Description

Express your opinion on:

1.       Evaluate THREE differences between a reactive sourcing process and a strategic sourcing process.

2.       Justify THREE examples of performance measures that can be used to assess the success of a Strategic Sourcing process

3.       A recent report highlighted that the main measure of performance used by the majority of purchasing organizations was reduced costs. Propose other sets of performance measures that could be applied by purchasing organizations to assess their contribution to corporate performance.

4.       How does supply management affect return on assets (ROA)? In what specific ways could you improve ROA through supply management?

5.       How can a supplier with a lower price end up costing the buyer more than a supplier with a higher price?

6.       An auto manufacturer sources both office supplies and subsystems such as seats. What, if any, difference in sourcing strategy would you recommend for the two types of products?

Quantitative Section

You are a purchasing manager in charge of stocking a certain type of transformer for a large electric utility. Weekly demand among your field crews for these transformers is normally distributed, with a mean of 100 and a standard deviation of 50. Holding costs are 25 percent, and you must hold a level of inventory corresponding to a cycle service level of 95 percent. You are faced with two suppliers, Reliable Components and Value Electric, who offer the following terms. Reliable sells the transformer for $5,000 with a minimum order of 100, and a lead time of 1 week with a standard deviation of 0.1 week. Value sells the transformer for $4,800, has a minimum batch of 1,000, a lead time of 5 weeks, and a lead-time standard deviation of 4 weeks.

a. What is the annual cost of using Reliable Components as a supplier?

b. What is the annual cost of using Value Electric as a supplier?

c. Which supplier would you choose?

d. If you could use both suppliers, how would you structure your orders?

Now imagine that you have chosen Reliable as your supplier. Value Electric very much wants your business and offers you the choice of three mutually exclusive alternatives: a reduced lead time of 1 week, a reduced minimum batch of 800, or a reduction in standard deviation of lead time by 1 week.

a. What are the expected annual costs of undertaking each of these options?

b. What is the expected annual cost if all three could be put into effect?

c. Would you change your decision to go with Reliable for any of these options?

Case 1.0

Plastic Cable Clips

In mid-September Robyn Pemberton, purchasing officer in the laundry division of Fisher & Paykel Limited, located in Auckland, New Zealand, was wondering which procurement option made most sense for the plastic cable clips requirements for the new line of washing machines.

THE LAUNDRY DIVISION

Fisher & Paykel Limited was the largest home appliance manufacturer in New Zealand with sales of its major appliances amounting to $135,000,000 and total sales of $270,000,000 for the fiscal year ending March 31, including $36,000,000 of export sales and royalty income. It comprised eight operating divisions, one of which was the laundry division employing over 500 people to produce washing machines and dryers. Currently, the laundry division produced about 50,000 washing machines, solely for the domestic market.

THE NEW WASHING MACHINE

For the last two years, the laundry division had been developing a new line of automatic washing machines. The planning and development of the new machine was conducted by a seven-person committee of engineers, production, and marketing people as well as a purchasing coordinator. The new machine, designed entirely by F&P, used electronic controls. It was believed to be technologically advanced by world standards. Its manufacturing process would be highly automated, featuring considerable part rationalization and cost reduction over the old production line. In fact, maintaining costs at the lowest possible level was one of the key priorities of the planning committee. With good opportunities for export and royalty income, the laundry division hoped to produce between 75,000 and 100,000 new washing machines a year. However, 50,000 machines were planned for the first full year of production. The first production run was scheduled for the beginning of next April.

PLASTIC CABLE CLIPS

The old washing machine used about 20 different plastic cable ties for a total of about 250 ties in each machine. At the moment, the laundry division bought nearly $1,250,000 a year worth of plastic cable ties: about $500,000 from Olson Plastics, a New Zealand manufacturer; $500,000 from Barry Cleaver and Sons, a local agent importing mostly from Japan; $200,000 from G. T. Rollman, another local agent importing from Australia; and at most $50,000 from Plastic Distributing, a relatively new and smaller multisource New Zealand agent.The ties to be used in the new machine required new specifications because of the automated production process. None of the existing ties suppliers actually had in stock the kind of parts required.

A year earlier, Robyn Pemberton, who was the purchasing coordinator for the new washing machine, managed to convince the planning committee to draw on the technical expertise of Barry Cleaver, the New Zealand agent currently supplying some of the plastic ties. As a result of Barry Cleaver’s input, the number of ties required was reduced to half a dozen new parts for a total of about 45 plastic clips to be used in each new machine. Robyn Pemberton made it very clear to Barry Cleaver that all current plastic ties suppliers would be asked to submit quotations as soon as all the specifications on the new clips were finalized and that his involvement would not give him any preferential treatment over the others.

SUPPLIER SELECTION

Because of design changes, the specifications for the new cable clips were not confirmed until early July. Robyn promptly sent letters asking for quotations to the four existing plastic ties suppliers (see Exhibit 1).