Cost of Purchasing

Product cost
Tariff/duty
Transportation cost
Mode of transportation
Sea -
Air
Rail
Road
Pipeline

Mode of Incoterms
Incoterms = International Commercial Terms
Location/place of purchasing
Location:
Ware house of the supplier: Ex works
Port of the supplier: FOB, FSA
Port of the purchaser: C&F, CIF
Ware house of the purchaser: DDP, DDuP

L/C – Letter of credit

PI = pro-forma invoice
Supplier Purchaser
S Bank P Bank – L/C open
L/C L/C + money
G Bank
L/C + money

Cost of selecting transportation mode

1. Freight cost
2. Stock carrying cost
i. Normal stock
ii. Safety stock/buffer stock
3. In-transit stock carrying cost/pipeline stock
carrying cost
4. Damage/theft/obsolete/lost
1. A manager at Strateline Manufacturing must choose
between two shipping alternatives: ten-day freight and
eighteen-day freight. Using eighteen -day freight would
cost $13.50 less for per 100 items than using ten -day
freight. The primary consideration is holding cost,
which is $20 per unit a year. Two thousand items are
to be shipped. Which alternative would you
recommend? Explain.

Holding/Carrying cost
a. Lose of interest
b. Rental cost
c. Maintenance cost
d. Damage cost

Solution:

Ten-day freight:

Freight cost (per 100 units) = 0

Total freight cost = 0 x 2000/100 = $0
Holding cost = 20 x 10/365x 2000 = $1096

Total cost = $1096

Eighteen-day freight cost:

Freight cost = -13.50 x2000/100 = - $270

Holding cost = 20 x 18/365 x 2000 = $ 1972.80
Total cost = $1702.8

Since comparative cost with ten-day freight is less than

that of eighteen-day freight so ten-day freight will be
selected.
2. Determine which shipping alternative would be most economical to
ship 80 boxes of parts when each box has a price of $200 and
holding costs are 30 percent of price, given this shipping
information: overnight, $300, four-day, $260, ten-day, $200.

Solution:

Overnight:
Freight cost = $300
Holding cost = 200 x 80 x 0.3 x 1/365 = $13.15
Total cost = 313.15

Four-day:
Freight cost = $260
Holding cost = 200 x 80 x 0.3 x 4/365 = $52.60
Total cost = 312.60

Ten-day:
Freight cost = $200
Holding cost = 200 x 80 x 0.3 x 10/365 = $131.50
Total cost = $331.50

Since four-day freight cost is less than other freight so four-day freight
may selected alternative.