Chapter 17, Problem 4P

a)

Summary Introduction

To determine: The total cost of producing in Country M.

Introduction:

Supplier selection is the process of evaluating the performance of each supplier and comparing it with in-house production to choose a capable supplier to support the output of the organization.

Explanation of Solution

Given information:

It is given that Company D is considering outsourcing its door production to Country M. The price quoted by the company of Country M is $83 for 5,000 units of standard door per year. The transportation cost is $825, which holds 250 doors. In order to send engineers to prequalify plant costs, $5,000 is required and to negotiate the contract, $1,000. The inventory cost is a 20 percent carrying charge for an average of 6 months.

Company D is currently situated in Country U, where the production cost is $119. In addition to this, the following information is given:

Criteria	Weight	Supplier from Country M		In-house
		Rating	Score	Rating	Score
Quality and delivery	16%	3		4
Price	60%	5		4
Social responsibility	7%	2		5
Currency risk	17%	3		5
Total	100%

Determine the total cost producing in Country M:

Price of the door	₹ 83.00
Transportation cost	₹ 3.30
Pre-qualify supplier	₹ 1.00
Manage contract	₹ 0.20
Inventory carrying	₹ 8.30
Total	₹ 95.80

Working note:

Price of the door, pre-quality supplier, and manager contract are given.

Compute transportation cost:

The transportation cost is $825 for one run, which holds 250 doors.

$\begin{array}{c}\text{Transportation cost}=\frac{825}{250}\\ =3.30\end{array}$

Compute inventory carrying cost:

The inventory cost is 20 percent carrying charge for an average of 6 months

$\begin{array}{c}\text{Inventory carrying cost}=83\times \left(\frac{0.20}{2}\right)\\ =8.30\end{array}$

Hence, the total cost of producing in Country M is $95.80 (refer to the table) per door, which is less than producing in Country U ($119).

b)

Summary Introduction

To determine: The total weighed scores for in-house production and Country M’s supplier.

Introduction:

Supplier selection is the process of evaluating the performance of each supplier and comparing it with in-house production to choose the capable supplier to support the output of the organization.

Explanation of Solution

Given information:

It is given that Company D is considering outsourcing its door production to Country M. The price quoted by the company of Country M is $83 for 5,000 units of standard door per year. The transportation cost is $825, which holds 250 doors.  In order to send engineers to prequalify plant costs, $5,000 is required and to negotiate the contract, $1,000. The inventory cost is a 20 percent carrying charge for an average of 6 months.

Company D is currently situated in Country U, where the production cost is $119. In addition to this, the following information is given:

Criteria	Weight	Supplier from Country M		In-house
		Rating	Score	Rating	Score
Quality and delivery	16%	3		4
Price	60%	5		4
Social responsibility	7%	2		5
Currency risk	17%	3		5
Total	100%

Determine the total weighted score:

Criteria	Weight	Supplier from Country M		In-house
		Rating	Score	Rating	Score
Quality and delivery	16%	3	0.48	4	0.64
Price	60%	5	3	4	2.4
Social responsibility	7%	2	0.14	5	0.35
Currency risk	17%	3	0.51	5	0.85
Total	100%		4.13		4.24

Computation of total weighted score:

Hence, the weighed score is 4.13 for the supplier from Country M and 4.24 for in-house production.

c)

Summary Introduction

To determine: Whether the firm should outsource or not.

Introduction:

Supplier selection is the process of evaluating the performance of each supplier and comparing it with in-house production to choose a capable supplier to support the output of the organization.

Explanation of Solution

Given information:

It is given that Company D is considering outsourcing its door production to Country M. The rice quoted by the company of Country M is $83 for 5,000 units of standard door per year. The transportation cost is $825, which holds 250 doors.  In order to send engineers to prequalify plant costs, $5,000 is required and to negotiate the contract, $1,000. The inventory cost is a 20 percent carrying charge for an average of 6 months.

Company D is currently situated in Country U, where the production cost is $119. In addition to this, the following information is given:

Criteria	Weight	Supplier from Country M		In-house
		Rating	Score	Rating	Score
Quality and delivery	16%	3		4
Price	60%	5		4
Social responsibility	7%	2		5
Currency risk	17%	3		5
Total	100%

Determine whether the firm should outsource or not:

It is better to produce the door in-house rather than outsourcing. Even though the price is less for outsourcing, the other ratings favor in-house production. The weighted score is maximum for in-house production. Hence, there is no need to outsource the production.