Operations and Supply Chain Management
Operations and Supply Chain Management
14th Edition
ISBN: 9780078024023
Author: F. Robert Jacobs
Publisher: MCG
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Chapter 16, Problem 12OQ

a.

Summary Introduction

To calculate: The total cost of ownership analysis and select the supplier according to the calculation.

a.

Expert Solution
Check Mark

Explanation of Solution

Total cost of ownership analysis and the selection of selection of supplier.

Annual purchase cost can be calculated as follows:

Annual purchase cost=Demand ×Unit price=12,000×$510=$6,120,000

Tooling cost is $22,000 as given in the question.

Ordering Cost can be calculated as follows:

Order per year=DemandLot size=12,0001,000=12 orders

Order processing cost=Number of order×order processing cost=12×125=$1,500

The inventory carrying cost can be calculated as follows:

Inventory carrying cost=Lot size2×Carrying cost×Unit Price

Inventory carrying cost(For A)=1,0002×0.20×$510=$51,000

Inventory carrying cost(For B)=1,0002×0.20×$505=$50,500

The transportation cost can be calculated as follows:

Weight of annual requirement as per 1,000 units is 22,000 pounds

Now, since 1pound is 0.0005 tons, so 22,000 pounds will have 11 tons.

 Now, for an order quantity of less than the truckload is $1.20 per ton-mile.

Therefore,

Annual transportation cost for A=11 tons×125 miles×$1.20×12*=$19,800

Annual transportation cost for B=11 tons×100 miles×$1.20×12=$15,840

Note*: 12 is the number of orders per year when 1,000units are ordered in each lot size.

The total cost can be calculated as follows:

Supplier12
Unit price($)510505
Annual Purchase cost($)$6,120,000$6,060,000
One time tooling cost($)$22,000$20,000
Orders Per Year1212
Order processing cost ($)$1,500$1,500
Inventory Carrying cost ($)$51,000$50,500
Distance (Miles)125100
Weight per load22,00022,000
Transportation (Less than truckload) $1.20 per 2,000 lbs. per mile$19,800$15,840
Total Cost$6,214,300$6,147,840

Table (1)

So, from the above calculations, supplier 2 should be selected because the total cost of ownership for supplier 2 is $66,460 less than that of supplier 1.

b.

Summary Introduction

To analyze: The situation where truckload quantities are ordered and then select the supplier.

b.

Expert Solution
Check Mark

Explanation of Solution

Perform the total cost of ownership analysis using the truckload quantities as follows:

Required lot size for trucks=40,00022=1,818 approx.

 Since the order quantity is under 1,499 units, therefore, the unit price will be calculated as follows:

Number of orders in a year can be calculated as follows:

Orders per year=DemandLot size=12,0001,8186.6 orders

The inventory carrying cost can be calculated as follows:

Inventory carrying cost=Lot size2×Carrying cost×Unit Price

Inventory carrying cost(For A)=1,8182×0.20×$500=$90,900

Inventory carrying cost(For B)=1,8182×0.20×$505=$91,809

The transportation cost can be calculated as follows:

Weight of annual requirement as per 1,818 units is 39,996 pounds (assumed as 40,000)

Now, since 1pound is 0.0005 tons, so 40,000 pounds will have 20 tons.

 Now, for an order quantity of the truckload is $0.80 per ton-mile.

Therefore,

Annual transportation cost for A=20 tons×125 miles×$0.80×6.6=$13,200

Annual transportation cost for B=20 tons×100 miles×$0.80×6.6=$10,560

The total cost can be calculated as follows:

Supplier12
Unit price($)500505
Annual Purchase cost($)$6,000,000$6,060,000
One time tooling cost($)$22,000$20,000
Orders Per Year6.66.6
Order processing cost ($125 for each order)$825$825
Inventory Carrying cost ($)$90,900$91,809
Distance (Miles)125100
Weight per load(in pounds)40,00040,000
Transportation (truckload) $0.80 per 2,000 lbs. per mile$13,200.00$10,560.00
Total Cost$6,126,925$6,183,194

Table (2)

Thus, from the above calculations, it can be observed that the cost of ordering in truckload quantity is $20,915($6,147,840$6,126,925) less than the cost of ordering in units.

In this case, the total cost of ownership for supplier 1 is $56,269 less than that of supplier 2. So, the supplier 1 should be selected. Hence, the supplier selection changes after ordering truckload quantities.

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