Clean Car Solutions (CCS), a manufacturer of car and two-wheeler engines, has purchased a1000 bearings per week from a local supplier who charges $1 per bearing. Recently during a Trade Exhibition, the CEO of CCS has identified another potential source willing to supply the bearings at $0.95 per bearing. Before making his decision, the CEO wants to evaluate the performance of the two suppliers.
The local supplier has an average lead time of 2 weeks and has agreed to deliver the bearings in batches of 2000. Based on past on-time performance, the CEO estimates that the lead time has a standard deviation of one week. The new sources, located in another city, has an average lead time of 6 weeks and a standard deviation of 4 weeks. The new source would also require a minimum batch size of 8000 bearings.
Which supplier should the CEO go with? CCS has a holding cost of 30%. It currently uses a continuous review policy for managing inventory and aims for a cycle service level of 95%. Weekly demand has a mean of 1000 and a standard deviation of 300.
If the local supplier decided to drop his price by 1 cent, would it change the CEO's decision?
Solution depicts the steps to assess the competing suppliers and then select the most economic one.