A Detroit-based company producer of subassemblies for the automotive market, Autolink has asked Sheila Austin, a buyer, to quote a quotation of different companies for a product, wiring harness. Two of the four suppliers who made quotes are willing to negotiate with the company. The companies willing to negotiate are Original Wire, a local-based from Auburn Hills, Michigan, 20 miles from Autolink headquarters and an international company, Happy Lucky Assemblies of Guangdong Province. The calculations below show their comparison of the costs which would be incurred if either of them is chosen.
Calculate the total cost per unit of purchasing from Original Wire.
Assumption: Austin work with Original wire for one year
Demand per month: 5000 units
Yearly demand per year: 5000X12 = 60000
Yearly packaging Cost: 60000X$0.75 = 45000
Cost of units supplied per year: 60000X$30 = 1800000
Tooling cost: = 6000
Yearly Freight Cost: 6000X$5.2 = 31200
Total = 1882200
Unit Cost = Total yearly cost/Total yearly units
= $31.37
The total cost per unit of wiring harnesses purchased from Original Wire is $31.37
Calculate the total cost per unit of purchasing from Happy Lucky Assemblies
Assumption: Austin work with Happy Lucky Assemblies for one year
Cost Calculation Total
Unit price: 5000195097500 19.50
Tooling: $3000 one-time fixed charge $3000/60000 0.05
Packing Costs: 2.00
Inland Transportation: 200/ container ($200X3)/5000 0.12
Freight Forwarder’s Fee: $100/shipment $100/5000) 0.02
Ocean Transport: $4000/container ($4000X3)/5000 2.40
Marine Insurance: $0.50 per $100 of shipment $487.5/5000 0.10
U.S. Port Handling Charge: $1200/container ($1200X3)/5000 0.72
Customs duty: 5% of unit cost 0.05X19.50 0.98
Customs broker fees $300/shipment $300/5000 0.06
Transportation (Seattle to Detroit) $1.86/hundred pounds $0.186X10 1.86
Warehousing $1.00/cubic foot per month $1.00X1 1.00
Cost of hedging currency $400/shipment $400/5000 0.08
Administrative time 4 hrs/shipment @$25/hour $100/5000 0.02
Visits to China twice a year $20000/60000 0.33
= $29.24
The total cost per unit of wiring harnesses purchased from Happy Lucky Assemblies is $29.24
Based on the total cost per unit, which supplier should Sheila recommend?
Based on the overhead costs of unit calculations only, Sheila should recommend Happy Lucky Assemblies for wire harnessing decision because the wiring harness from Happy Lucky Assemblies costs $29.24 and the one, which is similar, from Original Wire costs $31.37. This cost per unit is lesser by $2.13 even though all the costs of importing from China are considered.
Are there any other issues besides cost that Sheila should evaluate?
Besides the cost per unit, Sheila should keenly evaluate each option’s advantages and disadvantages. As seen that Original wire is hungry for business, Autolink and Original wire may collaborate and gain more by reducing the cost despite the purchase cost being higher. Another issue is consideration of the vicinity; Original wire is located 20 miles away from Autolink. This is advantageous in that access is easy for working together for example transport cost is cut (1). On the side of Happy Lucky Assemblies, purchase costs may be lower, but considering other costs like the foreign exchange and transport, both shipping and inland transportation costs go high.
5.Based on this case, do you think international purchasing is more or less complex than domestic purchasing? Why? Is it worth the additional effort?
International purchasing is more complex than domestic purchasing because of the additional costs that come in hand, for example, the warehousing and shipping costs. International purchasing may inconvenience working together because of the relationships of the two parties, the buyer and the seller, as time goes by. There have been findings or rather data in the world market that the top participants in the world market, in this case, an example of Happy Lucky Assemblies from China supplying to businesspersons economically (2). International purchasing is worth it because, with access to information, the buyers can find good prospective buyers.
Conclusion
Based on the above calculations and oversight, I believe Sheila Austin chose to work with Original Wire. This is because of the company’s geographical location, just 20 minutes away from Autolink headquarters. This favors a very easy collaborative business (3) together where other opportunities may open up because Original Wire are eager to continue to work together for more.
References
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