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University of Twente

BOM Module International Business Administration


Group 20
Tom Bierhold S1718347
David van de Fliert S1740512
Hanna Ltzen S1751506
Anastasija Seluzicka S1689231
Laura Tihila S1751964
Content
Introduction .................................................................................................................................................. 3
Supplier Portfolio .......................................................................................................................................... 3
Total Cost of Ownership ............................................................................................................................... 4
Outsourcing................................................................................................................................................... 6
Sourcing Strategy .......................................................................................................................................... 8
Appendix ....................................................................................................................................................... 9
Introduction
Every individual needs supplies if it is food for animals or humans but also computer and other
technical devices need resources to function. The ancient Rom for example built enormous big
aqueducts to provide its cities with water. They also have been strongly involved in building
streets. Rom put high effort to build these but what can we gain from this knowledge? If you
follow now the Newtons third law every action has reaction we can conclude that one of the
reasons why the Roman Empire was so successful was because of their good supply.
That is why next to having a good operation and good strategy a good supply is necessary to run
a successful company. Due to this we want to show in our report how big Total Cost of
Ownership is as well as how we can increase our value by simultaneously lowering our cost
through efficient sourcing for the Fresh Connection. For our analysis we used the book
Strategic Supply Management from Cousins, P., Lamming, R., Lawson, B. & Squire, B.
(2008).

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

Low Supply Risk High

Total Cost of Ownership


According to the book Strategic Supply Management(Cousins, P., Lamming, R., Lawson, B.
and Squire, B., 2008, chapter 12), total cost of ownership (TCO) can be defined as a big
picture perspective, considering costs beyond simply price. Other cost factors are critical,
including costs related to quality, delivery services, ordering, reception, inception and
transportation.. By looking the finance analysis from The Fresh Connection, beside direct
purchasing costs (total amount of 913,209) TCO takes stock costs (399,175), inbound
(manpower costs, 86,434) from handling costs, inbound (ordering costs, 102,522) from
administration costs and transportation costs (145,188) into account.

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%.

ART OF COST SUGGESTION EFFECTS


stock costs e.g. reduce order size increased ordering costs (more
smaller orders needed)
ART OF COST SUGGESTION EFFECTS
ordering costs e.g. enlarge ordering size reduce order interval but
meanwhile increase stock
costs, risk costs and manpower
costs

manpower costs e.g. investment of a machine, changes in time line requires


changes in order size or time changes in the whole
line production system

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

Next we calculate the costs if the machine is bought


Step 1: Calculating the total storage costs:
790
: ( ) 200 = 15,800
10
Step 2: Calculating the annual purchasing costs for the PET bottles:
0,0478
: ( ) 211,015 52 = 262,250
2
Step 3: Calculate annual total annual cost price:
: 15,800 + 262,250 + 140,000 = 418,050
Finally we can calculate how much cost reduction the company will experience if this new machine
is bought.
: 680,899 418,050 = 262,849
Will we buy the PET bottle machine based on these calculations?
We have decided to buy the PET bottle machine on these calculations. Even though our ROI will increase
due to the 700,000 investment it is still a very good option because the last rounds will count double for
our ROI.
Theories concerning this purchase
Transaction cost approach:
The transaction cost approach is a theory that is based on the interaction of two behavioral assumptions
and two transactions assumptions. The theory states that the higher the transaction costs get, the more
likely a company will start
making the product instead of
buying it.
Based on this theory we should
not buy the machine. We have
little asset specificity with our
supplier and their delivery
reliability is very high.

The Resource Base View approach:


The Resource based approach believes that
companies should look within their own
company to see if they can produce
internally. In table 3.4 the view of this
theory is drawn out. Based upon this theory
we should buy the PET bottle machine.
This way we will be able to make this
product internally.

Did the theories change our view on purchasing the machine?


No they did not, we looked at the calculations instead and based upon these we decided that it would be
beneficial for us to buy the machine.
Sourcing Strategy
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

Supplier Number of Supplier risk Purchase value Purchase value


suppliers (1/# of suppliers) (% of total
purchase value)
Mono packing 5 0.2 118,502 13%
Materials ( Pack 1
liter )
Philyp Jones 3 0.33 271,336 29.7%
Plastics (PET)
YoBoMa (Vitamin 4 0.25 1,604 0.2%
C)
NO8DO Mango 4 0.25 89,345 9.8%
(Mango)
Miami Oranges ( 7 0.14 432,421 47.4%
Orange )

Supply risk

Mono packing Materials: 1/5 = 0.2

Philyp Jones Plastic: 1/3 = 0.33

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%)

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