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Supplier Portfolio
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
The purchase value (without transportation) for the PET bottles is 173,839. We have been asked
to calculate the percentage of every upon mentioned cost in compare to the purchasing value of
PET bottles. Since transportation is one of these elements of TCO, we calculated the purchasing
value for every product without it (so its excluded from all below given purchasing values) and
we came into result 768. 021. After that it was easy to divide PETs purchasing value 173,839
from the complete purchasing value and we came to result 22.63 %. It was only possible to make
comparison between transportation costs and PETs purchasing value, since on the website of
The Fresh Connection transportation costs were the only ones given separately from product to
product. We calculated this by dividing PETs transportation costs (97,497) from its complete
purchasing value (173,839), which results 56.08 %. The other costs (stock costs, manpower
costs and ordering costs) we calculated separately by dividing their purchasing value (stock:
399,175, manpower: 86,434 and order: 102,522) from the total purchasing value (768,021
exc. transportation costs). The results are stock costs 51.97 %, manpower costs 11.25% and
ordering costs 13.35%.
transportation costs e.g. changes in order size and reduce order interval and
interval increase order size -> again can
cause increased stock costs
Table to represent effects of decreasing the 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.
PET bottles belong to non-critical items in Kraljic Matrix, so the other product we wanted to
observe is Miami Oranges oranges from the quadrant called leverage items. The purchasing
price per item for PET bottles is 0.031/ product and for oranges 0,40 / product (both values
exclude the transportation costs). We can already notice that the difference between purchasing
values is already 7.75%. Comparing the transportation costs, they cover 35 % from the total
purchasing value 0.0478 of PET bottles, when the same costs cover only 9.1% from the total
purchasing value 0.4400 of oranges. It is quite significant difference. Based on all these
information about costs and what we already noticed before, it is not possible to compare stock,
ordering and manpower unit values to oranges.
Because of the lack of information, it is only possible to speak for differences in transportation
costs. As noticed, when ordering PET bottles you pay 35% of the total price only for
transportation. One possibility is to bid different suppliers and find the one with best price-
quality-relationship.
There are many different benefits which adapting the TCO gives. Since different costs are
categorized and all hidden costs uncovered, it is easier to find the detailed information from
particular costs, e.g. compare different products and their costs with each other, observe the
development of costs, separate profitable products from non-profitable and makes prioritizing
and selection between suppliers easier. Product life cycle is also noticed, which is also an
important element, especially analysing investments. It is very difficult to pick only one main
benefit.
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 reducing 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. The data used for the calculations can be found
in the appendix
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 our company places an order to have
enough inventory for a few weeks. This means however that we need to have enough free pallet locations
to store the PET bottles for a few weeks.
Step 1: Calculating the Average capacity needed in weeks: safety stock lead time + lot size:
: 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
Supply risk
YoBoMa: = 0.25
NO8DO: = 0.25
Purchase value
Calculation Data:
- 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