Problem:
Your company assembles five different models of a motor scooter that is sold in specialty stores in the United States. The company uses the same engine for all five models. You have been given the assignment of choosing a supplier for these engines for the coming year. Due to the size of your warehouse and other administrative restrictions, you must order the engines in lot sizes of 1,000 each. Because of the unique characteristics of the engine, special tooling is needed during the manufacturing process for which you agree to reimburse the supplier. Your assistant has obtained quotes from two reliable engine suppliers and you need to decide which to use. The following data have been collected:
Requirements (annual forecast)
Weight per engine
Order processing cost
Inventory carry cost
12,000 units
22 pounds
$125 per order
20 percent of the average value of inventory per year
Note: Assume that half of lot size is in inventory on average (1,000/2 5 500 units).
Two qualified suppliers have submitted the following quotations:
Order Quantity
Supplier 1
Unit Price
1 to 1,499 units/order $510.00
1,500 to 2,999 units/order 500.00
3,0001 units/order 490.00
Tooling costs $22,000
Distance 125 miles
Supplier 2
Unit Price
1 to 1,499 units/order $505.00
1,500 to 2,999 units/order 505.00
3,0001 units/order 488.00
Tooling costs $20,000
Distance 100 miles
Your assistant has obtained the following freight rates from your carrier:
Truckload (40,000 lbs. each load):
Less-than-truckload:
$0.80 per ton-mile
$1.20 per ton-mile
Note: Per ton-mile 5 2,000 lbs. per mile.
Q1. Perform a total cost of ownership analysis and select a supplier.
Q2. Would it make economic sense to order in truckload quantities? Would your supplier selection change if you ordered truckload quantities?