National Institute of Industrial Engineering

Vihar Lake, Mumbai

Batch: PGDIM 28, Section- A, B, C, and D

Subject: Procurement and Materials Management

Prof. Rakesh Raut and Prof. Ravindra Gokhale

Max. Marks: 40 Date: 20/12/2021

Solve any Four (04*10 = 40 marks)

Que. 01

A Vice President of the Steel Industry is in the process of selecting a new vendor. The five possible
vendors are V1, V2, V3, V4, and V5. The criteria thought to be most relevant in the selection is, F1
represents the Quality (Q), F2 represents the Quantity (QTY), F3 represents the on-time delivery,
and F4 represents the Manufacturing Facility (MF). The following pairwise comparison matrices
were obtained.
F1 V1 V2 V3 V4 V5
V1 1 1 1 7 5
V2 1 1 3 5 5
V3 1 1/3 1 7 7
V4 1/7 1/5 1/7 1 7
V5 1/5 1/5 1/7 1/7 1

F2 V1 V2 V3 V4 V5
V1 1 1 3 7 1/3
V2 1 1 1 1/9 1/9
V3 1/3 1 1 1/7 1/7
V4 1/7 9 7 1 1/7
V5 3 9 9 9 1

F3 V1 V2 V3 V4 V5
V1 1 1 3 5 7
V2 1 1 1 5 9
V3 0.3333 1 1 7 3
V4 1/5 0.2 0.1428 1 7
V5 1/7 0.1111 0.3333 0.1428 1

F4 V1 V2 V3 V4 V5
1
 V1 1 1 1 1/7 1/9
V2 1 1 1 1/7 1/5
V3 1 1 1 1/7 1/5
V4 7 7 7 1 1/7
V5 9 5 5 7 1

Vendor
s weights
V1 0.20
V2 0.20
V3 0.18
V4 0.12
V5 0.30

A) Compute the priorities for each pairwise comparison matrix and also CR (RI for n=5 is
1.11.)
B) Determine an overall priority for each vendor. Which vendor is preferred?

Que. 02

The Global Sourcing Wire Harness Decision

Sheila Austin, a buyer at Autolink, a Detroit-based producer of subassemblies for the automotive
market, has sent out requests for quotations for a wiring harness to four prospective suppliers. Only
two of the four suppliers indicated an interest in quoting the business: Original Wire (Auburn Hills,
MI) and Happy Lucky Assemblies (HLA) of Guangdong Province, China. The estimated demand
for the harnesses is 4,000 units a month. Both suppliers will incur some costs to retool for this
particular harness. The harnesses will be prepackaged in 24 × 12 × 6-inch cartons. Each packaged
unit weighs approximately 10 pounds.

Quote 1
The first quote received is from Original Wire. Auburn Hills is about 15 miles from Autolink’s
corporate headquarters, so the quote was delivered in person. When Sheila went down to the lobby,
she was greeted by the sales agent and an engineering representative. After the quote was handed
over, the sales agent noted that engineering would be happy to work closely with Autolink in
developing the unit and would also be interested in a future business that might involve finding
ways to reduce costs. The sales agent also noted that they were hungry for business, as they were
losing many customers to companies from China. The quote included unit price, tooling, and
packaging. The quoted unit price does not include shipping costs. Original Wire requires no special
warehousing of inventory, and daily deliveries from its manufacturing site directly to Autolink’s
assembly operations are possible.

Original Wire Quote:

• Unit price = $45
• Packing costs = $1.00 per unit
• Tooling = $7500 one-time fixed charge
• Freight cost = $7.00 per hundred pounds

2
Quote 2
The second quote received is from Happy Lucky Assemblies of Guangdong Province, China. The
supplier must pack the harnesses in a container and ship via inland transportation to the port of
Shanghai in China, have the shipment transferred to a container ship, ship material to Seattle, and
then have material transported inland to Detroit. The quoted unit price does not include
international shipping costs, which the buyer will assume.
HLA Quote:
• Unit price = $38.00
• Shipping lead time = three weeks
• Tooling = $5,000

In addition to the supplier’s quote, Sheila must consider additional costs and information before
preparing a comparison of the Chinese supplier’s quotation:
• Each monthly shipment requires three 40-foot containers.
• Packing costs for containerization = $ 3.5 per unit.
• Cost of inland transportation to the port of export = $ 350 per container.
• Freight forwarder’s fee = $150 per shipment (letter of credit, documentation, etc.).
• Cost of ocean transport = $4,500 per container. This has risen significantly in recent years due to a
shortage of ocean freight capacity.
• Marine insurance = $ 1.00 per $100 of shipment.
• U.S. port handling charges = $2,000 per container. This fee has also risen considerably this year,
due to increased security. Ports have also been complaining that the charges may increase in the
future.
• Customs duty = 8% of unit cost.
• Customs broker fees per shipment = $ 700.
• Transportation from Seattle to Detroit = $29.60 per hundred pounds.
• Need to warehouse at least four weeks of inventory in Detroit at a warehousing cost of $2.00 per
cubic foot per month, to compensate for lead time uncertainty.

Sheila must also figure the costs associated with committing corporate capital for holding
inventory. She has spoken to some accountants, who typically use a corporate cost of capital rate of
18%.
• Cost of hedging currency—broker fees = $ 500 per shipment
• Additional administrative time due to international shipping = 4 hours per shipment × $20 per
hour (estimated)
• At least two five-day visits per year to travel to China to meet with the supplier and provide
updates on performance and shipping = $25,000 per year (estimated).

The additional costs associated with international purchasing are estimated but are nevertheless
present. If Sheila does not assume these costs directly, then both suppliers have agreed to either pay
them and invoice Sheila later or build the costs into a revised unit price. Sheila feels that the U.S.
supplier is probably less expensive, even though it quoted a higher price. Sheila also knows that this
is a standard technology that is unlikely to change during the next three years, but it could be a
contract that extends multiple years out. There is also a lot of “hall talk” amongst the engineers on
her floor about next-generation automotive electronics, which will eliminate the need for wire
harnesses, which will be replaced by electronic components that are smaller, lighter, and more
reliable. She is unsure about how to calculate the total costs for each option, and she is even more
unsure about how to factor these other variables into the decision.

Case Questions
3
1. Calculate the total cost per unit of purchasing from Original Wire.
2. Calculate the total cost per unit of purchasing from Happy Lucky Assemblies.
3. Based on the total cost per unit, which supplier should Sheila recommend?
4. Are there any other issues besides the cost that Sheila should evaluate?
5. Based on this case, do you think international purchasing is more or less complicated than
domestic- purchasing? Why? Is it worth the additional effort?

Que. 03

An organization is sourcing 3 components (C1, C2, and C3). There are 3 vendors (ABC, PQR, and
XYZ). All vendors are supplying all components. The report of each vendor for each component is
as follows:

Part C1:
Event Vendor ABC Vendor PQR Vendor XYZ
Average
Number of Average Cost per Average
Occurrence Cost per Number of Occurrenc Number of Cost per
s Occurrence Occurrences e Occurrences Occurrence
Return to 3 4
supplier 2 Rs. 1000 Rs. 1500 Rs. 2000
Scrap labor 1 2
costs 3 Rs. 2000 Rs. 2500 Rs. 4000
Material 2 1
rework costs 4 Rs. 500 Rs. 1000 Rs. 2000
Late delivery 1 Rs. 5000 1 Rs. 3000 1 Rs. 4000

Part C2:
Event Vendor ABC Vendor PQR Vendor XYZ
Average
Number of Average Cost per Average
Occurrence Cost per Number of Occurrenc Number of Cost per
s Occurrence Occurrences e Occurrences Occurrence
Return to 1 0
supplier 2 Rs. 3000 Rs. 2000 NA
Scrap labor 0 1
costs 1 Rs. 8000 NA Rs. 7000
Material 2 1
rework costs 0 NA Rs. 2500 Rs. 1500
Late delivery 0 NA 10 Rs. 1000 1 Rs. 1000

Part C3:
Event Vendor ABC Vendor PQR Vendor XYZ
Average
Number of Average Cost per Average
Occurrence Cost per Number of Occurrenc Number of Cost per
s Occurrence Occurrences e Occurrences Occurrence
Return to 1 1
supplier 1 Rs. 1500 Rs. 1000 Rs. 1000
Scrap labor 1 Rs. 1000 2 Rs. 750 3 Rs. 1000

4
 costs
Material 2 1
rework costs 2 Rs. 2000 Rs. 1500 Rs. 1500
Late delivery 2 Rs. 1500 1 Rs. 1500 1 Rs. 1000

The volume purchased and price data of each supplier is as follows:

Component Supplier ABC Supplier PQR Supplier XYZ

Quantity Price per Quantity Price per Quantity Price per
purchased unit purchased unit purchased unit
C1 18,000 Rs. 20 20,000 Rs. 20 20,000 Rs. 20
C2 22,000 Rs. 18 25,000 Rs. 15 18,000 Rs. 20
C3 15,000 Rs. 12 18,000 Rs. 12 15,000 Rs. 15

Based on the above data, calculate the overall Supplier Performance Index (SPI) of each supplier.
Also determine, for each component wise which is the lowest cost supplier.

Que. 04
For one of its components, ABC Corporation involves in the spot market. The component is a vital
part of producing a sub-assembly. The sub-assembly is being produced for an OEM. The OEM has
a limited number of suppliers for this sub assembly, and XYZ Corporation is one. XYZ Corporation
has an asset-light policy. Hence it does not own any warehouses. It uses the services of a 3PL
provider for the same. There are many dynamics in the market at all fronts – the purchase price for
the component in the spot market, the price charged by the 3PL provider for using the warehouse
facility, and the penalty charged by the OEM to XYZ corporation in the form of back-ordering cost.
Also, due to the nature of manufacturing involved at XYZ Corporation, the setup cost for
production of the component varies weekly. Not to mention, the demand from OEM is also
fluctuating depending on the requirement of the OEM and the the position of other suppliers for that
sub-assembly. At most, a 4-week time horizon can be forecasted with some accuracy, but not more
than that. The table below gives the forecasted demand and the dynamic prices related to the
component purchase price, setup cost, inventory carrying cost, and back-ordering cost over a four-
week horizon. Note that the inventory carrying cost and shortage cost are related to the
subassembly, but the figures mentioned in the table are apportioned for the component. Develop an
optimum production plan for the component considering this information.

Solve the problem without a back-ordering concept/approach.

Time period (i) 1 2 3 4

Demand (di) 60 100 140 200
Set up cost (Si) 160 150 170 180
Procurement cost (Ci) 6 7 7 6
Holding cost (hi) 1 1 2 2
Backordering cost (bi) 1 2 2 1

Que.05

5
Demand for a component used to manufacture a product is uncertain (due to uncertain demand of
the final product). However, a probabilistic model can be built for it based on the historic data.
Based on that, a buyer has the following options of buying the component from the supplier:
Option A: Enter a fixed rate contract. The supplier can supply exactly 40,000 components at a unit
price of Rs. 180 per component. If the actual demand turns out to be less than 40,000 units then the
buyer can salvage the unused components at Rs. 30 per unit. If the actual demand turns out to be
more than 40,000 components, the buyer can buy the shortfall quantity from spot purchase in open
market (unlimited capacity of open market) at a price of Rs. 200 per unit.
Option B: Enter a flexible contract. Pay a reservation price of Rs. 8,00,000. Then the supplier can
provide any quantity between minimum quantity of 30,000 and maximum quantity of 50,000, at a
price of Rs. 160 per unit. If the actual demand turns out to be less than 30,000 units then the buyer
can salvage the unused components at Rs. 30 per unit. If the actual demand turns out to be more
than 50,000 components, the buyer can buy the shortfall quantity from spot purchase in open
market (unlimited capacity of open market) at a price of Rs. 200 per unit.
For each of the two scenarios below, calculate the total cost for each option (Option A and Option
B) and determine which option is beneficial for each scenario:
Scenario 1: If actual demand turns out to be 36,000 units
Scenario 2: If actual demand turns out to be 44,000 units

Que.6
A buyer received bids and other relevant information from three suppliers for its latest product's
vital part. Given the following information, use total cost analysis to determine which supplier
should be chosen. Late delivery of the component results in 50% lost sales and 50% backorders of
finished goods.
Order lot size 800
Requirements(annual forecast) 20,000 units
Weight per engine 40 pounds
Order processing Cost $ 40/order
Inventory carrying rate 1.5 % per year
Cost of working capital 15% per year
Profit margin 16 %
Price of finished goods $10,000
Back-order cost $140 per unit

Order size Supplier 1 Supplier 2 Supplier 3

1 to 999 units/order $20/unit $20.5/unit $19.8/unit
1,000 to 2999 units/order $19.5/unit $190/ unit $19.2/ unit
3,000 + units/order $19.0/unit $185/ unit $19.0/ unit
Tooling Cost $12,00 $10,00 $15,00
Terms 2/10, net 30 1/15, net 30 1/10, net 30
Distance 1200 miles 1000 miles 1500 miles
Supplier Quality 3% 4% 5%
Rating(defects)
Supplier Delivery 3% 5% 1%
Rating(late delivery)
Truckload (TL >= 35,000 lbs): $0.90 per ton-mile
Less-than-truckload (LTL): $1.20 per ton-mile
Note: per ton-mile = 1,000 lbs per mile

6
 Que.07

Mileage Tyres Ltd. has four production facilities located at Chennai, Ahmedabad, Bhopal, and
Lucknow. The company has three primary sources of raw materials for its plants in New Delhi,
Kolkata, and Bhubaneswar. It wants the fourth source of raw materials and has identified two
options – Bangalore and Mumbai. Both these suppliers can supply a maximum of 2,000 units of
raw material per year. The company has constructed two tables showing plants' annual requirements
and an annual capacity of raw material suppliers. Table -1 includes Bangalore as the raw material
supplier, and the other table-2 includes Mumbai as the raw material supplier. The table data are the
costs of transportation of a unit load of raw material from a raw material supplier to a plant.
Table -1 shows that INR 500 is moving a unit load of raw material from New Delhi to Chennai.
Similarly, INR 700 is the cost of moving a unit load of raw material from Kolkata to Chennai. The
Chennai plant requires 2,500 units of raw material annually. Similarly, the Ahmedabad plant
requires 1,500 units of the raw material annually. The New Delhi supplier can supply a maximum
of 3,500 units annually, and so on. Based on the following data, select the best destination source
combinations by using the transportation approach.

Table -1 Transportation cost in INR/unit load (Bangalore as one of the suppliers)

Destination Chennai Ahmedabad Bhopal Lucknow Availability
Source
New Delhi 500 300 400 150 3500
Kolkata 700 600 300 450 1000
Bhubaneswar 100 600 250 550 4500
Bangalore 200 700 400 750 2000
Requiremen 2500 1500 3000 4000
t

Table -2 Transportation cost in INR/unit load (Mumbai as one of the suppliers)

Destination Chennai Ahmedabad Bhopal Lucknow Availability
Source
New Delhi 500 300 400 150 3500
Kolkata 700 600 300 450 1000
Bhubaneswar 100 600 250 550 4500
Mumbai 550 200 250 650 2000
Requiremen 2500 1500 3000 4000
t

Que. 08
Compton Electronics manufacturer laptops for significant computer manufactures. A vital element
of the laptop is the keyboard. Compton has identified three potential suppliers for the keyboard,
each located in a different part of the world. Important cost considerations are the price/keyboard,
freight cost, inventory cost, and contract administration costs. The annual requirements for the
keyboard are 2500 units. Assumes Compton has 250 business days a year. Managers have acquired
the following data for each supplier.
Annual freight costs
Shipping quantity(units/shipment)
Supplier 500 750 1000
Belfast Rs. 380 Rs. 260 Rs. 237

7
 Hong Kong Rs. 615 Rs.547 Rs.470
Shreveport Rs.285 Rs. 240 Rs. 200

Keyboard costs and shipping lead times

Supplier Price/unit Annual Inventory Shipping Lead Administrative
carrying cost/unit Time (days) costs
Belfast Rs. 10.50 Rs. 21.75 12 Rs. 11.50
Hong Kong Rs. 10.00 Rs.11.20 3 Rs.13.00
Shreveport Rs. 10.40 Rs.12.2 6 Rs.24.00

Which supplier provides the lowest annual total cost to Compton?

Que.09

Tower Distributions provides logistical services to local manufacturers. Tower picks up products
from the manufactures, takes them to its distribution center, and then assembles shipments to
retailers in the region. The tower needs to build a new distribution center; consequently, it needs to
decide on how many trucks to use. The monthly amortized capital cost of ownership is $4,000 per
truck. Operating variable cost are $ 2.5 per mile for each truck owned by Tower. If capacity is
exceeded in any month, Tower can rent truck at $ 3.5 per mile. Each truck Tower can be used 12,
000 miles per month. The requirements for the trucks, however, are uncertain. Managers have
estimated the following probabilities for several possible demand levels and corresponding fleet
sizes.

Requirements (miles/month) 100,000 150,000 200,000 250,000

Fleet size (trucks) 10 15 20 25
Probability 0.4 0.12 0.28 0.2

If Tower distribution wants to minimize the excepted cost of operations, how many trucks should it
use?