Michelle Changis a buyer atCanada Drug, a large nationalpharmacy chain with headquarterslocated in Belleville, Ontario.She is responsible
Question:
Michelle Changis a buyer atCanada Drug, a large nationalpharmacy chain with headquarterslocated in Belleville, Ontario.She is responsible for managing a variety of product categories, one of which ispersonal sanitation. Over the last few years profits have declined in this category and as a resultMichellehas faced increasing pressure from senior management to improve profitability of the category without sacrificing quality.
This year, senior management has asked Michelle to form a new product for the category - bottled hand sanitizer.The bottles are to be made of plastic with a pump at the top and feature the Canada Drug label wrapped around the bottle.Michelleneeds to find a single source supplier tomanufacture, bottle and label the product.To do this she prepared and released an RFQ based on her total sales estimate for theyear, received several quotes and has narrowed her selection down to two suppliers -Biomedlocated in Toronto, Ontario andDongguan TradersLtd. located inQingdaoChina.
Michellehas estimated that a total of10,000sales units will be required each month over a total oftwelve months (12)months.Regardless of whoMichelleselects, she will incur tooling charges because thelabelsrequire the newCanada Druglogo to be printed on them during manufacturing.Therefore a printing plate will need to be created by either supplierat Canada Drug's expense.
Eachsales unit willfit 300ml (10 oz) of hand sanitizer gel, with each sales unit measuring18cm (L) x 18cm (W) x 15cm(H).Each sales unit will weigh approximately0.15pounds (lbs).
BIOMED
Biomedhas been doing business withCanada Drugforthe year and currently manufactures the Canada Drug sanitizing wipes.As a small family-based company, itinitiallyfaced issues with ordering processing times and late deliveries, but hassince corrected these issues with an update toitsERP system with all orders now processed through EDI.AlthoughBiomeddoes not always offer the lowestpricing,Michelleconsidersit a goodsupplier becauseof quality service and fast delivery times.
Biomed does not currently produce hand sanitizer gel but the company has stated that many other buyers from other companies have recently requested quotes for the product.The companyalreadyoperates at nearly full capacity in amid-sizeplantlocated inScarborough, Ontario, Canada.
Thecompany sales representative hasoffered a fixed-price quotation with the following breakdown:
Vendor Quotation:
- Price per sales unit:$1.60CAD
- Tooling (Creation of printing plate):$4,000CAD (One-time)
- Inbound freight:$0.80per pound (lb) CAD
Vendor Support:
Biomedhas also agreed to provide financial support for the following:
- Full reimbursement on theprice per sales unitfor product returns (expected to be5%of total sales forthe next year)
Ordering & Holding Costs:
BecauseBiomedships JIT, the companydoes not require a minimum quantity and can ship any size order at any time.There are no ordering costs as the system will order automatically based on auto-replenishment.Michellewill also need to account for the cost of storing the goods at theCanada Drugwarehouse.She will need to "rent'' enoughspace at the warehouse to store one (1) month's supply of sales units each month for the durationof the year.
- Warehouse storage fee:$0.80per cubic foot (L x W x H) per month
- Warehouse Handling fee:$0.10CAD per sales unit
- Inventory insurance: $3.00 CAD for every 200 units on hand
DONGGUANTRADERS LTD.
Dongguan Traders, Ltd. controls several factories inQingdao, China.The company manufactures a variety of textile,pharmaceutical and health and beauty products,and is already an established manufacturer of hand sanitizer gel.Dongguanhas no history of doing business withCanada Drug, howeverMichellehas had discussions with other buyers in the industry who have done business withDongguanand their feedback has beengenerally positive.The general consensus is that althoughDongguanoffers very aggressive pricing and alwaysshipson time,the companyprovides little to no service and often imposes a "win-lose" attitude when negotiating.Onebuyer shared experiences with inconsistency of quality in their products in the past, butalmost all other buyerswere very satisfiedwith price and quality.
Dongguanhasoffered a direct quotation from China which has a 12-week lead time from thedate of placing order.Thecompany has atotal minimum order quantityof156,000sales units.Michelle must manage the budget constraint thatonly one (1)fullcontainer can be ordered per month, according to official Canada Drug purchasing policy. Taking this into consideration, the vendor has agreed to ship gradually by full container loads on a monthly basis.
Because thevendorisselling directly from Chinaitisquoting FOB pricing in USD.The conversion factor to exchange CAD to USD is1.30.
Vendor Quotation:
- Minimum order quantity:156,000sales units
- Price Per Sales Unit:$0.70USD (FOBQingdao)
- Tooling (Creation of printing plate):$2,500 USD (One-time)
Freight & Importation Costs:
One container fits13,000units of sales unit inventory.
- Container packing cost:$0.02USD per sales unit
- Cost of inland transport from factory to the port ofQingdao:$250USD per container shipment
- Cost of freight forwarder:$70USD per container shipment
- Cost of ocean transport:$1,500USD per container shipment
- Marine insurance:$6.00USD for every$150USDworth of total value of product in the container (the value of the sales units only, nothing more)
- Vancouver port handling cost:$800CAD per container
- Canadian Customs duty:6% of total value of the sales units in CAD (the value of the sales units only, nothing more)
- Customs brokerage fee:$110CAD per container
- Inbound freight (Vancouver to Belleville):$0.60CAD per pound (lb)
Ordering & Holding Costs:
- Ordering administration costs:3hrs per container order at$20CAD per hour.
Michellewill also need to account for the cost of storing the goods at theCanada Drugwarehouse.Because she will need to import one (1) container per month overtwelve(12) months in order to meet both the supplier minimum order quantity and her sales demand, she will need to "rent" enough space at the warehouse to store one (1) full container's worth of sales unit inventory each month.
- Warehouse storage fee:$0.80per cubic foot (L x W x H) per month
- Warehouse Handling fee:$0.10CAD per sales unit
- Inventory insurance: $3.00 CAD for every 200 sales units on hand
Other Considerations:
- Competition in the Canadianpharmacysector is increasingas profits become thinner, and retail prices have become very aggressive.
- The Canadiandollar isweakeningrelative to the USdollar.
- Global demand for hand sanitizer products is at an all-time. As a result, raw material prices are increasing and supply of plastic bottles is scarce.
- Although there are no tariffs onhand sanitizer productsat this time, trade tensions between Canada and China have increased in recent years.
- Canada Drugpurchases20% of its products from Canadian companies.The new CEO ofCanada Drughas a desire to increase that number to40% within the nextthree (3) years.
Michellewill need to analyze the financial details as well as therisksof selectingeachsupplier to decide which supplier to choose in order to communicate her decision and plan with senior management next week.
CASE STUDY REPORT ASSIGNMENTA professional prepared Word document report written in formal business language.You must includeall five (5) sections in your report.
Section 1 - Background
- Identify and explain the supply need with a brief summary of the relevant facts to be considered. Do not judge the facts, only state them here.
Section 2 - Issues
- Identify and explain the key issuesyou have identified as relevant to your analysis.Provide your judgement on these issues and why they are of concern.
Section 3 - Financial Analysis
- Conductfull financial analysisfor each supplier, converting units of measurement as needed.Calculate the total cost on a per unit basis and then for the entireyear(in CAD).Focus on every detail.
- Includeyour copy ofthe table in this section that shows your breakdown for each supplier (see below).You must show your work!
Cost Component
Cost
Per Unit
Cost
Total Year
TOTALCOST OF OWNERSHIP
Section 4 - Non-Financial Analysis
- Identify and explain the non-financialthreatsand opportunities by supplier separately.Usewhat you've learned from the course in your analysis.Extrapolate from thefacts of the case but make sure to clearly state any assumptions you make.
Section 5 - Recommendation and Plan
- State your recommendations based on your financial and non-financial analysis.Explain why your group is making this recommendation and how it will most benefit the organization.
- Provide both a short and long term plan for the organization with a brief conclusion.