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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
ordering costs e.g. enlarge ordering size reduce order interval but
meanwhile increase stock
costs, risk costs and manpower
costs
transportation costs e.g. changes in order size and reduce order interval and
interval increase order size -> again can
cause increased stock 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).
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
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
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%)