Eleanor Jamison, the director of purchasing for Advanced Computer Logic (ACL), was becoming increasingly concerned about the large number of orders placed for some of the company's least-expensive component parts.
ACL was a 100 million dollars multinational firm that manufactured customized automated assembly equipment. The manufacturing operation was divided into two separate divisions: fabrication and assembly. The fabrication division consisted of 10 departments and the assembly division was a paced assembly line consisting of 95 workstations.
Last year while reviewing the purchasing process for the electronic actuator components, Eleanor discovered that each of the departments in the fabrication division was purchasing the same actuator components but from 9 different suppliers. 7 of the suppliers were local and 2 were located within 100 miles of the facility. Last year the total purchases for the 10 departments were 967,000 dollars.
Eleanor called Tom Camp, the electronic component buyer, and expressed her concern. "Tom, investigate why we are buying the same inexpensive components from 9 different suppliers. There should be no more than 3 suppliers for these components. Provide me with data and your suggestions at your earliest convenience."
The following day at lunch, Tom informed Eleanor that each department manager had different reasons for using specific component suppliers. The reasons ranged from delivery performance to informal engineering advice.
Eleanor iterrupted, "How much is it costing the company to order the same components from 9 different suppliers?" Tom responded, "Last year it cost the company approximately 185,000 dollars to place individually triggered orders." The average component unit values range from a low of 0.75 dollar to a high of about 133.00 dollars. The value of the combined inventory holding costs across the 10 departments is 306,000 dollars with an average obsolescence rate of 30 percent. The cost of holding one component in inventory for one year is 25 percent. The obsolescence rate was high because the customers sometimes changed the engineering design before the equipment was shipped.
Tom asked, "Why do we need so much inventory that may quickly become obsolete? Do you believe a systems contracting arrangement with one of the suppliers would work better for us? From experience, a systems contracting arrangement would reduce ordering cost by more than 70 percent. On the other hand, maybe we should consider a reverse auction."
Questions:
1. How should Tom Camp respond to Eleanor?
2. Is this the appropriate application for systems contracting? If so, what are the possible savings?
3. Is this the appropriate application for a reverse auction? If so, what are the possible savings?