Fast Lane Ltd manufactures motorbikes and is located in Brisbane. More than 70 percent of the caste the company’s motorbikes consists of material and components, which are purchased from Australia, suppliers. About three years ago, Fast Lane introduced a comprehensive supplier evaluation system to monitor the performance of its suppliers. Each supplier was given a three-year contract that guarantee: large orders as long as it performed according to Fast Lane’s strict requirements. Each supplier’s performance was measured by considering its adherence to delivery schedules (Fast Lane works on just-in-time system), accuracy of orders delivered, number of components rejected on delivery, and its achievements in reducing its production costs (and, therefore, its material and component prices)oree4 contract period. Performance in all of these areas will determine whether Fast Lane renews the supple’ contract or offers the contract to another supplier. The suppliers are aware that there are many alternative component suppliers who would be eager to enter into a long-term contract with Fast Lane.
After holding discussions with the purchasing manage, as part of the review process, the financial controller has conducted a study to determine the full cost of dealing with suppliers. While the (omen uses a series of non-financial performance measures to measure most aspects of supplier performance the financial controller believes that the calculation of the total cost of ownership will provide an additional perspective to viewing supplier performance. For the most recent year, the following supplier related activities and costs have been identified:
Fast Lane obtains its exhaust systems from two suppliers: Hot Exhausts and Chrome Manufacturers Last year, Fast Lave purchased 3000 units from Hot Exhausts at $100 per unit, and 4000 units from Chrome Manufacturers at $90 per unit. Both suppliers provide an identical component.
The analysis revealed that last year the following activities related to the two suppliers:
Activity Hot Exhausts Chrome manufacturers
1. Construct an Excel’ spreadsheet in a format similar to Exhibit 15.3, to determine the cost per unit of activity driver for each supplier-related activity, and the total cost of ownership and the total cost per unit for the two suppliers.
2. Calculate the supplier performance index for the two suppliers.
3. Compare the performance of the two suppliers.
4. Use your spreadsheet to answer the following question. What is the total cost per unit for Chrome Manufacturers if the number of late deliveries reduces to 12, and the production downtime due to late delivery reduces to 30 hours.
5. Describe the changes that the purchasing manager and financial controller could implement to minimise supplier-related costs.
6. Consider the various criteria used by Fast Lane to determine whether or not supplier contracts should be renewed. For each criterion, suggest two performance measures that Fast Lane might use to evaluate suppliers performance.
7. Fast Lane is considering implementing electronic systems for transacting with suppliers. Outline some advantages that might accrue to both Fast Lane and its suppliers from such systems.