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Supplier Portfolio

Different things should be bought in a different way. How much time and effort would you
lose if you would pick the wrong strategy? Therefore, we determined all the components in
the Kraljic Matrix. Based on the financial impact and the supplier risk on business we
assigned every product to a particular quadrant.
To determine the financial impact, we decided to calculate the percentage of the total
purchase value and to assess the supply risk we used the formula 1 divided by the number of
suppliers. (See Appendix)
Miami Oranges has low supply risk and moderate financial impact non critical/
routine
Mono Packing Materials has low supply risk and low financial impact non-critical /
routine
NO8DO has low supply risk and low financial impact non critical/ routine
Philyp Jones Plastic (PET) has low supply risk and low financial impact non
critical/ routine
YoBoMa has low supply risk and low financial impact non critical/ routine

High

Fin.
Impact

Low

Low Supply Risk High

Total Cost of Ownership (TCO)


According to the book Strategic Supply Management (Cousins, P., Lamming, R., Lawson,
B. and Squire, B., 2008, chapter 12), total cost of ownership (TCO) can be defined as .. a
big picture perspective, considering costs beyond simply price. Other cost factors are
critical, including costs related to quality, delivery services, ordering, reception, inception and
transportation.. By looking the finance analysis from The Fresh Connection, beside direct
purchasing costs (total amount of 913. 209) TCO takes stock costs (399. 175), inbound
(manpower costs, 86. 434) from handling costs, inbound (ordering costs, 102.522) from
administration costs and transportation costs (145. 188) into account.
The purchase value (without transportation) for the PET bottles is 173. 839. We have been
asked to calculate the percentage of every upon mentioned cost in compare to the purchasing
value of PET bottles. Since transportation is one of these elements of TCO, we calculated the
purchasing value for every product without it (so its excluded from all below given
purchasing values) and we came into result 768. 021. After that it was easy to divide PETs
purchasing value 173. 839 from the complete purchasing value and we came to result 22,63
%. It was only possible to make comparison between transportation costs and PETs
purchasing value, since on the website of The Fresh Connection transportation costs were the
only ones given separately from product to product. We calculated this by dividing PETs
transportation costs (97. 497) from its complete purchasing value (173. 839), which results
56,08 %. The other costs (stock costs, manpower costs and ordering costs) we calculated
separately by dividing their purchasing value (stock: 399. 175 , manpower: 86. 434 and
order: 102. 522) from the total purchasing value (768. 021 exc. transportation costs). The
results are stock costs 51,97 % , manpower costs 11,25% and ordering costs 13,35%.

ART OF COST SUGGESTION EFFECTS


stock costs e.g. reduce order size increased ordering costs (more
smaller orders needed)

ordering costs e.g. enlarge ordering size reduce order interval but
meanwhile increase stock
costs, risk costs and manpower
costs

manpower costs e.g. investment of a machine, changes in time line requires


changes in order size or time changes in the whole
line production system

transportation costs e.g. changes in order size and reduce order interval and
interval increase order size -> again can
cause increased stock costs

Table to represent effects of decreasing the costs.

If these suggestions of decreasing the costs want to be fulfilled, changes have to been made
also at the supplier policy. Possibilities are, for example, to make more flexible contract terms
or use less suppliers.

Based on our given information from Kraljic Matrix, we can notice that all products belong to
non-routine quadrant. Because of that, its impossible to make any comparison between their
costs. Also as noticed above, all costs of products havent been given separately for all cost
categories, which results to difficulties at calculating. We can assume that there arent
differences between the categories. If there were, it would mean measurements for supplier
policy (e.g. bidding the suppliers).

Because of the lack of information, it is only possible to speak for differences in


transportation costs. As noticed, when ordering PET bottles you pay 35% of the total price
only for transportation. One possibility is to bid different suppliers and find the one with best
price-quality-relationship.
There are many different benefits which adapting the TCO gives. Since different costs are
categorized and all hidden costs uncovered, it is easier to find the detailed information from
particular costs, i.g. compare different products and their costs with each other, observe the
development of costs, separate profitable products from non-profitable and makes prioritizing
and selection between suppliers easier. Product life cycle is also noticed, which is also an
important element, especially analyzing investments. It is very difficult to pick only one
main benefit.

Outsourcing
In the next round we will have the opportunity as a company to buy our own PET bottle
blowing machine. This machine will reduce our need for pallet locations and by the reduce
our inventory costs. Furthermore The purchasing value of the PET bottles will be halved. The
machine does however come with extra costs and an one time investment. In the following
part we will use calculations to find out if the PET bottle machine will give us an economic
advantage. For these calculations we will use the following information:
- Annual cost per pallet location: $200
- Safety stock: 2 weeks
- Lead time supplier: 5 days
- Lots size: 3 weeks
- Number of PET bottles per pallet: 1080 PET bottles
- Purchasing price of PET bottle: $0,0478
- Annual costs increase due to new machine: $140,000
- Average demand per week in the last year:
Round Demand for PET bottles per week
4 211430
5 210601
Average 211015

Calculations:
Step 1: Finding out for how many weeks the PET bottles are in inventory
The first step is to find out how long the PET bottles are in the raw warehouse. To ensure our
dependability we have built in a safety stock and when ordering, when ordering our company
places an order to have enough inventory for a few weeks. This means however that we need
to have enough pallet locations to store enough pallet locations for a few weeks.
: + :
: 2 1 + 3 = 4
Step 2: Calculating how many PET bottles will be in inventory on average
: 211,015 4 = 844,060
Step 3: Calculating how many pallets are needed to store these PET bottles
844,060
: = 782
1080
Step 4: Calculating the storage costs for the PET bottles
: 782 200 = 156,400
Step 5: Calculating the annual purchasing costs for the PET bottles:
: 0,0478 211,015 52 = 524,499
Step 6: Calculating the total annual purchasing and storage costs:
: 524,499 + 156,400 = 680,899

Next we calculate the costs if the machine is bought


Step 1: Calculating the total storage costs:
790
: ( ) 200 = 15,800
10
Step 2: Calculating the annual purchasing costs for the PET bottles:
0,0478
: ( ) 211,015 52 = 262,250
2
Step 3: Calculate annual total annual cost price:
: 15,800 + 262,250 + 140,000 = 418,050
Finally we can calculate how much cost reduction the company will experience if this
new machine is bought.
: 680,899 418,050 = 262,849

Will we buy the PET bottle machine based on these calculations:


We have decided to buy the PET bottle machine on these calculations. Even though our ROI
will increase due to the 700,000 investment it is still a very good option because the last
rounds will count double for our ROI.

Theories concerning this purchase


Transaction cost approach:
The transaction cost approach is a theory that is based on the interaction of two behavioral
assumptions and two transactions assumptions. The theory states that the higher the
transaction costs get, the
more likely a company will
start making the product
instead of buying it.
Based on this theory we
should not buy the
machine. We have little
asset specificity with our
supplier and their delivery
reliability is very high.

The Resource Base View approach:


The Resource based approach believes
that companies should look within the
their own company to see if they can
make products internally. In table 3.4
the view of this theory is drawn out.
Based upon this theory we should by
the PET bottle machine. This way we
will be able to make this product
internally.
Did the theories change our view on purchasing the machine
No they did not, we looked at the calculations instead and based upon these we decided that it
would be beneficial for us to buy the machine.

Sourcing
As already mentioned before, the Fresh Connection has several suppliers and several to
choose from. In this chapter we now want to discuss why it would be useful to have more
than one supplier for each component. The key components here are the mangos and the
oranges.
One reason is that oranges, mangos as well as the vitamin C are pretty expensive goods
compared to the Pet and the 1 litre packs. The offer of suppliers on the other hand is very big
though according to Kraljik matrix (Cousins, Lamming, Lawson, & Squire, 2008, p.47) these
components would fit in the leverage quadrant. To minimise the cost and get the best possible
quality we would like to have competition between the suppliers. Therefore a good choice is
multi-souring (Cousins, Lamming, Lawson, & Squire, 2008, p.53). Furthermore there is safty
to get always the best product for the best price and to get components delivered reliable and
in time also if one supplier goes bancrott.
But we also have to consider the rising administration cost with rising suppliers. To satisfy
quality and reliable deliveries we therefore choose the dual sourcing strategy. The
pricedifference of each product is so small that it is not relevant anymore if you weigh them
with the administration costs.
Appendix

Supplier Number of Supplier risk Purchase value Purchase value


suppliers (1/# of (% of total
suppliers) purchase value)
Mono packing 5 0,2 118,502 13%
Materials ( Pack
1 liter )
Philyp Jones 3 0,33 271,336 29,7%
Plastics (PET)
YoBoMa 4 0,25 1,604 0,2%
(Vitamin C)
NO8DO Mango 4 0,25 89,345 9,8%
(Mango)
Miami Oranges 7 0,14 432,421 47,4%
( Orange )

Supply risk
Mono packing Materials: 1/5 = 0.2
Philyp Jones Plastic: 1/3 = 0,3
YoBoMa: = 0.25
NO8DO: = 0.25
Miami Oranges: 1/7 = 0,14

Purchase value
Total purchase value: 118,502 + 271,336 + 1,604 + 89,345 + 432,421 =913,208
Mono packing Materials 118,502/913,209 = 0,13 (13%)
Philyp jones Plastics 271,336/913,209 = 0,297 (29,7%)
YoBoMa 1.604/913,209 =0,02 (0,2%)
NO8DO Mango 89,345/913,209 =0.098 (9,8%)
Miami Oranges 432,421/913,209 = 0,474 (47,4%)