Question: Vendor Analysis Computech Inc., makes circuit boards for microcomputers. It is evaluating two possible suppliers of electronic memory chips. The chips do the same job. Although manufacturing quality has been improving, some chips are always defective. Both sup pliers will replace defective chips. But the only practical way to test for a defective chip is to assemble a circuit board and "burn it in"-run it and see if at works. When one chip on a board is defective at that point, it is impractical to search for the defect, and the whole circuit board must be scrapped. Supplier I guaran-tees a chip failure rate of 1 per 1.000 (that is a defect rare of 0.1 percent). Supplier 2s 0.3 percent defect rate is higher, but its price is lower. Supplier 1 has been able to improve its quality because IL uses a heavier plastic case to hold the chip. The only disadvantage of the heavier case is that it requires Computech to use a connector that is somewhat more expensive. Transportation cents are added to the pnce quoted by either supplier, but Supplier 2 is further away so transpor-tation costs are higher. And because of the distance, de-lays in supplies reaching Computech are sometimes a problem. To ensure that a sufficient supply is on hand to keep production going. CompuTech must maintain a backup inventory-and this increases inventory cost, Corn-puTech figures inventory casts-the expenses of finance and storage-as a percentage of the total order cost.
To make its vendor analysis easier, CompuTech's pur-chasing agent has entered data about the two suppliers on a spreadsheet. He based his estimates on the quantity he thinks he will need over a full year.
a. Based on the results shown in the initial spread-sheet. which supplier do you think CompuTech should select? Why?
b. CompuTech estimates it will need I00.000 chips a year if sales go as expected. But if sales are slow, fewer chips will be needed. This isn't an issue with Supplier 2; its price is the same at any quantity. However, Supplier l's price per chip will be $3.09 if CompuTech buys less than 90.000 during the year. If CompuTech only needs 80,000 chips. which supplier would be more economical? Why?
c. If the actual purchase quantity will be 80,000 and Supplier l's price is $3.09. at what price for Supplier 2 is the total cost to CompuTech from either supplier roughly equal? (Hint: You can enter various prices foe Supplier 2 in the spreadsheet-or we the What If analysis to vary Supplier 2's price and display the total costs for both vendors.)