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Chapter 4

Q. 4.4

The Acme Computer Company is looking for suppliers of wireless touchpads to ship with its computers. Acme needs 10,000 units and has sent out a request for bids from suppliers of touchpads. The company recognizes that the cost of the touchpads goes beyond the purchase price. Some suppliers require more contact with the purchasing
department, which costs the company $50 per contact. The suppliers also have different expected defect rates. Acme inspects all incoming touchpads and discovers about 90 percent of the defective units. Defective units that are discovered through inspection are returned to the supplier at a cost of $20 per touchpad. The other 10 percent of
defective touchpads are not discovered. These defective units are shipped with Acme computers and sent to customers. When the customer discovers the defect, the cost to Acme to replace the defect and provide the additional customer service is $200 per defect. The bids and expected purchase contacts and defect rates for the suppliers are:

Supplier Bid/Touchpad Purchase Contacts Percentage of Defect
A $10.00 50 1.00%
B $9.75 40 2.00%
C $10.50 80 0.50%

Which supplier is least costly?


Verified Solution

The number of defects discovered through inspection and by customers:

Supplier Total Defects Discovered through Inspection Discovered by Customers
A (0.01)(10,000) = 100 (0.9)(100) = 90 (0.1)(100) = 10
B (0.02)(10,000) = 200 (0.9)(200) = 180 (0.1)(200) = 20
C (0.005)(10,000) = 50 (0.9)(50) = 45 (0.1)(50) = 5

The supplier costs are estimated as follows: multiply the bid/touchpad by 10,000 to determine the cost of the touchpads; the purchase contacts times $50 to determine the cost of purchase contacts; the number of defects discovered through inspection times $20 to determine the cost of returns; and the number of defects discovered by customers times $200 to determine the cost of customer complaints:

Supplier Cost of Touchpads Purchase Contacts Returns Customer Complaints Total Cost
A $100,000 $2,500 $1,800 $2,000 $106,300
B $97,500 $2,000 $1,600 $4,000 $107,100
C $105,000 $4,000 $900 $1,000 $110,900

Supplier B has the lowest purchase cost, while Supplier C has the lowest defect rate .However, Supplier A is the lowest-cost supplier when overall costs are considered.