case study

CASE REQUIREMENTS – Sub-headings must be provided for each of the 6 Questions

The team realized this supplier selection decision, which was one of the most critical involving the new product line, was also going to be difficult. Until the team analyzed the numbers and discussed the findings from the field visits, it was clear that no consensus existed among team members concerning which supplier(s) to select. To reach a decision, you must do the following:

1. Identify the immediate issue and other issues and concerns.

2. Perform a situational analysis (SWOT, PEST, Porters 5 forces etc.)

3. Perform various analysis designed to support the supplier evaluation and selection decision. These analyses, with supporting worksheets or templates provided, include:

·
Financial Risk Analysis

While this case assumes that the cross-functional team visited four suppliers, organizations often perform a preliminary financial risk analysis to identify the suppliers that may not warrant further consideration due to excessive financial risk.

·
Total Cost Analysis

Unit price rarely, if ever, equals the total cost of doing business with a supplier. This analysis requires each group to identify relevant additional costs beyond unit price. This involves considering a combination of actual and estimated costs. Consider potential currency issues in your analysis.

·
Supplier Evaluation and Selection Analysis
As organizations continue to rely on fewer suppliers, the supplier selection process takes on greater importance. The Supplier Evaluation and Selection Analysis is a robust tool used during supplier assessment.

· Evaluate the single sourcing option versus multiple sourcing option

Single Sourcing: Potential Advantages

Single Sourcing: Potential Disadvantages

Multiple Sourcing: Potential Advantages

Multiple Sourcing: Potential Disadvantages

· The issue of short versus long-term contracts is also an important consideration during supplier selection. Using the following table, identify the potential advantages and disadvantages of short and longer-term contracts (not only as they relate to this case).

Short-Term Contracts: Potential Advantages

Short-Term Contracts: Potential Disadvantages

Longer-Term Contracts: Potential Advantages

Longer-Term Contracts: Potential Disadvantages

4. Identification of at least 3 alternatives which are well described and clearly related to organization goals and clearly developed from situational analysis and other analysis.

5. Make a final recommendation.

6. Make an implementation timeline chart.

· Process (see Case Preparation Chart), which includes; Who, What, Why and when as well as identifying the immediate issue as well as identification of other issues. In addition you need to complete all the appropriate Quantitative Analysis e.g. financial risk analysis, total cost analysis and supplier evaluation and selection analysis. Show your calculations and from the analysis, what would be your recommendation.

‘

Robots Everywhere Corporation Case

OVERVIEW

Robots Everywhere Corporation (REC) is a small industrial equipment company located north of Boston. It was founded in 1990 by recent engineering graduates who had a dream of making robots a common house hold item. REC designs and builds robots. It uses technology in navigation, mobility, manipulation and artificial intelligence to build robots. Their robots have been used for many uses including space exploration and bomb detection. The company has two segments: Defense and Security Robots and Remote Presence Robots. Recently it was decided to enter a new segment: Home Robots. In particular the marketing department decided to focus on domestic, residential cleaning to exploit the booming growth in household machines and an increasing demand for items that allow people to accomplish more in their daily lives. The company, recognized as a well-established robotics company offering military and research products focusing on the space and defense sector has grown a from a single product manufacturer with annual sales of $180,000 to a multi-product manufacturer $50 million firm in a little over ten years. Robots Everywhere has a strong reputation for manufacturing high quality products with on-time customer delivery. The company also emphasizes state-of-the-art technology in its product design, production, information, and delivery systems.

REC’s decision to enter the home residential cleaning market occurred in 2001. In particular the marketing department decided to focus on domestic, residential cleaning to exploit the booming growth in household smart gadgets and an increasing demand for items that allow people to accomplish more in their daily lives. Although Robots Everywhere Corporation was not in the residential cleaning business the company decided to pursue an aggressive strategy of selling high quality robotic vacuum cleaners at affordable prices. The robotic vacuum cleaner is called the Zumba. The Zumba is a compact, computerized vacuum cleaner that automatically guides itself around your home. Like a conventional cleaner, it picks up dirt with spinning brushes and a vacuum. There’s a side-mounted, flailing brush that pushes dirt underneath the machine and, once there, two more counter-rotating brushes pick up the dirt and direct it to the vacuum which sucks it away into the storage bin. The Zumba moves itself around your room with two large wheels. Power comes from a NiMH rechargeable battery pack. When it’s finished it goes back to its docking station and recharges for next time.

REC is not the first company to manufacture a robotic vacuum cleaner. However, the product is fairly new and it is fairly difficult to forecast the sales of the Zumba. REC is betting that in starting in 2002 the robotic vacuum cleaner industry will grow at a slow but steady state as consumers upgrade their regular vacuums with robotic vacuums with the predicted slow but steady growth in the economy. This decision poses some risks, given that there is a “mixed bag” of opinions regarding the growth of the electronics sector in 2002. The decision was made to pursue the residential vacuum user, through a strategy focused on shipping low-cost, high-quality robotic vacuum cleaners through large retailers who focus on electronics and other residential appliances and other residential products.

Robotics Everywhere Corporation will assemble the robotic vacuum cleaners in its own facilities, but intends to outsource many of the key product components and subassemblies, including the Advanced Power System (APS) 3000 mAh NiMH Battery, a component that will be standard on each vacuum cleaner. The decision to outsource the power system resulted from an executive-level insourcing/outsourcing study that concluded the cost to manufacture the power system in-house was highly prohibitive. The product requires production capabilities that are beyond REC’s current expertise. Marketing estimates that first year demand for the new robotic vacuum cleaner, and therefore the power system, would be approximately 500,000 units, with a 20% growth expected for year two. Expected pricing for the robotic vacuum cleaner will be under

$10

00. The APS 3000 mAh NiMH battery demands depend totally on final product demand, which can be volatile.

Exhibit 1 details the monthly sales forecast for the Zumba vacuum cleaner. However, given the volatility of the electronics market and REC’s limited experience with marketing to large retailers, marketing estimates, with 95% confidence that actual demand will likely be between 400,000 and 600,000 units. As with most high technology companies, adequate supplier capacity is a critical issue. Taking a lesson from the demands placed on it by its current customers, Robotics Everywhere Corporation will seek some assurance from its suppliers that they can increase the supply of components by 25% within four weeks’ notice of changing market conditions. Supplier responsiveness and ability to satisfy Robotics Everywhere Corporation’s volume requirements will be critical.

Advanced Power System (APS) 3000 mAh NiMH Battery Market Information

REC recognizes that APS 3000 mAh NiMH Battery demand is growing rapidly, although actual numbers are difficult to obtain. One of the challenges REC faces, and perhaps a major reason why REC may want to quickly “lock in” supplier capacity, is that other industries use similar batteries as are used in the robotic vacuum cleaner. In particular, producers of video game joysticks, remote controlled cars, competition robots, TETRIX motors and electronics and other robotics products are moving aggressively in the use of the NiMH rechargeable batteries.

In sum, REC must share their market with the growing rechargeable battery market, and assess their relative leverage in the market given other market demands for the batteries.

Exhibit 1

Two – Year Zumba Demand Forecast

March 2002 55,000 units March 2003 66,000 units

April 2002 50,000 units April 2003 60,000 units

May 2002 40,000 units May 2003 48,000 units

June 2002 40,000 units June 2003 48,000 units

July 2002 45,000 units July 2003 54,000 units

August 2002 35,000 units August 2003 42,000 units

September 2002 35,000 units September 2003 42,000 units

October 2002 40,000 units October 2003 48,000 units

November 2002 40,000 units November 2003 48,000 units

December 2002 40,000 units December 2003 48,000 units

January 2003 40,000 units January 2004 48,000 units

February 2003 40,000 units February 2004 48,000 units

Robotics Everywhere Corporation is targeting the price of its Zumba at $1000. This means that the Advanced Power System (APS) 3000 mAh NiMH battery unit price would need to be in the $50 – 60 range. This is not unreasonable given current market pricing. However, the market for NiMH rechargeable batteries extends well beyond the robotic vacuum cleaner industry, and is not without its share of uncertainty and disruptions.

Another key consideration in the supplier selection decision is that Robotics Everywhere Corporation expects to control the transportation link from the supplier(s) to its facility in Boston. The company has decided to assume responsibility for transportation, but not ownership of inventory, from the supplier’s facility. The company plans to support its inbound logistics with carriers that offer corporate-negotiated rate discounts.

While early robotic vacuum cleaners were notorious for quality-related problems, today’s customers demand defect-free products. With intense price competition and narrow profit margins, a single product defect, particularly when the vacuum cleaner is in the customers’ hands, can “wipe out” any profit from the sale. Poor quality will also adversely affect market reputation and future sales. Although exact numbers are difficult to obtain, financial analysts at Robotics Everywhere Corporation calculate, based on experience and assumptions, that each with a defect will result, on average, in

$20

0 in non-conformance costs that Robotics Everywhere Corporation must bear (including lost customer goodwill).

The company plans to introduce the new line of robotic vacuum cleaners to the market place in March 2002. It must have inventory by January 2002 to begin process proving and pilot production. The March date coincides with preparing for the peak vacuum cleaner sales season to coincide with spring cleaning. It is now early August 2001.

Robotics Everywhere Corporation relies on cross-functional commodity teams to develop sourcing strategies for key purchased items. Executive management views the supplier selection decision as a critical part of the Zumba development. The commodity team has spent the last several weeks visiting four battery suppliers, and is currently evaluating various supply options. The team expects to begin negotiation with one or more suppliers within the next several weeks. Information regarding the suppliers under consideration is presented in the following section.

THE SUPPLY ALTERNATIVES

The team developed a market analysis of battery suppliers, and narrowed their search to four specific suppliers. These four suppliers were selected as final contenders based on: a) cost competitiveness given Robotics Everywhere Corporation initial target cost, and/or b) location proximity to REC’s assembly sites. The team was somewhat divided, as some members felt that REC should globalize its sourcing initiatives, while others felt that local suppliers would be a better choice in terms of working arrangements. Engineering supported the commodity team’s preliminary efforts by purchasing off-the-shelf batteries for testing. This helped determine if the suppliers had a product that initially satisfied REC’s expectations. Relying on product samples, while providing preliminary insight into the capability and technology of each supplier, was not sufficient to support a final supplier selection decision. Hence, the need for direct visits by the commodity team became apparent.

The team decided to visit four suppliers directly to collect detailed information. The visits ranged from one to two days each, with all four visits completed within a three-week period. These visits were time-consuming and exhausting, particularly since two suppliers were located in Asia. Unfortunately, Robotics Everywhere Corporation does not have an International Purchasing Office (IPO) to support its international procurement activities. Furthermore, no one on the team spoke Korean or Chinese. Fortunately, the other two suppliers, located in the U.S., were much easier to visit. In fact, one supplier was located only ten miles from the REC’s assembly facility. The following sections summarize data collected during the commodity team’s visits to the four suppliers.

Batteries R Us

Batteries R Us, a fairly large and reputable manufacturer of batteries, including 3000 mAh NiMH Rechargeable batteries, was located less than ten miles from REC’s facilities. About 15% of the company’s $1 billion sales came from the sale of 300 mAh NiMH battery like products. In fact, the firm was the second largest producer of batteries worldwide (with 20% market share). In addition, the plant manager pointed out that the company has committed significant resources to setting up a JIT production system for the battery line. Indeed, the REC team was impressed with the performance of the kanban signals and flow-through workstations. The plant manager also emphasized that because of their close proximity to Robotics Everywhere Corporation, they would have no problem delivering the product in two-day lot sizes, “just-in-time,” to REC’s facilities. The manager was able to show the team reports that backed this claim. Batteries R Us also had a solid reputation within the industry for working with its customers on future product development.

Upon visiting the quality department, the quality manager seemed particularly preoccupied and “on edge.” When the plant manager left for a few minutes to answer a phone call, the group asked the quality manager if the company had experienced any significant problems recently. He confessed that the last shipment of NiMH battery power systems had several quality problems, and the number of returns from large distributors had increased dramatically. This was creating some fairly severe disruptions to production scheduling and delivery. The most serious problem was an issue with the batteries not recharging. However, he assured the REC team that the design engineers were working full-time on the problem and that it would be solved well before REC placed an order. When the plant manager returned, the quality manager made no further mention of the problem. The plant manager estimated that the ramp-up time for the first shipment would be very short, approximately 3 months. Relevant Batteries R Us data include:

 Quoted price = $50

 Delivery lead time = 1 week

 On-time delivery record = 99.5%

 Quality = 7,500 PPM defects



Transportation

costs from Batteries R Us to Robotics Everywhere Corporation = $8 per unit (due to frequent deliveries of small quantities)

 Current installed capacity for 3000 mAh NiMH Battery = 90%

 Duties and customs = $0.00 per unit

 Insurance = $0.50 per unit

 Frequency of shipment = Every day



Tooling

costs = $1 million

 Ordering, inbound receiving, and quality inspection costs = $0.50 per unit

 Ramp-up time = 3 months

· Denomination of contract = Dollars

Oynas

Oynas, located in Guangzhou, China was the largest supplier the team visited (sales of $7 billion). The plant covered ten acres, with a wide variety of computer and electronic components produced in the facility. Power systems and batteries represent a large segment of Oynas production (Oynas commits 15% of total capacity to 3000 mAh NiMH battery production similar products and derives 15 % of revenues from the sales of these power systems). Because of its size, however, the company seemed most interested in large contracts ($75 million or more annually). Oynas currently controls approximately 30% market share of battery sales. Geographic distance from Boston, along with the need to accommodate the needs of some large customers, made Oynas’s quoted lead time the longest of the four suppliers being evaluated.

The highest-ranking manager that met with the REC team was a sales manager, who took the team to visit various departments. The division vice-president and plant manager were in conference with a battery customer, who the REC team found out had formed a strategic supply alliance with Oynas. The REC commodity team felt a bit “snubbed” at the facility, particularly the group’s female members. The facility was efficient, spotless, and modern.

When the team visited engineering, they spoke with a manager in Power Systems design. The engineer estimated, based on previous experience, that the ramp-up time to begin production that would satisfy REC’s specifications would be about 2 months. Furthermore, tooling costs would likely be $900,000.

The sales manager was particularly proud of Oynas new Internet-based electronic data interchange (EDI) system. This system allowed direct communication with customers. He was also proud that Oynos was “the price leader” for the industry, and was producing NiMH Battery Power Systems for several of the major robotics companies. He also talked about the company’s extensive investment in research and development. When the sales manager heard that the NiMH Power System order, based on 500,000 units in year one, would likely not exceed $30 million per year, he hesitated, saying that he would need to discuss the order with management. Moreover, he indicated that the company typically was not interested in orders of less than $75 million per annum, but that exceptions might be possible. The economics associated with large orders is what made Oynas a low-cost producer. Relevant Oynas data include:

 Quoted price = $45 per unit (quoted at 8.27 CNY to $1 U.S.)

 Delivery lead time = 10 weeks

 On-time delivery record = 95% on-time (for large customers)

 Quality = 9,500 PPM defects

 Transportation costs from Asia to Corporation = $8 per unit

 Current installed capacity for 3000 mAh NiMH Battery Power systems = 97%

 Duties and customs = $4.75 per unit

 Insurance = $1.00 per unit

 Frequency of shipment = Monthly

 Tooling costs = $900,000

 Ordering, inbound receiving, and quality inspection costs = $2.25 per unit

 Ramp-up time = 2 months

 Denomination of contract = Chinese yuan

There exist some country-specific risks associated with sourcing in China. The WorldFactBook 2001 notes that “developing trends presage more divergence between the United States and key East Asian countries and more difficulties for US policy and interests. . . . Greater friction will also arise as a result on an expected downturn in the US economy, anticipated difficulties in US-China relations, and greater debate between the United States and Japanese and South Korean allies over military bases, host nation support, and other alliance arrangements. . . East Asian policies toward the United States will be driven strongly by the uncertain regional security environment, the nascent revival of regional economies after the Asian economic crisis, and trends in international politics and norms that affect East Asian authoritarian and democratic governments differently but underline strong regional nationalistic pride and assertiveness.” [footnoteRef:1] [1: The World Factbook, 2001, (http://www.odci.gov/cia/publications/factbook).]

Sanasonic

A third candidate for the contract is Sanasonic, a small manufacturer located in Goleta, California. The company focuses exclusively on the design and production of battery powered power systems. Sanasonic derives 75% of its

$275

million in revenues from power systems similar to the 3000 mAh NiMH Power System. The team discovered this company almost by accident. A team member was browsing a trade journal and saw Sanasonic’s advertisement. When the team visited the facility, the team was surprised at its small size and by the fact that it is located in an old warehouse. Sanasonic’s president met with the team in person. He explained that he was a graduate of MIT in electrical engineering and had decided to start his own company after working for 15 years. The company entered the battery market four years ago and has produced NiMH Battery Power systems just over a year. During this time, however, Sanasonic has established a reputation for delivery reliability and innovation. The president explained that Sanasonic’s success was based largely on its commitment to develop new technology, especially technology that enhanced product reliability. He also claimed that he knew every customer personally. Electronics Weekly had praised the company’s products in several recent editions. However, the company was definitely a small growing entity (with less than 4% of global market share), but they expressed their intent to focus more on the NiMH Battery Advanced Power systems.

Everyone in the plant seemed highly motivated, and, except for the president, the team did not see any person who appeared over the age of 35. The president was particularly excited about the possibility of working with Robotics Everywhere Corporation, and promised to work with them closely on this contract and for any new product lines. In particular, he emphasized that rechargeable battery technology was improving and that the robotics market was another sector that would continue to expand in the future. Ramp-up time for the NiMH Battery Power system would be approximately 3.5 months.

When asked if his firm would have any problem in meeting demand should they receive the contract, he hesitated before answering. He admitted that this contract would be the largest in Sanansonic’s relatively short history. He also indicated that several other buying teams were also going to be sending teams to evaluate Sanansonic within the next week. However, he assured the team that he would do whatever it took to maintain reliable delivery schedules if Sanansonic received the contract. Interestingly, it appeared that the production lines were experiencing some problems during the team’s visit, as they were shut down for nearly four hours! Relevant Sanansonic data include:

 Quoted price = $51.50

 Delivery lead time = 3 weeks

 On-time delivery record = 97% on-time

 Quality = 10,500 PPM defects

 Transportation costs from Sanasonic to Robotics Everywhere Corporation = $3.00 per unit

 Current installed capacity for 3000 mAh NiMH Battery Power systems = 88%

 Duties and customs = $0.00 per unit

 Insurance = $0.75 per unit

 Frequency of shipment = weekly

 Tooling costs = $1 million

 Ordering, inbound receiving, and quality inspection costs = $2.75 per unit

 Ramp-up time = 3.5 months

 Denomination of contract = Dollars

K-Power

The fourth supplier, K-Power, is a Korean company with 12% of global market share in battery powered system sales. K-Power provided the second lowest bid at $47.50 per unit. During the team’s visit the plant manager claimed that capacity was not an issue, and that the company would be willing to commit the required production capacity to the Robotics Everywhere Corporation contract. Similar NiMH Battery Powered Systems accounted for about half of Avenue’s $0.65 billion in 2000 sales.

The commodity team felt much more comfortable at K-Power than at Oynas. While this supplier has minimal experience doing business with North American firms, the company seemed quite anxious for the contract. The company has several large Taiwanese and Japanese electronics makers as customers. At this time K-Power has no U.S. facilities or support staff. The team had some concerns about becoming K-Power’s first major North American customer.

The company’s product was excellent. Every NiMH Battery Powered system went through an extensive testing procedure that assured few problems would occur. In fact, K-Power’s process control and testing were more thorough than any other supplier the team visited. However, the combination of the testing process and geographic distance meant that delivery cycle times were much longer, up to 8 weeks per order, although the on-time delivery performance for the facility was excellent. The team was not sure if current Asian delivery performance would be indicative of delivery performance to the U.S. The facility appeared well maintained, clean, and orderly. The team noticed that the battery power system facility was extremely busy and wondered if the plant manager’s claim about adequate capacity was accurate. All employees worked closely together in work cells and knew each other by name. Industry experts viewed K-Power as one of the most promising and dynamic companies in the industry. The ramp-up time for the delivery of the first shipment was quoted as 3 months. Relevant K-Power data include:

 Quoted price = $47.50

 Delivery lead time = 8 weeks

 On-time delivery record = 99.0%

 Quality = 4,000 PPM defects

 Transportation costs from K-Power to Robotics Everywhere Corporation = $8 per unit

 Current installed capacity for 3000 mAh NiMH Battery Power systems = 92%

 Duties and customs = $4.75 per unit

 Insurance = $1.75 per unit

 Frequency of shipment = Monthly

 Tooling costs = $1.4 million

 Ordering, inbound receiving and quality inspection costs = $1.25 per unit

 Ramp-up time = 4 months

 Denomination of contract = Dollars

As noted earlier, regional instabilities, particularly with North Korea, pose a threat to US interests in the area. The World Factbook 2001 notes that “China will work against US efforts to strengthen its position in the region. Notably, Beijing will press against and challenge US support for Taiwan, US efforts to build missile defenses in the region, and US efforts to strengthen the alliance with Japan.. . . Japan and South Korea strongly support their respective alliances with the United States and are currently cooperating closely with Washington in trilateral efforts to deal with North Korea. Yet, like many other US allies, both Tokyo and Seoul chafe over the asymmetry in their alliance relationship with the US superpower. They seek adjustments in the US military presence that would accommodate their nationalistic or local concerns.”

SUPPLIER FINANCIAL DATA

The team also gathered financial data for each supplier. While the team believes the data for the U.S. suppliers to be reliable, several assumptions and estimates had to be made regarding the Asian suppliers. The team had to convert Chinese and Korean currency into dollars. In some cases, the desired figures were not available, or the supplier showed no interest in providing the team with the requested information. In particular, this was an issue with Oynas. Exhibits 2 and 3 summarize selected supplier financial data.

Exhibit 2

Selected Supplier Balance Sheet Data (U.S. $ in millions)

For Period Ending December 31, 2000

$20

$37.5

$22.5

$654.8

$4,938

$175

$503.1

Batteries R Us	Oynas		Sanasonic				K-Power
ASSETS
Cash	$37.1	$95.9	$17.5	$28.2
Marketable securities	$45.5	$122.5	$4.5	$12.9
Accounts receivable	$167.2	$889		$22 .5	$80.3
Inventories	$72.5	$105 7.7		$37.5	$77.7
Total current assets	$32 2.3	$2,165.1	$82	$199.1
Investments at equity	$33	$738.4	$10.5	$49.5
Goodwill	$69.5		$300				$20	$39.2
Total investments and other assets	$102.5	$1,038.4		$30.5	$87.7
Property, plant, and equipment	$230	$1,734.5	$62.5	$216.3
TOTAL ASSETS		$654.8		$4,938		$175		$503.1
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable	$525.5	$5.5	$18.5
Accounts payable	$110.5	$525.9	$63.5
Taxes due on income	$32	$245	$11.5	$22
Accrued payroll and employee benefits	$91	$484.2	$6.8	$67.5
Total current liabilities	$253.5	$1,780.6	$61.3	$171.5
Long-term debt	$120.5	$1,243.5	$80.5
Shareholders’ equity	$280.8	$1,913.9	$91.2	$251.1
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

Exhibit 3

Statement of Income Data (U.S. $ in millions)

Year Ended December 31, 2000

Sanasonic

K-Power

$30.5

$20

$300

$20

Batteries R Us	Oynas
Net sales	$1,000	$7,000	$275	$650
Cost of goods sold	$600	$4,500	$194	$395
Selling, general, and administrative expenses	$250	$476	$130
Interest expense	$10
Costs and expenses	$875	$5276	$234.5	$545
Income before income taxes	$125	$1724	$40.5	$105
Estimated taxes on income	$48.97	$738	$17.4	$56.9
NET INCOME	$76.03	$986	$23.1	$48.1

ADDITIONAL INFORMATION AND ASSUMPTIONS

 Although Robotics Everywhere Corporation is buying a standard Advanced Power System (APS) 3000 mAh NiMH batteries, extra production demands and a small level of design customization will result in additional tooling requirements at each supplier.

 The company expects the Advanced Power System (APS) 3000 mAh NiMH battery to have a two-year life cycle. The commodity team will allocate all supplier-related production costs, such as tooling, on a per unit basis over a two-year period. The company fully expects to introduce its next generation of Robotic Vacuum Cleaners at the end of two years.

 The US dollar has shown signs of weakening in the last months of 2001. The outlook for the US dollar is that it may further weaken against many of the Asian currencies in 2002. The team has not done enough research in this area to determine the extent of this weakening.

 Robotics Everywhere Corporation plans to maintain some level of safety stock inventory for the Advanced Power System (APS) 3000 mAh NiMH batteries, at least for the first year. Due to long material pipelines, Robotics Everywhere Corporation expects to maintain a two-month safety stock inventory if it utilizes Asian suppliers. For domestic suppliers, the company expects to maintain an inventory equal to one month worth of demand as safety stock.

 Inventory carrying costs, which include storage, handling, obsolescence, taxes, and cost of capital, are 20% per year of the inventory’s unit cost. The company assumes carrying costs for safety stock material.

 Assume the unit price quoted by each supplier is what Robotics Everywhere Corporation would pay for the Advanced Power System (APS) 3000 mAh NiMH batteries from each supplier. Subsequent negotiations will likely alter the quoted price.

 While tooling depreciation could be a cost consideration, this case does not consider depreciation.

· While REC takes an active role in coordinating inbound transportation shipments, company policy states that REC will not assume title to material until the material arrives at the company’s receiving dock.

·
Appendix 1: Supplier Financial Analysis

Purchasers assess supplier financial health for several reasons. The most important reason involves managing supply base risk. The analysis may highlight difficulties that will interfere with the smooth and timely flow of material. A supplier may be experiencing capacity constraint problems, have difficulty meeting its payables, have too many receivables, have poor inventory management as revealed by low inventory turns, or have cash flow problems as noted by current liabilities exceeding current assets.

A supplier financial analysis is likely whenever a purchaser is attempting to reduce a pool of potential supply sources. If a supplier does not meet certain thresholds as defined by the purchaser, then the supplier will likely not move to the next level of consideration.

Financial ratios are a key part of a supplier financial analysis. Of course, the key to a supplier financial analysis is a purchaser’s ability to obtain reliable and complete financial data, which can be a challenge when evaluating closely or privately held corporations.

Besides calculating and attempting to interpret the meaning of financial ratios, comparing ratio data can provide even greater insight into a supplier’s financial condition. While no correct answers exist for financial ratios, a comparison of a supplier’s ratios to published industry norms can help identify if further financial analysis is necessary. An analyst should also compare several years of supplier financial data, if available, to identify favorable or unfavorable trends. Another comparison involves comparing a supplier’s ratios with specific competitors, which is likely when a purchaser has collected data from more than one supplier.

Supplier Financial Analysis

Please use the following template to calculate selected financial ratios for the four suppliers being considered for the Advanced Power Systems (APS) 3000 mAh NiMH batteries.

Supplier Financial Analysis Worksheet

K-Power

Selected Financial Ratios	Batteries R Us		Oynas	Sanasonic
Asset Utilization: Asset Turnover = Sales/Assets Inventory Turnover = Cost of Sales/Average Inventory Receivable Days = Accounts Receivable/Sales X 365
Capitalization: Leverage = Debt/Equity Return on Equity = Net Income/Equity = Profit Margin X ATO X Leverage Long-term Debt to Equity = Long-term Debt/Equity Long-term Debt to Assets = Long-term Debt/Assets Current Ratio = Current Assets/Current Liabilities Quick Ratio = (Cash + Short-term Inventory + Accounts Receivable)/ Current Liabilities EBIT Coverage = Earnings Before Interest and Taxes/Interest Expenses
Profitability Ratios: Contribution Margin = (Sales – Variable Cost)/Sales Profit Margin = Net Income/Sales

Note: Shareholders equity includes stock and retained earnings. This value is also referred to as Net Worth.

Conclusions and Interpretation:

Appendix 2: Total Cost Analysis

This template requires each group to quantify costs that are in addition to the quoted unit price. Using cost information provided in the case for each supplier, calculate the estimated per unit total cost from each supplier for year one.

Total Cost Analysis Worksheet–Year One

Oynas

K-Power

Cost Category	Batteries R Us	Sanasonic
Quoted Unit Price
Transportation
Tooling
Quality non-conformance costs
Duties/customs, insurance, and tariffs
Inventory safety stock carrying charges:
Ordering, inbound receiving and inspection costs
Estimated Per Unit Total Cost

Conclusions and Comments:

Appendix 3: Supplier Evaluation and Selection Analysis

The development of a supplier evaluation and selection analysis follows a sequence of steps:


Step One: Identify Key Supplier Evaluation Categories

Supplier evaluations must include those performance categories that are relevant to the sourcing decision under consideration. Examples of supplier evaluation categories that a team or individual may evaluate include (but are not limited to):

• Management and personnel capability • Cost competitiveness

• Information systems capability • Quality performance

• Process and technological capability • Environmental compliance

• Delivery performance • Longer-term partnership potential

• Flexibility • Volume capacity

• Previous history and performance • Supplier’s supply management efforts

• Responsiveness to customer needs • Information system capability

While including the relevant performance categories is critical, each additional category adds a greater degree of assessment complexity.


Step Two: Weight Each Relevant Evaluation Category

The performance categories included within the analysis receive a weight proportional to the relative importance of that category. With any combination of weights, the weights must sum to 100%.


Step Three: Identify and Weight Subcategories

Step 2 defines the broad performance categories included within the evaluation. This step requires the user to identify performance subcategories, if they exist, within each broader performance category. Each subcategory receives a weight, the total of which equals the weight of the broader performance category. For example, assume that supplier quality performance is 20% of the total score. Within that category, a team may create subcategories related to process control systems (5%), total quality commitment (8%), and parts per million defect performance (7%). Please note that the subcategories sum to 20%.

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Step Four: Define Scoring System for Categories and Subcategories

This step involves defining what each score means within a performance category. A clearly defined scoring system takes criteria that may be subjective and develops a quantified scale for measurement. The scoring metrics are reliable if different individuals interpret and score similarly the same performance categories under review.

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Step Five: Review Evaluation Results and Make Selection Decision

The primary output from this step is a recommendation concerning which supplier(s) should receive a purchase contract. As with any tool, the outcome from this analysis is only as good as the planning and effort put forth.