Alpha Appliances, Inc. is a major distributor of household appliances. Its customer base consists of local retailers who stock a variety of products including appliances. Alpha purchases bulk of its products from China, Mexico, India, and Thailand. The business has been good.
In past few months, Jay Adams, VP-Marketing has received numerous complaints from its customers that they have not been receiving supplies on time, costs have gone up, etc. Jay calls a meeting of his sales manager Kathy Land, production manager Abraham King, and procurement manager Ashley Thompson.
Jay Adams: Good morning ladies and gentlemen! How are you guys!
Kathy, Abraham and Ashley all respond with a smile.
Jay: Lately I have been receiving a lot of complaints from our customers and that worries me.
Ashley: I am not aware of it! What are the complaints about?
Jay: There are complaints such as our product prices have gone up, we are not able to deliver on time, and so on!
Abraham: Are the complaints specific to a product, or across the board?
Jay: Well, I am not sure. We probably have problems with many of our products. The most serious problem however seems to be with our very popular ceiling fan model B23Y5. Ashley, are you aware of any issues either with this product or its supplier?
Ashley: Well, we have buying this product from China with a company named Xanu Enterprises. They have recently raised prices, so we were forced to raise ours, in order to maintain our margins.
Jay: Abraham, do you think we can buy parts and assemble this fan in house? Abraham: Yes, we have the capability to do so.
Jay: Kathy, why do our customers complain about late deliveries? Do not we have a good idea of the future demand?
Kathy: We do forecast as best we can. But, I guess sometimes we screw it up! If we do better job of forecasting, this problem can be minimized.
Jay: Well, we have had good discussion of the situation. I am giving you guys one week of time to do your home work. Ashley, try to identify more reliable vendors; Abraham, estimate the cost if we do in-house production; and Kathy, you come up with a more reliable forecast.
Kathy, Abraham and Ashley all nod their heads and the meeting is adjourned.
AFTER ONE WEEK
The meeting takes place, and the following data is presented.
ASHLEY THOMPSON: We have identified two more reliable vendors with following cost structure.
Xanu Enc. - $32 per fan, lead time fixed - 2 weeks
Weni Inc.- - $33 per fan (if purchase quantity is below 2,000)
$31 per fan (if the purchase quantity is between 2,000 and 5,000) $30 per fan, if the purchase quantity is above 5,000
(Lead time fixed, 2 weeks)
Yama Inc. - $31 per fan, lead time variable, will require a safety stock of 200 fans
The ordering cost is $500, irrespective of the vendor.
ABRAHAM KING: We can produce this product with following cost and related data.
Cost of production of fan: $30 per fan
Production rate: 200 fans/day
Production Set up cost: $2,000
KATHY LAND: We have examined recent past sales data and recent market trends. We expect daily demand to about 50 fans.
The management estimates inventory costs to be about $5 per year per fan. After accounting for holidays, it is estimated the company is in business for about 300 days in a year.
Answer the following questions. Show all work that you need to arrive at the final answer.
If Alpha did not want to go for in-house production, which of the three vendors it should choose? Why?
If Alpha decides to produce, how many fans should it produce every time?
Should company buy or produce? Justify your answer.