SpinFast Electric Motor Co: TCO and Vendor Selection SpinFast is evaluating two

Question

SpinFast Electric Motor Co: TCO and Vendor Selection

SpinFast is evaluating two vendors to supply the armature assembly for its Model 127, a small electric motor used in a variety of industrial robots. The company states that the following factors will be the same whichever vendor it chooses:

Annual purchase volume of 12,000 armatures.

Annual inventory carrying cost of 15% of average inventory value

Order processing cost of $200 per order.

Supplier 1 has submitted the following proposal:

Unit price of $125 per armature

Shipping and handling of 8% of the cost

Orders to be placed monthly.

Supplier 2 has submitted the following proposal:

Unit price of $115 per armature

Shipping and handling of 10% of the cost

Orders to be placed quarterly.

Which supplier will be the lower total cost for SpinFast? What factor(s) chiefly contribute to that difference? I suggest that you create a spreadsheet with columns for the two suppliers and have as many of the cell references linked as possible. By this I mean, have the S&H cost automatically computed from the purchase cost, not calculated separately and entered in manually.

Explanation / Answer

Supplier 2 will be cost efficient

Unit price cost is the contributing factor

Annaul Purchase Volume         12,000 Inventory carrying cost 15% Ordering Cost $          200 Supplier 1 Supplier 2 Cost per piece $125 $115 Shipping and Handling               10                 12 Orders lead time 1 month 1 Quarter Annual Cost $1,500,000 $1,380,000 Annual Shipping and Handling       120,000         138,000 Total Cost     1,620,000       1,518,000

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