Cornell Cookery Inc. (CCI) needs some metallic pan liners for its products. The
ID: 351198 • Letter: C
Question
Cornell Cookery Inc. (CCI) needs some metallic pan liners for its products. The current supplier accepts large orders but is only able to supply 5000 liners/day. The current supplier charges 0.47 $/liner. CCI plans an annual demand of 1,000,000 units. They are able to successfully produce this number of product during the 250 operating days. Whenever CCI places an order with any vendor, they typically incur a 128 $/order cost. Carrying cost is typically estimated at 4% of the liner unit cost per year. An upstart supplier is offering the liners to you at a substantial price discount at 0.445 $/liner with the caveat that the minimum order quantity be 100,000 liners with essentially no maximum limit. Due to a recent investment in new technology, they will be able to deliver up to 600,000 liners in a day if needed. Should CCI stay with the current supplier or switch to the upstart rival?
Explanation / Answer
Following detail highlights total cost incurred while ordering from current supplier vis a vis upstart supplier :
Order Quantity : 5000 liners from current supplier :
Number of orders = Annual demand / Order Quantity = 1,000,000 / 5,000 = 200
Annual unit inventory carrying cost = 4% of $0.47 = $0.0188
Ordering cost = $128/ order
Total annual ordering cost = Ordering cost / order x Number of orders = $128 x 200 = $25600
Total annual inventory carrying cost
= Annual unit inventory carrying cost x Average inventory
= Annual unit inventory carrying cost x Order Quantity / 2
= $0.0188 x 5000/2
= $47
Total annual purchasing cost = Unit cost x annual demand = $0.47x 1,000,000 = $470,000
Therefore , total annual cost
= Total annual ordering cost + Total annual inventory carrying cost + Total annual purchasing cost
= $25600 + $47 + $470,000
= $ 495647
Order quantity : 100,000 from Upstart supplier :
Number of orders = Annual demand / Order Quantity = 1,000,000 / 100,000 = 10
Annual unit inventory carrying cost = 4% of $0.445 = $0.0178
Ordering cost = $128/ order
Total annual ordering cost = Ordering cost / order x Number of orders = $128 x 10 = $1280
Total annual inventory carrying cost
= Annual unit inventory carrying cost x Average inventory
= Annual unit inventory carrying cost x Order Quantity / 2
= $0.0178 x 100,000/ 2
= $890
Total annual purchasing cost = Unit cost x annual demand = $0.445 x 1,000,000 = $445,000
Therefore , total annual cost
= Total annual ordering cost + Total annual inventory carrying cost + Total annual purchasing cost
= $1280 + $898 + $445,000
= $447,178
Since total annual cost incurred by ordering from an upstart supplier ($447,178) < total annual cost incurred by ordering from current supplier ( $495.647) , CCI should switch to upstart rival