Reference no: EM132299404
Total Landed Cost Exercise
Suppose you are trying to decide whether to make engines in Michigan next to the Ford plant where they will be used, in Chihuahua, Mexico, or in coastal China.
A truckload of carburetors from Chihuahua takes 15 days to reach Michigan, while a similar sized container of carburetors requires 66 days to reach Michigan from Yantian. The local Michigan supplier has committed to 2 hour delivery, Just-In-Time quantities (i.e. one unit at a time delivery). There are 100 engines in the truckload or container, and order quantities are 1 container at a time, except for JIT from the Michigan supplier.
Estimated annual demand 52,000 carburetors
The price of the carburetors from each of the three locations:
China: $900.00 F.O.B. the port of Yantian
Chihuahua: $1200.00 F.O.B. Chihuahua
Michigan: $1500 delivered to the plant
Shipping cost
Yantian to Michigan: $1500 per container
Chihuahua to Michigan: $ 400 per load
Local supplier $ 10.00per carburetor
Customs
China: 7% duty based on commercial contract price + freight
Chihuahua Nafta origin
Local Supplier Not applicable
Risk
Inventory cost (includes insurance) at 15% per year, or per day
Your inventory consists of
Safety Stock - 6 weeks of sales(usage) This is stored either at the factory or at the local supplier, depending on choice of supplier
Cycle Stock - ½ of the order quantity, which in this case is a container for the offsite potential suppliers
In Transit stock - Assume you incur cost based on order size (1 container) for the transit time necessary to get the order to the site, since you have possession/balance sheet responsibility as soon as the container leaves the supplier’s plant. Note that you incur this cost for every order
Overhead
Carburetor buyer $50,000 per year
Travel $ 8,000 per year (China)
$ 2,000 per year (Mexico)
Compute the Total Landed Cost under each scenario.