Frich Turbo Engines: Using Cost Plus Analysis to Inform Purchasing Decisions

You are the new purchasing manager for Frich Turbo Engine Company. Frich makes engines that use a forced induction device to increase airflow to the engine combustion chamber. This forced induction, created through the use of turbines, means more air $$ and more fuel $$ moves through the combustion chamber as compared to simple atmospheric pressure intake alone. As a result, Frich$$s turbo engines yield a high level of performance for customers.

Last year, Frich requested bids for valves that go into the assemblies of the company$$s engines. Valves are considered Leverage items, since quality is important, but there are many suppliers for these items. Frich received the following bids from three suppliers:

Last Year$$s Quotes:

Bayfleet Union Fingold

Materials $ $0\mathrm{.}414$ $ $0\mathrm{.}380$ $ $0\mathrm{.}448$

Direct Labor $ $0\mathrm{.}288$ $ $0\mathrm{.}400$ $ $0\mathrm{.}344$

Overhead $ $0\mathrm{.}317110\%$ $ $0\mathrm{.}30075\%$ $ $0\mathrm{.}516150\%$

Factory Cost $ $1\mathrm{.}019$ $ $1\mathrm{.}080$ $ $1\mathrm{.}308$

SGA $ $0\mathrm{.}10210\%$ $ $0\mathrm{.}0545\%$ $ $0\mathrm{.}19615\%$

Total Cost $ $1\mathrm{.}121$ $ $1\mathrm{.}134$ $ $1\mathrm{.}504$

Profit $ $0\mathrm{.}13412\%$ $ $0\mathrm{.}0918\%$ $ $0\mathrm{.}22615\%$

Product Price $ $1\mathrm{.}255$ $ $1\mathrm{.}225$ $ $1\mathrm{.}730$

Tooling $ $0\mathrm{.}104$ $ $0\mathrm{.}232$ $ $0\mathrm{.}192$

Selling Price $ $1\mathrm{.}359$ $ $1\mathrm{.}457$ $ $1\mathrm{.}922$

Last year, Frich decided to dual source with both Bayfleet and Union. Both suppliers have good $($not great$)$ scorecard scores$$both have scores in the upper$-80$s$.$ However, at the end of last year, both suppliers called to tell you they needed a $20\%$ price increase moving forward. Bayfleet explained the increase was because their material costs had increased $25\%.$ Union told you that their labor costs had increased by $25\%.$ Fingold didn$$t submit a new cost plus, but told you that they would like your business and will give Frich a $4\%$ reduction from last year$$s quote.

While your predecessor quoted Fingold last year, Frich has not purchased any products from Fingold in the past year.

Given the three bids that Frich received last year, and the new information from Bayfleet, Union, and Fingold develop a sourcing strategy as outlined on the next page. Note that you should create cost analysis $($similar to our in$-$class assignments$)$ in excel to answer these questions. Include the excel file with your homework submission in Blackboard.

Questions on next page:

$1.$ Use cost plus analysis to gain a better understanding of what factors are driving the price for each supplier.

a$.$ What are the new quoted prices from Bayfleet, Union and Fingold?

b$.$ What is the highest price that you are willing to pay Bayfleet, Union and Fingold given your cost plus analysis? Use the cost plus analysis to answer this question.

$2.$ Bayfleet is also concerned about losing business with Frich. Bayfleet has proposed to your Value Analysis $/$ Value Engineering $($VA$/$VE$)$ team to use a new proprietary metal alloy for the valves. This would reduce material cost by $5\%$ from Bayfleet$$s information with the $25\%$ material increase. Your VA$/$VE team believes that the new proprietary metal alloy is feasible for use in Frich$$s valves from Bayfleet. What would Bayfleet$$s new price be with this information? Use the cost plus analysis to answer this question.

$3.$ Union knows that you are concerned about their labor increase and knows that their business with Frich is at risk. They have asked your continuous improvement $($CI$)$ team to review their manufacturing processes. Your CI team believes, with a little work, there could be a $10\%$ reduction in labor from Union$$s information with the $25\%$ labor increase. What would Union$$s new price be with this information? Use the cost plus analysis to answer this question.

$4.$ You are excited about the opportunities presented by both the CI and VA$/$VE teams. In fact, the CI team believes that further labor reductions could be made with each of the suppliers, if given time to train each supplier. With the information from your analyses and this information from your CI team, how would you position your negotiation with each supplier to achieve the best results for Frich? Develop a well$-$reasoned strategy that is supported by specific evidence from your cost plus analyses.