As purchasing manager, you have been asked to assess the outsourcing and possible off-shoring option for your employer, Ford Motor Corporation of Oakville, Canada. In play here is an RFP for a 2 year contract for an automotive part with an option to renew for a third year. In specific you are comparing a domestic and global sourcing options for the supply of an electronic navigation module for the Ford Winstar with information as follows:
Total Demand = 6,200 units per month
Package Size = 12” x 12” x 12”
Weight = 10 lbs
Option 1: Keep the component In House at Ford $32.21/unit
Option 2: Local Sourcing – Magna Corp. distance = 20 km
Unit Price = $30.310/unit
Packaging Costs = $0.824 /unit
Tooling /Retooling = $8,200 one-time fixed cost each year of the contract
Freight Cost = $5.90/cwt (hundred weight)
Option 3: Sun Components and Assemblies, Hong Kong, China
Unit Price = $19.52/unit
Shipping Lead time = 2 months
Tooling/Re-tooling = $4,300 one-time fixed cost per year
Training & Travel = $20,000/year
In addition, the Sun Components shipment requires 3 containers each month with the following
Container Stuffing Costs = $2.20/unit
Pre-carriage (Inland) Transportation (Hong Kong) = $200/container
Freight Forwarder’s Fee = $100
Ocean Transportation = $4,200/ container
Marine insurance = $.5480 per $100 declared value
US Port Handling Charges = $1200/shipment
Import Tariff = 5% CIF Cost (Including Transportation)
Transportation to Toronto from Vancouver = $19.30/cwt
Customs Brokerage Fees = $300/shipment
Inventory Holding Costs
Warehousing (1 month supply) = $1.210/cubic foot
Other Holding Costs = 15%
Foreign Exchange Hedging Cost = $400/shipment
Traffic Coordinator’s Time = 4 hours @ $25/hour / month
Assignment:
Calculate the Total Annual Cost and per unit cost for Magna Corp. and for Sun Components. What is the percentage difference between the two?
Are there any other qualitative or quantitative issues apart from cost that you should consider?
Can you find ways to reduce your overall costs from Toronto or Hong Kong further to improve the viability?
Which supplier, if any would you recommend? That is, what is your final recommendation to your management?