The lot sizing rule consists of lot-for-lot, Fixed order quantity and Fixed period quantity. Out of all lot sizing rule, lot-for-lot rule results in least inventory because the order is planned and released according to net requirement of that particular week. A fixed order quantity is an inventory system in which a firm orders a fixed lot size i.e. the order quantity remains the same when ordered every time.
c
Explanation of Solution
Following are some of the criteria other than then total cost. The relevant metrics for measurement are also mentioned in the following table.
Criteria | Metric |
Quality | Sigma level |
Reliability | Average service level |
Capacity | Percentage utilization |
Delivery adherence | Variability in lead time |
d
Interpretation:
Recommendation for supplier who is not awarded the brake pad order..
Concept Introduction:
The lot sizing rule consists of lot-for-lot, Fixed order quantity and Fixed period quantity. Out of all lot sizing rule, lot-for-lot rule results in least inventory because the order is planned and released according to net requirement of that particular week. A fixed order quantity is an inventory system in which a firm orders a fixed lot size i.e. the order quantity remains the same when ordered every time.
d
Explanation of Solution
Supplier L should be given a target of reducing the procurement cost per unit by, say, 3%. Even with a 3% reduction of procurement cost per unit, it can compete with supplier A based on the total cost. This is shown below.
Total supply chain cost analysis | ||
Data | Supplier A | Supplier L |
Procurement cost/ unit, P | $11.80 | $10.85 |
Tariff cost/ unit, | $0.00 | $0.46 |
Unit transportation cost, | $0.90 | $1.25 |
Order cost/ order, | $155 | $195 |
Holding cost per unit, | $1.45 | $1.10 |
Lead time, L | 45 | 100 |
Order quantity | 50000 | 100000 |
Average number of orders/ year (D/Q) | 20 | 10 |
Annual demand, D | 1000000 | |
No. of days in a year, d | 340 | |
Average daily demand (D/d) | 2941 | |
Cost calculations | ||
Total procurement cost | $11,800,000.00 | $10,524,500.00 |
Total management oversight cost | $0.00 | $460,000.00 |
Total annual transportation cost | $900,000.00 | $1,250,000.00 |
Annual order cost | $3,100 | $1,950 |
Annual holding cost | $36,250.00 | $55,000.00 |
Average annual pipeline Inventory cost | $191,911.76 | $323,529.41 |
Total supply chain cost | $12,931,261.76 | $12,614,979.41 |
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