Week 5 6 Suggested Answers

Topics: Variable cost, Costs, Economic order quantity Pages: 26 (2396 words) Published: April 27, 2015
Tutorial 5
Suggested answers of the tutorial questions

EXERCISE 15.31 Customer response time
1
Date
March

April

Days
taken

Action
10

LO’s order received by sales department

0

0

14

Order forwarded to manufacturing department

4

4

28

Fabric received from supplier

14

18

8

26

5

Manufacturing commenced

16

Manufacturing completed and order sent to warehouse

30

Order delivered to customer

11
14

Total customer response time
2

3

Cumulative
days

Order receipt time (days)
Waiting time
Production time
Production cycle time
Delivery time
Total customer response time (days)

37
51
51

4
22
11
33
14
51

ST’s customer response time can be improved by the following: 
Sales orders should be forwarded to the manufacturing department immediately they are received.

Manufacturing should order supplies (if required) immediately. 
Manufacturing should only source suppliers who can supply materials with minimum delay.

Manufacturing needs to assess production capacity constraints and identify if outsourcing need to be used in times of full capacity and/or if capacity need to be increased. 
Completed orders need to be delivered immediately to customers and not stockpiled in the warehouse.

The use of subcontractors for deliveries could be investigated.

Page | 1

PROBLEM 15.34 Analysis of supplier costs; supplier performance measures: manufacturer 1
Supplier A
Activity
cost per
unit of
activity No. of
driver activities
$

Activity

Unit level
Rework due to low quality
tiles
$50
Downtime: Late delivery
260
Order level
Order components
200
Receive order
1 500
Inspect order
250
Return material to supplier
210
Pay supplier
190
Dispute invoice
480
Supplier related
Supplier relationship
manager
$90 000
Total supplier activity
costs
Purchase cost
Total cost of ownership
Supplier performance
index

Supplier B

No. of
activit
ies

$

Supplier C

No. of
activiti
es

$

Supplier D

No. of
activit
ies

$

11
20

$550
5 200

10
60

$500
15 600

0
10

$0
2 600

0
10

$0
2 600

20
20
5
3
12
2

4 000
30 000
1 250
630
2 280
960

50
80
25
8
48
0

10 000
120 000
6 250
1 680
9 120
0

30
10
5
0
12
13

6 000
15 000
1 250
0
2 280
6 240

10
20
0
0
10
2

2 000
30 000
0
0
1 900
960

10%

9 000

15%

13 500

10%

9 000

5%

4 500

53 870
60 000
=$113 870

176 650
120 000
=$296 650

42 370
70 000
=$112 370

41 960
30 000
=$71 960

0.898

1.472

0.605

1.399

2

Supplier C is clearly a most cost effective supplier to deal with than the other suppliers, with an SPI of 0.605. Supplier B is the most expensive supplier, with a large number of orders, deliveries and payments, and an excessive number of late deliveries that have resulted in downtime. There are many opportunities here for Fabulous Enterprises to negotiate with Supplier B to set up new processes to decrease the number of individual orders and to improve the quality of tiles delivered. If this is not possible, assuming that the tiles supplied by the four suppliers are similar, then Fabulous may choose to direct future orders to Supplier C.

3

Fabulous Enterprises could use the following criteria and non-financial measures to assess the performance of the tile suppliers:
Criteria
On-time delivery

Measures
Percentage of orders delivered on schedule
Hours of downtime due to late delivery

Organisational change

Adoption of EDI systems at supplier
Improvement in supplier productivity

Quality

Percentage of orders rejected
Hours of downtime due to defective material

Page | 2

PROBLEM 15.42 Customer profitability; product profitability; competitive strategy: service firm
1

Profitability of services:

Sales revenue
Direct costs
Contribution to profits
CM/Sales revenue

2...
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