Sourcing of a new sub-component
Your company, based near Wilmington, N.C., needs to source a new sub-component that will be a key element in a new product that is due to start production next year. Your boss contacted three producers of the sub-component and obtained the cost information below.
Your boss has asked you to provide a detailed spreadsheet of the cost and provide a recommendation on which firm would be able to provide the sub-component at the best price. She needs to brief the CEO next week. Since your firm has worked with all three of the producers before, and all have a good record of providing sub-components, the decision will be solely based on the lowest cost.
Additional Shipping Information
10,000 units of the sub-component will fit into a 40-foot shipping container, so to keep the shipping cost down; all three firms will ship full containers each time an order is placed.
Producer A is located in Nashville, Tennessee, and can provide the sub-component for $3.25 each. The producer’s warehouse is 600 miles from your production facility, and truck transportation will cost $1.25 per mile. There is a container-handling fee of 1% of the total product cost that is assessed by the shipping company, as well as a required $200 insurance policy.
Producer B is located in Europe and can provide the sub-component for $2.00 each. The producer’s warehouse is 100 KMs from the port and the truck transportation will be $1.50 per kilometers. The trucking cost from the United States port to your production facility is 35 miles and the transportation will cost $1.25/mile. From Europe to the United States, the sea shipping will run $2,000 with a handling fee of 1.25% of the total product cost. Since the sub-component must be imported into the United States, there is a 10% import duty assessed on the total cost of the product. Finally, there will be a fee of $850 for sea and surface transportation insurance.
Producer C is located in Asia, the furthest away from your facility however; their cost per unit is the lowest at $1.50. The factory for Producer C is located 150 kilometers from the closest port and costs $0.20 per KM to move the container to the port. Sea shipping runs $2,500, with a handling cost of 1.25% of the total cost of the product. As with Producer B, once the container reaches the United States, it will be assessed import duties of 10%. Final transportation to your facility will run $43.75. Finally, there will be a fee of $900 for sea and surface transportation insurance.
Additional information to Consider
While both Producer B and C have a lower cost per unit, they have a higher shipping cost. Also, since both Producer B and C are so far away, and delivery time is uncertain, then your firm will want to hold $3,000 worth of safety stock. Finally, part of the reason that Producers B and C sub-components are cheaper is that some additional work will be needed on their components once they are received. Your production office has determined that it will cost $.50 each to finish off the sub-component for Production B and $1.10 each to finish the sub-component from Producer C.
Include the following in your submission
- Provide a professional looking detailed spreadsheet with all of the costs outlined, including calculations for the total landed cost.
- Provide a professional looking (not APA formatted), one-page summary (double-spaced) of your findings that your boss can give to the CEO. In your initial task, you were told that the lowest cost would be the winner, but oftentimes the lowest price is not always the best solution. Therefore, in your memo, provide some information on sourcing that you would want your boss and the CEO to consider before making the final decision.