A purchasing team rates four casting suppliers on total cost, adding each supplier’s annual quality-related and delivery-related costs to its purchase price. Each supplier would ship 10,000 castings per year. Based on the data shown, which supplier should be ranked first?
| Supplier | Unit price | Quality-related cost per year | Delivery-related cost per year |
|---|---|---|---|
| Northfield Foundry | $43.00 | $1,000 | $1,000 |
| Ridgeway Castings | $38.50 | $30,000 | $22,000 |
| Lakeshore Metals | $41.00 | $5,000 | $3,000 |
| Pinecrest Alloys | $39.50 | $6,000 | $34,000 |
Show answer & explanation
Answer: A
- 1. Total cost per casting = unit price + (quality-related cost + delivery-related cost)/annual volume.
- 2. Annual volume = 10,000 castings for each supplier.
- 3. Northfield 43.00 + 2,000/10,000; Ridgeway 38.50 + 52,000/10,000; Lakeshore 41.00 + 8,000/10,000; Pinecrest 39.50 + 40,000/10,000.
- 4. Totals: Northfield $43.20, Ridgeway $43.70, Lakeshore $41.80, Pinecrest $43.50 per casting.
- 5. Lakeshore Metals ranks first; the lowest price (Ridgeway) and the lowest nonperformance cost (Northfield) both mislead.
Lakeshore Metals: Correct. Total cost per casting = $41.00 + ($5,000 + $3,000)/10,000 = $41.80, the lowest of the four.
Ridgeway Castings: Has the lowest unit price ($38.50), but its $52,000 of quality and delivery costs add $5.20 per casting, for $43.70; ranking on price alone ignores nonperformance costs.
Pinecrest Alloys: Looks best ($40.10) if delivery costs are left out, but adding its $34,000 of delivery-related cost gives $43.50.
Northfield Foundry: Has the lowest nonperformance costs, but its high price gives $43.00 + $0.20 = $43.20, above Lakeshore.
A cost-based supplier rating adds the costs of poor quality and late delivery to the purchase price; the lowest total cost, not the lowest price, ranks first.