supply chain-02

Health-Care Equipment Corp. (HCEC) designs and manufactures a wide
variety of health-care equipment for specialized use, for example by
patients with orthopedic problems. HCEC sells these products through
one major distributor, to hospitals and doctors. The distribution center
(DC) manages customer service. The DC also places orders and maintains
inventory.

HCEC has built a captive customer base by offering leading edge
products. However, HCEC requires an average 4-week lead-time to get
product to their distribution center to maintain predictability in
HCEC’s manufacturing process. Even so, they have difficulty living up
to promised delivery dates. HCEC wants the DC to maintain a high level
of service. The DC places orders once per day, using an
“order-up-to” system. They want to “run out” less than 0.4% of
the days, so they maintain safety stock. This is based on running out
once out of 250 days (one year).

You work for “Contract Manufacturers, Inc. (CMI). You just received a
call from HCEC’s Director of Procurement, and learned that HCEC is
willing to consider outsourcing (all ) manufacturing. HCEC believes that
outsourcing will lower their manufacturing cost per unit. Certain
members of HCEC’s management believe a Mexican manufacturing location
is the “right answer” for their products, as manufacturing costs are
much lower there. HCEC’s decision will be driven by landed cost to
their North American distribution center. They do and will ship all
items from any manufacturing site selected to a distribution center in
Michigan. CMI’s plant is located in the same town as HCEC’s
manufacturing site.

HCEC wants you to visit their site next week to discuss the opportunity.

As the Business Development Manager on the HCEC account, you are
scheduled for a 1 hour meeting next week with the Director of
Procurement and the Operations Manager, to be followed by a quick tour
of their manufacturing floor. They’ve asked you to email a proposed
agenda.

CMI has developed a new manufacturing approach that will be faster,
cheaper, and at least as good in quality of product. They would like to
get this business. Since CMI is in the same city as HCEC, transportation
costs would be the same for CMI as for HCEC.

Questions and estimates of cost and time data are given on the next
page. During the analysis, use the normal distribution as an
approximation. Also, assume that all items are shipped immediately from
the production site to the DC in Michigan, and units are produced only
when the DC orders them. Shipping occurs once per day, including all
products. HCEC will be responsible for sending raw materials to any
production site, in anticipation of need.



Questions:

1. What price should CMI charge? What else should they propose to HCEC?
(Help CMI make its best sales pitch to HCEC. Be quantitative.) The
analysis is for one sample item, item “A.”

2. What parts of the sales pitch may be questionable in HCEC’s
opinion? Why?

3. What financial metrics could CMI help HCEC to improve?

4. Who in HCEC’s organization is most likely to care about supply
chain costs? Why?

5. What is your proposed meeting agenda?

6. Very briefly, how else might CMI reduce costs for HCEC? No
calculations are required for this part, only words. Is there any other
information you would like to have?

Quantitative data and estimates for item “A”:

First, all time is measured in working days. HCEC and its DC operate 5
days per week, with 250 days per year. Use the normal distribution for
the initial analysis.

The product in question sells out of the DC with m = 30 units and s = 8
units per day. There is no strong seasonal pattern for this product.
These figures are based on a forecasting model, using time-series
analysis.

HCEC’s cost per unit = $76.50

HCEC’s manufacturing lead times: average = 10 days, standard deviation
= 4 days

HCEC uses a 30% carrying cost rate.

Shipping cost, current transport company: $3.40 per unit when shipped
each day

Transportation time for current transport company: m = 5 days and s = 2
days

A premium shipment mode could operate with m = 3 days and s = 0 day for
$2 more per unit.

CMI’s production cost = $64. They can achieve this because they have
developed an innovative manufacturing process. (Of course, they
want to charge as much as they can.) CMI’s manufacturing lead-time = 3
days maximum. (CMI will use m = 3 and s = 0 in analyses.)

The Mexican vendor can produce with a unit cost of $62, and we believe
they might go as low as $58. However, they will have a long and variable
lead-time to produce (m = 20 days and s = 7 days) and ship (m = 20 days
and s = 6 days). Transportation cost = $7.60 per unit. Finally, the
Mexican vendor asks for payment 10 days after the item is shipped, no
matter when it is received. CMI will ask for payment 10 days after the
item is received at the DC.