Choosing suppliers for JIT purchasing.
Arjun Manraj runs a print shop. Manraj requires 100 000 boxes of printing paper each year. He wants his suppliers to deliver the boxes on a JIT basis in order quantities of 400 boxes. Papyrus Ltd currently supplies the paper to Manraj. Papyrus charges £100 per box and has a superb reputation for quality and timely delivery. Manraj reports the following revenue and cost information for a typical print job:
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Sales
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£100 000
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Costs of printing paper (£100 per box × 400 boxes)
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40 000
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Other direct materials (ink, etc.)
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2 000
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Variable printing costs (other than materials)
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3 000
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Fixed printing costs
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25 000
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Variable marketing and distribution overhead
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1 000
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Fixed marketing and distribution overhead
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12 000
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Suffolk Leaves Ltd has approached Manraj with a proposal to supply all 100 000 boxes to Manraj at a price of £95 a box. The savings in purchase costs are substantial and Manraj is tempted to accept Suffolk Leaves's offer, but before doing so, Manraj decides to check on Suffolk Leaves's reputation for quality and timely delivery. The information Manraj gathers is not all positive. Manraj estimates that late deliveries from Suffolk Leaves would lead to his incurring overtime and subcontracting costs of £30 000 per job on ten jobs during the coming year. Manraj also recognises that Suffolk Leaves's paper quality is not uniformly high and ink sometimes smudges after printing. Manraj expects that smudging would occur on five jobs during the year. Manraj would then have to buy paper in the open market at £110 per box and rerun the job. Manraj does not expect both delivery problems and quality problems to occur on the same jobs. Manraj requires a rate of return of 15% per year on investments in stock.
Required
1. Calculate changes costs if he purchases paper from (a) Papyrus and (b) Suffolk Leaves. Which supplier should Manraj choose only on the basis of the financial numbers given in the problem?
2. What other factors should Manraj consider before choosing a supplier?