You use a lot of heavy cast gray iron parts in your furniture manufacturing busi

Question

You use a lot of heavy cast gray iron parts in your furniture manufacturing business and you have an American supplier who does not give you very good service. Deliveries are often late, quantities may be below what you ordered, and parts may require filing or grinding before use. But, they always arrive, and they always work, more or less. But now a supplier in Argentina offers you castings for half the price, but sea shipment is very slow and filled with delays, and air shipment is expensive and also subject to availability of airlift: there may not be space on a flight for heavy items and so they get bumped. Describe how you make a decision here. Volume is not large enough to maintain two suppliers. What are the risks and costs? Describe a good management strategy here.

Explanation / Answer

In case of American Supplier, Pros: (i) Guarantee of supply, (ii) affordable quality Cons: (i) price of part is high (ii) late delivery incurs cost and loss of customers (iii) less than lot size (less than order) incurs non-delivery to your customer (iv) Rework on arrived parts incurs manufacturing cost and labour (man & machine) cost This case shows the dominance of supplier rather than customer In case of Argentian Supplier, Pros: (i) price is less Cons: (i) more lead time in case of shipment through sea (ii) more expensive in case of air shipment (iii) highly volatile lead time in case of both above (iv) Assuming that quality of part is equivalent If you can find the trade off between transportation cost and inventory cost, you can order more and store in your warehouse if you want to reduce both. The decrease in price of the part may give you more room for increase in inventory cost. Inventory helps in uncertain situations if you get delayed by the shipments either by air or sea. You need to have clear view of your future business for inventory management in warehouse which gives you more profitable with new supplier. Since the risk of delay in shipments is there in both suppliers, managing risk is inevitable in both cases and it gives you more benefits with Argentian supplier with effective inventory management

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