Solar Pty Ltd manufactures solar panels. The panels are made from photovoltaic cells that convert the sun’s energy into electricity. Photovoltaic cells are placed between layers of semi-conducting materials such as silicon. The silicon is purchased from four suppliers, two from India, one from China and one from Australia. Solar Pty Ltd is currently assessing whether they should sign another five-year contract with only one supplier. After Covid, times are tough and profits have declined a little. Any cost savings would be beneficial for the company. After holding discussions with senior managers, as part of the review process, the financial controller has conducted a study to determine the full cost of dealing with the suppliers. While the company 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:
| ACTIVITY | TOTAL COST | NUMBER OF ACTIVITIES |
| Order silicon from supplier | $567 000 | 2 500 orders |
| Receive order | $240 000 | 3 000 deliveries |
| Return damaged silicon to supplier | $150 000 | 900 returns |
| Pay overtime to receiving staff for late deliveries | $200 000 | 4 000 hours |
| Production downtime due to defective material | $330 000 | 800 hours |
| Process invoice and pay supplier | $100 000 | 2 500 invoices |
| Dispute invoice amount | $225 000 | 1 200 disputes |
In addition to the above supplier related activities, Solar Pty Ltd also employees a supplier relationship manager, Roger Dames. Roger is in charge of developing and maintaining supplier relationships, negotiating contracts and pricing and resolving any issues with suppliers that cannot be resolved by other departments such as purchasing and accounts. Roger is paid a salary of $150 000 annually. He spends his time equally on the four suppliers. Last year Solar Pty Ltd purchased silicon from the four suppliers as follows: 8 000 boxes from Sidka Limited at a price of $115 per box. 9 700 boxes from Tosca & Co at a price of $119 per box. 8 500 boxes from Jordan Limited at a price of $125 per box. 9 200 boxes from Twinkle Pty Ltd at a price of $117 per box. Last year the following activities related to the four suppliers:
| ACTIVITY | Sidka Limited | Tosca & Co | Jordan Limited | Twinkle Pty Ltd |
| Order silicon from supplier | 500 | 300 | 600 | 1100 |
| Receive order | 900 | 450 | 1000 | 650 |
| Return damaged silicon to supplier | 300 | 50 | 475 | 75 |
| Pay overtime to receiving staff for late deliveries | 900 | 250 | 1500 | 1350 |
| Production downtime due to defective material | 200 | 90 | 105 | 405 |
| Process invoice and pay supplier | 790 | 875 | 110 | 725 |
| Dispute invoice amount | 400 | 0 | 678 | 122 |
1. Determine the cost per unit of activity driver for each supplier-related activity.
2. Calculate the total cost of ownership and the per unit cost of ownership for the four suppliers.
3. Calculate the supplier performance index for the four suppliers.
4. Analyse the performance of all the suppliers. Look into specific details. If Solar Pty Ltd were to choose only one supplier to do business with, which supplier would you recommend?
5. Do you recommend Solar Pty Ltd to deal with only one supplier? Explain your answer.
6. Suggest three ways Solar Pty Ltd can reduce costs associated with supplier related activities and three ways that the suppliers can help to reduce supplier related costs for Solar Pty Ltd.
7. What is the meaning of collaborative relationship with a supplier and how can Solar Pty Ltd benefit from having a collaborative relationship with its suppliers?
To calculate the cost per unit of activity driver for each supplier-related activity, we will divide the total cost for each activity by the number of activities performed for each supplier. This will help us understand the cost efficiency for each supplier in various activities.
OrdeReturn damaged silicon to supplier
Sidka Limited: $150,000 / 300 returns = $500 per return
Tosca & Co: $150,000 / 50 returns = $3,000 per return
Jordan Limited: $150,000 / 475 returns = $315.79 per return
Twinkle Pty Ltd: $150,000 / 75 returns = $2,000 per return
Pay overtime to receiving staff for late deliveries
Sidka Limited: $200,000 / 900 hours = $222.22 per hour
Tosca & Co: $200,000 / 250 hours = $800 per hour
Jordan Limited: $200,000 / 1,500 hours = $133.33 per hour
Twinkle Pty Ltd: $200,000 / 1,350 hours = $148.15 per hour
Production downtime due to defective material
Sidka Limited: $330,000 / 200 hours = $1,650 per hour
Tosca & Co: $330,000 / 90 hours = $3,666.67 per hour
Jordan Limited: $330,000 / 105 hours = $3,142.86 per hour
Twinkle Pty Ltd: $330,000 / 405 hours = $814.81 per hour
Process invoice and pay supplier
Sidka Limited: $100,000 / 790 invoices = $126.58 per invoice
Tosca & Co: $100,000 / 875 invoices = $114.29 per invoice
Jordan Limited: $100,000 / 110 invoices = $909.09 per invoice
Twinkle Pty Ltd: $100,000 / 725 invoices = $137.93 per invoice
Dispute invoice amount
Sidka Limited: $225,000 / 400 disputes = $562.50 per dispute
Tosca & Co: $0 (No disputes)
Jordan Limited: $225,000 / 678 disputes = $331.80 per dispute
Total Cost of Ownership and Per Unit Cost of Ownership
To calculate the total cost of ownership for each supplier, we need to sum up all the costs associated with each supplier. This includes the costs mentioned in the supplier-related activities and the salary of the supplier relationship manager, Roger Dames.
Sidka Limited
Total Cost = $567,000 + $240,000 + $150,000 + $200,000 + $330,000 + $100,000 + $225,000 + $150,000 (Roger Dames’ salary)
Total Cost = $1,962,000
Per Unit Cost of Ownership = Total Cost / Total boxes purchased = $1,962,000 / 8,000 boxes = $245.25 per box
Tosca & Co
Total Cost = $567,000 + $240,000 + $150,000 + $200,000 + $330,000 + $100,000 + $0 (No disputes) + $150,000 (Roger Dames’ salary)
Total Cost = $1,737,000
Per Unit Cost of Ownership = Total Cost / Total boxes purchased = $1,737,000 / 9,700 boxes = $179.07 per box
Jordan Limited
Total Cost = $567,000 + $240,000 + $150,000 + $200,000 + $330,000 + $100,000 + $225,000 + $150,000 (Roger Dames’ salary)
Total Cost = $1,962,000
Per Unit Cost of Ownership = Total Cost / Total boxes purchased = $1,962,000 / 8,500 boxes = $230.82 per box
Twinkle Pty Ltd
Total Cost = $567,000 + $240,000 + $150,000 + $200,000 + $330,000 + $100,000 + $225,000 + $150,000 (Roger Dames’ salary)
Total Cost = $1,962,000
Per Unit Cost of Ownership = Total Cost / Total boxes purchased = $1,962,000 / 9,200 boxes = $213.04 per box
Supplier Performance Index
The supplier performance index can be calculated by comparing the per unit cost of ownership for each supplier. A lower per unit cost of ownership indicates better supplier performance.
Sidka Limited: $245.25 per box
Tosca & Co: $179.07 per box
Jordan Limited: $230.82 per box
Twinkle Pty Ltd: $213.04 per box
Supplier Performance Analysis:
From a cost perspective, Tosca & Co has the lowest per unit cost of ownership, indicating cost efficiency.
However, it’s important to consider other non-financial performance measures as well, such as quality, reliability, and service.
Recommendation on Dealing with Only One Supplier
While Tosca & Co appears to be the most cost-effective supplier, it’s not advisable to choose only one supplier based solely on cost. A single supplier strategy can have risks, especially in the event of unforeseen supply chain disruptions or quality issues.
It is recommended that Solar Pty Ltd continues to diversify its supplier base but focuses on improving the performance of all suppliers, especially in areas like dispute resolution and reducing production downtime due to defective materials.
Ways to Reduce Costs
Ways Solar Pty Ltd Can Reduce Costs
Implement an efficient supplier management system to streamline activities like order placement, invoice processing, and dispute resolution.
Invest in supplier training programs to improve the quality of delivered materials
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