• January 4th, 2017

Accounting Faastlane Ltd

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Q1. a. In cost analysis, the total cost of ownership should be considered, three different levels of supplier activities and costs that are incurred by buying organization: unit level activities, order level activities and supplier level activities.
I-Pot Exhausts Chroma manufacturers
Total units purchased 5,000 3,000
Purchase price per unit $190 $200
Supplier activity costs
Unit level
Return reject components to supplier $11,200 $10,500
Receive late deliveries $56,000 $12,000
Production downtime due to late delivery $135,000 $102,000
Production downtime due to defective material $34,800 $24,000
Order level
Order components from supplier $39,000 $27,000
Receive order $135,000 $81,000
Process invoice from supplier $45,500 $4,200
Supplier level
Dispute invoiced amounts $2,400 $800
Quality audit of suppliers $100,000 $50,000
Total supplier activity costs $558,900 $311,500
Total supplier activity cost per unit 111.78 $103.83
Total cost of ownership per unit 301.78 $303.83
By analyzing the evaluation of our suppliers we can calculate the Supplier Performance Index, which is a technique used to compare the performance of a
range of suppliers. From the formula, SPI = Total Supplier Activity Cost / Total Purchase Price.
So, SPI for I-Pot Exhausts is = $558,900 / (5000 * 190) =0.588;
SPI for Chroma manufactures is =$311.500 / (3000 *200) = 0.519
b. there are five key drivers affect SPI. The first one is delivery, it relates the timeframe requirement from suppliers. Next is quality, the level of quality is deeply affect the suppliers’ performance. Thirdly, the cost, which involved financial measurement for suppliers. The organizational change and relationship are another two drivers. Buying organization may require suppliers make changes to some part of organization and the relationship between suppliers and organization is important in any areas. The cost, quality and delivery may be the most important drivers of SPI as cost can be considered by buying organization first, financial measures in managing area is very important. Next, the quality is each buying organization must consider in analysis supplier performance and the delivery is deeply effect the effective of the organization performance. Therefore, cost, quality and delivery are more responsive to SPI.
c. to evaluate the performance of suppliers, we should compare the two suppliers’ performance, I-Pot and Chroma.
For I-Pot Exhausts, higher SPI (0.588), more money spent per dollar of purchase; lower total cost of ownership per unit (301.78), less money spent per unit with supplier; late on 36% deliveries and returned 48% of delivered components.
For Chroma manufacture, lower SPI (0.519), less money spent per dollar of purchase; higher total cost of ownership per unit (303.83), more money spent per unit with supplier; late on 7% of deliveries and returned 45% of delivered components.
Overall, Chrome manufacture is more cost effective than I-Pot Exhaust due to supplier related less costs.
d. the current situation is one division is more effective than the other one, and the divisions should be all in high effective so the contract should be renewed. To get a win-win result, two individual should try to find the best of themselves and maximize potential value of the relationship. The organization can renew contracts by three factors, which are delivery, quality and cost. For delivery, it contains adherence to delivery schedules and the accuracy of orders delivered. For quality, the number of components rejected on delivery and the achievement of quality certification are the important features to renew. The last one is cost, in the renew contract the cost should achievement in reducing production cost and percentage reduction in price of materials supplied.
I-Pot Exhausts Chrome manufactures Which one performs better
Receive late deliveries 28 6 Chrome manufacture
Production downtime due to late delivery 45 34 Chrome manufacture
Return reject components to supplier 16 15 Chrome manufacture
Production downtime due to defective material 29 20 Chrome manufacture
Quality audit 2 1 Chrome manufacture

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