The estimated demand for the harness is 5,000 units a month. Both suppliers will incur some cost to retool for this particular harness. the harnesses wil be prepackaged in 24x 12x 6 inch carton. Each package weighs 10 pounds
1.Calculate the total cost per unit of purchasing from original wire Unit Price- $30
Quote 1
The first quote received is from Original Wire, Auburn Hills is about 20 miles from Auto link's corporate headquarters, so the quote was delivered in person. When Sheila went down to the lobby she was greeted by the sales agent and an engineering representative. After the quote was handed over, the sales agent noted that engineering would be happy to work closely with Autolink in developing the unit and would also be interested in future business that might involve finding ways to reduce costs. The sales agent also noted that they were hungry for business, as they were loosing a lot of customers to companies from China. The quote included unit price, tooling, and packaging. the quoted unit price does not include shipping costs. Original wire requires no special warehousing of inventory and daily deliveries from its manufacturing site directly to Autolink's assembly operations are possible.
Packing Cost=$.75 per unit
Tooling= $6,000 one time fixed charge
Frieght Cost=$5.20 per hundred
2. Calculate the total cost per unit of purchasing from Happy Lucky Assembleies
Quote 2
The second quote received is from Happy Lucky Assemblies of Guangdong Province, China. The supplier must pack the harnesses in a container and ship via inland transportation inland transportation to the port of Shanghai in China, have the shipment transferred to a container ship, ship material to Seattle then have material transported inland to Detroit. the quoted unit price does not include international shipping cost, which the buyer will assume
HLA Quote Unit Price- $19.50
Shipping Lead Time=8 weeks
Tooling=$3,000
In addition to the suppliers quote, Shilea must consider additional cost and information before preparing a comparision of the Chineese Suppliers quatation:
-Each montly shipment requires three 40 ft containers
-Packing cost for containerization=$2 per unit
-Cost of inland transportation to port of export =$200 per container
- Cost of ocean transport=$4000 per container
- Frieght forwarders fee $100 per shipment Marine insurance=$50 per $100 of shipment
US port handling charges= $1,200 per container.
-Customs Duty=5% of unit cost
-Customs broker fees per shipment=$300
Transportation from Seattle to Detroit =$18.60 per hundred pounds
-Need to warehouse at least four weeks of inventory in Detroit at a warehousing cost of $1.00 per cubic foot per month, to compensate for lead time uncertainty. Sheilea must also figure the cost associated with commiting corparate capitol for holding inventory. She has spoken to some accountants, who typically use a corparate cost of capital rate at 15%
-Cost of hedging currency-broker fees=$400 per shipment
-Additional admin time due to international shipping=4 hours per shipment x $25 per hour (estimated)
-At least two five day visits per year to travel to China to meet with supplier and provide updates on performance and shipping=$20,000 per year (estimated)
The international sourcing cost must be absorbed by shiela as the supplier does not assume any of the additional estimated costs and invoice Shiela later, or build the cost into a revised unit price. Shiela also knows that this is a standard technology that is unlikely to change during the next three years, but which could be a contract that extends multiple years out. There is also a lot "hall talk" amongst the engineers on her floor about next generation automotive electronics, which will completly eliminate the need for wire harnesses, which will be replaced by electronic components that are smaller, lighter, and more reliable. She is unsure about how to calculate the total cost for each option, and she is even more unsure about how to factor these other variables into the decision.
3. Based on the total cost per unit, which supplier should shiela recommend?
4. Are there any other issues besides cost that Shiela should evaluate?
5. Based on this case do you think international purchasing is more or less complex than domestic purchasing? Why? Is it worth the additional effort? Comment