GB527 Unit 7 Supplier Comparison Example

Forty Percent Cheaper on the Quote, Not on the Dock: A Unit 7 Supplier Comparison for Ductile Iron Valve Bodies

[Student Name]

Purdue University Global

GB527: Global Operations

Unit 7 Supplier Comparison

[Instructor Name]

[Date]

The manufacturer, its suppliers, prices, duty rates and every figure are composite and illustrative, with duty rates assumed as of the analysis date; the sources cited are real.

The Purchase

Platte Valve Works buys about 210,000 kilograms a year of ductile iron castings for its valve bodies. Its current supplier, a foundry in Ohio, quotes $3.40 a kilogram. Two alternatives have quoted: a foundry near Monterrey, Mexico, at $2.65, and a foundry in Hebei province, China, at $2.05. Purchasing has asked whether to move volume.

Exhibit 1: Landed Cost per Kilogram

All figures are per kilogram on 210,000 kilograms a year.

Quoted price: Ohio $3.40; Monterrey $2.65; Hebei $2.05.

Freight, insurance and brokerage to Nebraska: Ohio $0.09; Monterrey $0.22; Hebei $0.38.

Import duty, at assumed rates as of the analysis date: Ohio none; Monterrey none, assuming the castings meet the origin requirements of the North American trade agreement; Hebei 25 percent of the quoted price, or about $0.51, reflecting additional tariffs on many Chinese goods.

Carrying cost of castings in transit, at 22 percent a year: Ohio about $0.006, for three days in transit; Monterrey about $0.011, for seven days; Hebei about $0.049, for about forty days door to door.

Carrying cost of extra safety stock: longer and less predictable lead times need larger buffers. Safety stock of about 4,000 kilograms for Ohio, 9,000 for Monterrey and 30,000 for Hebei costs about $0.015, $0.027 and $0.093 a kilogram.

Rejected castings: reject rates in sample lots of 0.8, 1.5 and 4.0 percent, valued at landed cost plus handling, add about $0.029, $0.045 and $0.124.

Total landed cost: Ohio about $3.54; Monterrey about $2.95; Hebei about $3.21.

Annual cost: Ohio about $743,000; Monterrey about $620,000; Hebei about $674,000.

Hebei's 40 percent price advantage over Ohio shrinks to about 9 percent once the castings reach the dock, and it ends about 26 cents a kilogram above Monterrey.

Chopra and Meindl (2019) emphasize that sourcing decisions should compare total cost of ownership, not price, because transport, duties, inventory and quality costs often reverse the ranking. Here they do: the cheapest quote is the second most expensive delivered option.

What the Table Leaves Out: Risk

Landed cost uses expected values. Three risks change the picture further.

Duty risk. The duty on Chinese castings is a policy choice that has changed several times and could rise or fall. At 50 percent, Hebei's landed cost would rise to about $3.76, above Ohio. Monterrey's zero duty depends on the foundry documenting that the castings meet the agreement's origin rules, which Platte must verify before relying on it.

Lead-time risk. Forty days from Hebei includes an ocean crossing and a port, both exposed to the kind of disruption the Unit 6 seminar examined. Monterrey's seven days by truck can still be disrupted at the border, but delays are shorter and easier to work around.

Quality and engineering risk. Porosity is the plant's main quality problem, as the Unit 4 memo found. A new foundry must master Platte's patterns and its impregnation requirement. Ohio has done so; Monterrey's sample lot showed a higher reject rate, and Hebei's higher still.

How Robust Is the Ranking?

Three changes were tested one at a time. If Monterrey's reject rate rose from 1.5 to 4 percent, matching Hebei's sample, its landed cost would rise by about eight cents to roughly $3.03, still the lowest. If ocean freight from Asia fell by half, Hebei's landed cost would fall by about twenty cents to about $3.00, still above Monterrey's $2.95. If the peso strengthened 15 percent against the dollar and the Monterrey foundry passed that through in full, its price would rise to about $3.05 a kilogram and its landed cost to about $3.36, below Ohio but above Hebei at the current duty. Monterrey's lead is therefore robust to quality and freight changes but sensitive to the exchange rate, which is one more reason to keep a second source. Platte could also ask the Monterrey foundry to price in dollars with an annual adjustment band, which would move part of the currency risk back to the supplier in exchange for a slightly higher price.

Working With the New Supplier

Heizer et al. (2020) note that moving to a new supplier is the start of a relationship, not the end of a purchase, and that supplier development, sharing specifications, training and performance data, often decides whether expected savings appear. Platte should assign a supplier quality engineer to the Monterrey foundry for the first two quarters, share its pressure-test results lot by lot and agree on a scorecard covering on-time delivery, reject rate and porosity.

Applying a Portfolio View

Kraljic (1983) argued that purchased items should be managed according to their profit impact and supply risk. Valve body castings have high profit impact, since they are the largest purchased cost in a valve, and moderate supply risk, since few foundries can meet the porosity requirement. For such items, Kraljic recommends keeping more than one qualified source and balancing price against security of supply rather than choosing on price alone.

Recommendation

Move about 70 percent of volume to Monterrey and keep 30 percent with Ohio. At the landed costs above, the split costs about $3.13 a kilogram, or about $657,000 a year. That is about $86,000 less than staying with Ohio alone, and about $37,000 more than moving everything to Monterrey. The $37,000 buys a second qualified foundry with a short lead time and proven quality, which protects the plant if Monterrey has a quality problem, a border delay or a capacity shortage in peak season.

Do not move volume to Hebei. Its landed cost is above Monterrey's, its duty is uncertain and its lead time adds exposure to ocean disruptions.

Conditions and Next Steps

Before moving volume, Platte should audit the Monterrey foundry's process, confirm its impregnation capability, verify its documentation for preferential duty treatment and run three production lots through Platte's pressure test. Volume should move in stages, 30 percent in the first quarter and the rest after two quarters of acceptable quality. Ohio should be told that it remains a long-term supplier at a lower share, and its pricing should be reviewed at the next contract renewal.

Limits

The figures depend on assumed duty rates, freight rates and sample reject rates, all of which can change. The safety stock estimates come from quoted lead times rather than history with the new suppliers. The comparison should be repeated after six months using actual figures.

References

Chopra, S., & Meindl, P. (2019). Supply chain management: Strategy, planning, and operation (7th ed.). Pearson.

Heizer, J., Render, B., & Munson, C. (2020). Operations management: Sustainability and supply chain management (13th ed.). Pearson.

Kraljic, P. (1983). Purchasing must become supply management. Harvard Business Review, 61(5), 109-117.