Question

Northcutt manufactures high-end racing bikes and is looking for a source of gear sprocket sets. Northcutt would need 1,550 sets a month. Supplier A is a domestic firm, and Suppliers B and C are located overseas. Cost information for the suppliers is as follows: Supplier A—Price of $100 per set, plus packing cost of $2 per set. Total inland freight costs for all 1,550 units would be $800 per month. Supplier B—Price of $96 per set, plus packing cost of $3.50 per set. International transportation costs would total $3,500 per month, while total inland freight costs would be $800 per month. Supplier C—Price of $93 per set, plus packing cost of $3.00 per set. International transportation costs would total $5,000 per month, while total inland freight costs would be $1,000 per month. (***) Suppose that international and inland freight costs are fixed for volumes up to 4,000 units a month. Under this assumption, which supplier would have the lowest landed cost if demand were cut in half? If demand doubled? Whose landed cost is most sensitive to volume changes? (**) What factors other than landed costs might Northcutt consider when selecting the supplier? (Hint: Incorporate what you learned in Chapters 5 and 7. Show all work

Answer 1

Solution:

Suppliers	Price/unit	Packaging cost/unit	Inland freight/month	International freight/month
Supplier A	100	2	800	0
Supplier B	96	3.5	800	3500
Supplier C	93	3	1000	5000
Demand	775
Cost of Supplier A	79850	USD	QTY*(price/unit+packaging cost/unit)+inland freight/month+international freight/month
Cost of Supplier B	81412.5	USD	QTY*(price/unit+packaging cost/unit)+inland freight/month+international freight/month
Cost of Supplier C	80400	USD	QTY*(price/unit+packaging cost/unit)+inland freight/month+international freight/month
Demand	3100
Cost of Supplier A	317000	USD	QTY*(price/unit+packaging cost/unit)+inland freight/month+international freight/month
Cost of Supplier B	312750	USD	QTY*(price/unit+packaging cost/unit)+inland freight/month+international freight/month
Cost of Supplier C	303600	USD	QTY*(price/unit+packaging cost/unit)+inland freight/month+international freight/month
In both cases since demand is within 4000 sets, hence freights are same as in case of 775 units and 3100 units as its on monthly basis

The landed cost of Supplier C is most sensitive to volume, as because the same freight (inland+international) of 6000 USD is applicable till volume is 4000 units, hence as the volume increases the per unit fixed cost of freight component comes down drastically

The other factors that should be considered while comparing domestic supplier and international supplier are like cost of ensuring good quality, Delivery service level, inventory holding cost, lead time, cost to address excalations, travelling cost of employee for liasoning with supplier, tariff, duty etc also needs to be considered.