Chapter 12, Problem 9PA

a

Summary Introduction

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.

Explanation of Solution

Data	Supplier A	Supplier L
Procurement cost/ unit, P	$11.80	$10.85
Tariff cost/ unit, $T_c$	$0.00	$0.46
Unit transportation cost, $T_m$	$0.90	$1.25
Order cost/ order, $C_o$	$155	$195
Holding cost per unit, $C_h$	$1.45	$1.10
Lead time, L	45	100

The different cost components that are involved in this case are:

  $•$ Total procurement cost

  $•$ Total tariff cost

  $•$ Total transportation cost

  $•$ Annual ordering cost

  $•$ Annual inventory carrying cost

  $•$ Average annual pipeline Inventory cost

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 = $D.T_e$

Total transportation cost = $D.T_m$

Annual ordering cost = $\left(\frac{D}{Q}\right).C_o$

Annual carrying cost = $\left(\frac{Q}{2}\right).C_h$

Annual pipeline inventory cost = $\left(\frac{D}{d}\right).L.C_h$

Where, D= annual demand, P= procurement cost per unit, $T_c$ = tariff cost per unit, $T_m$ = unit transportation cost, $C_o$ = ordering cost per order, $C_h$ = unit carrying cost per annum, Q = order size, d = number of days in a year, and L = lead time.

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, $T_c$	$0.00	$0.46
Unit transportation cost, $T_m$	$0.90	$1.25
Order cost/ order, $C_o$	$155	$195
Holding cost per unit, $C_h$	$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

Summary Introduction

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.

Explanation of Solution

Based on the minimum total cost, the correct choice should be the Supplier A with Q = 50,000.

c

Summary Introduction

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.

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

Summary Introduction

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.

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, $T_c$	$0.00	$0.46
Unit transportation cost, $T_m$	$0.90	$1.25
Order cost/ order, $C_o$	$155	$195
Holding cost per unit, $C_h$	$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