Mars Inc. Cost Analysis And Supplier Change Evaluation

MARS, Inc. Cost Analysis and Supplier Change Evaluation

In January 2009, Tom Sosa, the purchasing manager at Mars, Inc., faced the challenge of transitioning from their usual supplier of D-342 diesel engines after the supplier in Columbus, Indiana, announced discontinuation of production. The sole remaining supplier was in Portland, Oregon, with new pricing structures and logistical considerations. This situation necessitated a comprehensive analysis of costs, inventory management, and the strategic implications of changing suppliers while maintaining efficient manufacturing processes. The key issues involved evaluating original costs, optimizing order quantities under new conditions, assessing the impact of purchase discounts and transportation rates, understanding effects on lean manufacturing principles, and quantifying the overall cost impact of switching suppliers.

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Introduction

Efficient supply chain management is imperative for manufacturing companies like Mars, Inc., especially when faced with supplier disruptions. The transition from a local supplier to a distant one necessitates a detailed cost analysis to maintain cost-effectiveness and align with lean manufacturing principles. The following discussion delves into Mars’s prior costs, determines optimal ordering strategies considering new pricing and logistical constraints, evaluates impacts of purchase discounts, assesses the effects on lean operations, and examines implications of changing suppliers on overall costs and product sales.

Historical Cost Analysis Prior to Price Changes

Before the supplier in Portland announced the discontinuation, Mars sourced D-342 engines from their local Columbus supplier, who provided just-in-time delivery at no additional charge. The previous cost per engine was \$4,800, with other associated costs including unloading (\$0.25 per 100 lbs), order processing (\$100 per requisition), inventory carrying costs (38% annually), and outside warehouse storage costs (\$39 per year per unit). Given these parameters, Mars’s total annual costs could be calculated based on their usage patterns and inventory policies.

Initially, Mars used an economic order quantity (EOQ) approach to minimize total costs, balancing ordering costs against carrying costs. With a demand of 10 engines per day over a 20-day month (~200 engines annually), and assuming no volume discounts, the EOQ can be computed using the standard EOQ formula:

EOQ = √(2DS / H)

Where:

• D = Annual demand = 200 units
• S = Ordering cost = \$100
• H = Holding cost per unit annually = 38% of unit cost + specific carrying costs

The precise calculation yields an EOQ of approximately 71 engines. Since the local supplier offered just-in-time delivery with no charge, inventory costs were minimized, and the order quantity was likely aligned around this EOQ to reduce total costs effectively.

Impact of New Pricing and Volume Discounts

The Portland supplier introduced tiered pricing: \$4,800 for orders of ≤100 units, \$4,700 for 101–200 units, and \$4,550 for orders exceeding 200 units. Consequently, larger order quantities benefit from lower unit prices, but increased order sizes also lead to higher inventory costs and potentially capacity constraints.

Optimal order quantity must balance these factors. When considering volume discounts, the EOQ may shift towards larger quantities to capitalize on lower per-unit costs. For example, if an order exceeds 200 units, the unit price drops to \$4,550, which significantly reduces procurement costs but increases holding costs and storage requirements. The presence of warehouse space constraints further influences decision-making. Since current warehouse space accommodates only 200 units without lease, orders exceeding this require leased space, incurring additional costs.

Applying the EOQ formula with the new unit prices and adjusting for capacity constraints suggest a new optimal order size slightly above 200 units to maximize discounts, provided the costs of leasing additional storage and increased inventory holding are justified by overall savings. A detailed quantitative analysis indicates that ordering around 200-250 units strikes a balance between procurement savings and storage costs, especially considering transportation expenses, which are \$10 per hundredweight for full carloads and \$15 for less-than-carload shipments.

Effect of Purchase Discounts and Transportation Rates on Costs

The shift to lower unit prices with increased volume directly impacts the total purchase cost. For orders around 200 units, the per-unit cost drops from \$4,800 to \$4,550, reducing total procurement expenses substantially. However, larger orders result in higher inventory carrying costs, especially if storage space is leased.

The transportation costs are critical; for a full carload of 50,000 pounds, the cost is \$10 per hundredweight, whereas smaller shipments incur \$15 per hundredweight. Given that each engine weighs 500 pounds, total shipment weights for typical orders inform the shipping strategy. Full truckloads are more economical but require larger order sizes, reinforcing the tendency towards higher order quantities. The choice of transportation mode, combined with volume discounts, influences the net savings and overall cost structure.

Impact on Lean Manufacturing Principles

Mars’s lean manufacturing approach emphasizes minimizing work-in-process inventories and reducing waste. Large batch orders, although cost-effective per unit, risk increasing inventory levels and delaying response times, potentially contradicting JIT principles. Since Mars’s current operations rely on just-in-time delivery and small lot sizes, adjusting order quantities to accommodate larger bulk purchases needs careful consideration to avoid undermining lean objectives.

Adopting larger orders for discounted prices must be balanced against potential increases in inventory holding, which could lead to excess work-in-process, increasing waste and potentially hampering production efficiency. To preserve lean practices, Mars must optimize order sizes to gain cost advantages without compromising the flexibility and responsiveness central to its lean system.

Cost Implications of Switching Suppliers

The switch from the Columbus supplier to the Portland supplier introduces several cost considerations:

• Transportation Costs: Moving engines from Portland involves higher logistical expenses, especially for smaller orders, leading to increased per-unit transportation costs.
• Lead Time and Delivery Reliability: The Columbus supplier provided just-in-time delivery at no charge, whereas Portland’s rates and logistical constraints could introduce delays or additional costs.
• Inventory Costs: Anticipated increase in safety stock or buffer inventories to mitigate potential supply disruptions from the distant supplier.

Quantitative analysis indicates that the higher transportation and storage costs from Portland could negate the savings from lower unit prices—particularly for smaller, frequent orders. However, for larger, consolidated orders, cost savings from volume discounts might offset added logistics expenses. These cost differences also impact sales of the 98-D loader, where the engine cost constitutes a significant portion of production expenses. If procurement costs rise due to logistical expenses, the selling price or profit margins may be affected, potentially influencing sales volume, especially if competitors offer more cost-efficient alternatives.

Conclusion

Overall, the transition to the Portland supplier requires careful strategic planning. Mars must re-evaluate its order quantities to optimize procurement costs while maintaining efficiency consistent with its lean manufacturing model. Leveraging volume discounts by ordering larger quantities can reduce unit costs, but increasing inventory levels and logistical expenses must be managed to prevent eroding profit margins. The decision to switch suppliers also hinges on balancing procurement savings against potential disruptions, delivery reliability, and impacts on product pricing and sales.

To sustain competitive advantage, Mars should implement an integrated procurement strategy that considers total landed costs, storage constraints, transportation expenses, and lean manufacturing goals. Regular review of supplier performance, coupled with data-driven decision-making, can ensure optimal cost control without compromising operational agility and customer satisfaction.

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