15.CS: Case Study - Choosing a New Supplier

Last updated
Save as PDF

Page ID: 22163

Jean-Paul Olivier
Red River College of Applied Arts, Science, & Technology

$ \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } $ $ \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} $$\newcommand{\id}{\mathrm{id}}$ $ \newcommand{\Span}{\mathrm{span}}$ $ \newcommand{\kernel}{\mathrm{null}\,}$ $ \newcommand{\range}{\mathrm{range}\,}$ $ \newcommand{\RealPart}{\mathrm{Re}}$ $ \newcommand{\ImaginaryPart}{\mathrm{Im}}$ $ \newcommand{\Argument}{\mathrm{Arg}}$ $ \newcommand{\norm}[1]{\| #1 \|}$ $ \newcommand{\inner}[2]{\langle #1, #2 \rangle}$ $ \newcommand{\Span}{\mathrm{span}}$ $\newcommand{\id}{\mathrm{id}}$ $ \newcommand{\Span}{\mathrm{span}}$ $ \newcommand{\kernel}{\mathrm{null}\,}$ $ \newcommand{\range}{\mathrm{range}\,}$ $ \newcommand{\RealPart}{\mathrm{Re}}$ $ \newcommand{\ImaginaryPart}{\mathrm{Im}}$ $ \newcommand{\Argument}{\mathrm{Arg}}$ $ \newcommand{\norm}[1]{\| #1 \|}$ $ \newcommand{\inner}[2]{\langle #1, #2 \rangle}$ $ \newcommand{\Span}{\mathrm{span}}$$\newcommand{\AA}{\unicode[.8,0]{x212B}}$

The Situation

Lightning Wholesale is always looking for profitable opportunities to expand its business. This usually means adding more product lines that will increase its product mix offering to its retail clients. The retail clients appreciate the offerings, since the diversity results in increased customer satisfaction along with higher profits. Lightning Wholesale finds itself in a position to add another product line to its mix. Four different suppliers have provided information to management. To accommodate any of these manufacturers, management knows that modifications must be made to their distribution centre in terms of the needed equipment, storage space, sorting machines, and other additional resources.

The Data

Supplier	Initial investment required	Storage space required in distribution centre	Additional labour hours required annually by the product	Cost of the product today	Forecasted unit sales in the first year and expected annual increase in sales	Lightning Wholesale’s price for the product today	Years until the product line is discontinued
#1	$220,000	450	520	$54.00	2,000; 10%	$92.00	4
#2	$253,000	685	390	$76.00	3,000; 8%	$102.00	5
#3	$190,000	265	295	$33.00	4,200; 5%	$54	3
#4	$280,000	540	440	$48.00	1,500; 13%	$97	5

Important Information

Utility costs are estimated at $5.40 per square foot of storage space and forecasted to rise 5% each year.
Labour costs are estimated at $14.25 per hour and forecasted to rise 3% each year.
All suppliers will increase the cost of their product in line with inflation each year at 3% annually.
Lightning Wholesale will increase the selling price of any product $2 annually.
Lightning Wholesale’s cost of capital is 11%.
The storage, labour, and product costs are incurred throughout the year.
The profits are earned throughout the year.

Your Tasks

Based on the information provided, recommend only one supplier that Lightning Wholesale should select to add to its offerings. Perform the necessary calculations and write a brief report to the marketing manager about your decision. For simplicity in any given year, since the costs and profits are incurred throughout the year, you can net the storage, labour, and product costs against sales of the product to determine the net profit at the end of each year. When making any annual changes, be sure to round all costs and prices to two decimals as well as any units to integers.

Contributors and Attributions

Template:ContribBusiMathOlivier