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# SOLUTIONS TO PROBLEMS

## PROBLEM 15.33 (40 minutes) Supplier costs analysis; supplier performance

measures; supplier selection: builder
1&2
Cost per unit
of activity
driver
Activity

Possum Timber
No. of
activities

Wombat Plumbing

Emu Insulation

No. of
activities

No. of
activities

Unit level
Downtime: poor material

400

10

4 000

800

Order material

500

40

20 000

48

24 000

30

15 000

360

40

14 400

60

21 600

38

13 680

Inspect order

600

40

24 000

60

36 000

38

22 800

Return material

440

2 200

1 760

15

6 600

Pay supplier

380

12

4 560

48

18 240

12

4 560

1 120

2 240

13

14 560

\$90 000

0.20

18 000

0.60

54 000

0.20

18 000

Order level

## Dispute invoiced amount

Supplier related
Supplier relationship mgr
Total supplier activity costs

\$89 400

\$155 600

\$96 000

Purchase cost

240 000

300 000

148 000

\$329 400

\$455 600

\$244 000

0.3725

0.5187

0.6486

## Total cost of ownership

Supplier performance index

Wombat Plumbing is the most expensive supplier to deal with in absolute terms, as it has the highest
supplier activity costs, but proportional to the value of orders Emu Insulation is a poorer performer as it
has the highest supplier performance index.
The high costs of Wombat Plumbing are mainly due to the high number of orders, inspections and
payments to suppliers and the large number of orders and receipts. Sixty per cent of the supplier
relationship manager's time was spent working with Wombat Plumbing and this is the largest component
of supplier activity costs. This may be due to Wombat being a much larger supplier to Jacaranda, or it
may be due to the need to solve more relationship problems between Wombat and Jacaranda. However,
relative to purchase cost, Wombats supplier activity costs are not as poor as those of Emu Insulation.
Emu Insulations high supplier performance index seems to be driven by a large number of disputed
invoices and orders returned to the supplier. Also, with purchases from Emu costing less than half the cost
of purchases from Wombat, there are more than half as many deliveries (38 compared with 60 deliveries
for 49.3% material cost).
The most cost-effective supplier is Possum Timber, due to the small number of orders and deliveries
relative to the value of their material, and the low number of payments given the number of deliveries.

In selecting its suppliers, Jacaranda Builders should assess the ability of the suppliers to deliver on time,
at the required level of quality and at the right price. For new suppliers, it can be difficult to assess
whether suppliers have the capability to meet these requirements. However, if any of the three existing
suppliers contracts are due for renegotiation, then Jacaranda has performance data that can be used to
assist in the decision.
On the basis of the above data Jacaranda may decide not to renew the contract of Wombat or Emu
Insulation unless there are changes that can reduce the number of supplier activities. In practice, firms
often discuss these data with the supplier to find ways to improve their performance.

PROBLEM 15.35 (25 minutes) Economic order quantity: equation approach; effects of

## ( 2)( annual requiremen t )( cost per order)

annual carrying cost per unit

(2)(4 800)(\$300)
\$8

360 000

= 600

Using the formula given for requirement
1:
Total annual cost of ordering and
storing XL-20

4 800
600

\$300
\$8
600
2

\$4800

Note that this cost does not include the actual cost of XL-20 purchases (i.e. the quantity purchased multiplied
by the price).

## Orders per year:

Number of orders per year

annual requiremen t
order quantity

4 800
600

(a)

EOQ

## (2) (annual requiremen t) (cost per order)

annual carrying cost per unit

(b)

## Number of orders per year

(2)(4 800)(\$60)
\$40

14 400

= 120

annual requiremen t
order quantity

4 800
120

40

1

## Annual financial impact:

Return on released funds [(\$7 200 000 \$1 200 000) 6%]
Savings in insurance and property taxes
Lease revenue (30 000 square metres 75% \$80)
Depreciation on remodelled facilities (\$1 200 000 10 years)
Savings in warranty and repair costs

\$360 000
54 000
1 800 000
(120 000)
50 000

Salary savings*

150 000

(140 000)

## Increase in profits due to the JIT system

\$2 154 000

* Note: The cost of the two transferred employees is excluded because Pacific Player will continue to have
these individuals on the payroll.

The effects of changing cost and rate of investment on the annual savings of adopting JIT is as follows:
Return on released funds [(\$7 200 000 \$1 200 000) 4%]
Savings in insurance and property taxes

\$240 000
54 000

1 800 000

(150 000)

Salary savings*

50 000
150 000

(140 000)

## Increase in profits due to the JIT system

\$2 004 000

* Note: The cost of the two transferred employees is excluded because Pacific Player will continue to have
these individuals on the payroll.

Long-term contracts under a JIT purchasing system can include tight standards with respect to the quality
of materials purchased and delivered. This may reduce the need for incoming inspections of materials
from the suppliers.