Case 2: Strategic Sourcing at ASS Group

You are the supply chain analyst in ASS Group that assembles five different models of motorbikes that is sold in several stores in Australia. The company uses the same engine for all five models. You have been asked to choose a strategic supplier for these engines for the coming year. Due to the size of your warehouse and other administrative restrictions, you currently order the engines in lot sizes of 1,000 each. Because of the unique characteristics of the engine, special tooling is needed during the manufacturing process for which you agree to reimburse the supplier. Your assistant has obtained quotes from two local engine suppliers and you need to decide which one to use. The following data have been collected:

Requirements (annual forecast) 12,000 units

Weight per engine 22 kg

 Order processing cost $125 per order

 Inventory carrying cost 20% of the average value of inventory per year

Note: Assume that half of lot size is in inventory on average (1,000/2 = 500 units) 

Two qualified suppliers have submitted the following quotations:

Order Quantity               Supplier 1                 Supplier 2

1 to 1,499 units/order       $510 per unit            $505 per unit

1,500 to 2,999 units/order  $500 per unit            $505 per unit 

3,000+ units/order           $490 per unit             $488 per unit

Tooling cost                   $22,000 per year         $20,000 per year  

Distance                        125 km                    100 km 

The following freight rates have been obtained from a reliable transportation provider:

Truckload (40 tonne each load) $0.8 per tonne-km

Less than truckload $1.20 per tonne-km

Note: 1 tonne = 1,000 kg

Questions to be addressed in your analysis:

1. Perform a total cost of ownership analysis and select a supplier.

2. If the warehouse size and administrative restrictions are resolved, would it make economic sense to order in truckload quantities? Would your supplier selection change in this case? (Note: do not round the number of orders)

3. Browse the available literature for some of the latest and well-adopted supplier evaluation and selection methods (other than TCO). Briefly discuss some of these methods and provide real world examples.