Phonics Electronics and Electricals Ltd.

PHONICS ELECTRONICS AND ELECTRICALS LTD.

(A case in incoming material quality control)

Phonics Electronics & Electricals Ltd. Enjoyed market share because of the goodwill it had generated by its products which were not only of high quality but also very reliable. Since the company insisted on severe tolerance limits, suppliers agreed to do an initial inspection where a sample was tested if found ok, the whole lot was inspected and the supplier was obliged to take back all the rejected pieces after inspection. However, with increasing scrap rate, suppliers raised the prices and it proved to be a very costly method. Therefore the, two of the suppliers agreed on proposal of source inspection. Though with the help of this helped reduce the inspection cost, customer complaints increased, the company was forced to rethink the whole system and purchase after inspection at supplier’s source. The company is known for its increasing technical excellence and it’s offering better value products to customers. It looks at this value as suitability and continued performance reliability expressed as where Q= quality, R= reliability, P=price[pic 1]

When the company used to do inspection of material after arrival at the sight, the cost of transportation of scrap used to be high, therefore they sent to pre-dispatch inspection at source because with supplier’s insistence they couldn’t adhere to tight tolerance limits. One of the solutions is double sampling. 

In Double sampling, initially a sample of units is selected for obtaining auxiliary information only, and then a second sample is selected in which the variable of interest is observed in addition to the auxiliary information. Double sampling is also called two-phase sampling.

In our case, the first sample can be taken during pre-dispatch. If the material is not of the appropriate quality, it is rejected. Therefore, we have saving on cost which would have been otherwise incurred had the scrap been returned. However, if it is accepted in the first round of inspection, it is sent for second round of inspection at sight. This not only ensures that the quality and accuracy is verified at the initial stage (i.e. tight tolerance level is adhered) but also cost of transportation of the rejected materials is saved.

INDIAN MINING MACHINERY AND ALLIED TOOLS MFG. CO. LTD.

(A case in vendor-rating)

India Mining Machinery and Allied Tools mfg. co. Ltd. is a well-established manufacturer in the field of mining machinery and high grade tools, generally used in exploratory drilling and mining industries. The management of the company recently approved composite rating plan. The new composite vendor rating plan takes three factors into consideration. Quality, Service and Price. Quality is the measure for material negatively expressed not in conformance with given specification. It takes into account both the number of defectives as well as seriousness of defect. Service measure the promptness of the promptness of the vendor in keeping the delivery schedule , removing rejected materials and responding to other mutual agreed activities. Price is the measure of price differential for the same product supplied by different suppliers. The weightages given to different factors are quality 70%, service 20% and price 10%. Supplier A has low rejection rate but the supplier B has lower service failure. The composite score of supplier A is 87.4 and supplier B has 88.2.  Since the company has sufficient reserve funds to finance the project and also it’s a long term project, so price won’t be a major deciding factor here. Also both the vendors quoted competitive prices which the company is willing to pay.

As per the case the company has high inventory turnover ratios .In such cases factors like sticking to delivery schedule, removing rejected materials, annual maintenance are more important as it will help in repeat business. The contract will also run concurrently with the expansion project recently undertaken by the company for increased production on trunkey basis. So keeping these points in view the contract should be awarded to supplier B. Not only the score is higher than its competitor but also due to its lower service failure, it will be more suitable for the job. The rejection rate is somewhat higher but it can been offset by service promptness

BHARAT MOTORS LIMITED

(Application of Learning curve in buying negotiation)

Both the suppliers have an 80% learning curve. And the unit cost for Hind Automotive is 52.50 and for Usha Auto parts it is 42.35. Usha Auto parts have a restriction on being able to produce only 500 pieces. So the new unit cost for both the suppliers is as follows

[pic 2]

Reduction ratio for 500 and 1000 pieces are 0.135 and 0.108.

Hind Automotive:

New labour cost for 1000 pieces = 1000*15.55*0.108 = 1679.4

Unit labour cost = 1679.4*1000 = 1.6794

Total cost per unit = (25.95+1.6794+6.22+4.77)*1.2=46.34

Usha Auto Parts

New labour cost for 1000 pieces = 1000*10*0.135 = 1350

Unit labour cost = 1350*1000 = 1.350

Total cost per unit = (25+1.35+3.50+3.85)*1.2=40.44

The suppliers should charge Rs 46.34 by Hind Automotive and Rs 40.44 by Usha Auto Parts at 80% learning curve.

When comparing costs between the outsourcing and internal production, the following principles should be followed:

• All cost comparisons should be based on an “apples with apples” approach.
• The costs for maintaining the same service levels and quality should be considered.
• Time required to produce and deliver the same product or service internally or externally should be considered and compared.
• Likely availability of internal expert resources to produce, deliver and maintain (as appropriate).
• Impact on the market if internal resources cannot deliver on time or with equivalent quality.
• All costs should be included in the calculation, including e.g. administrative cost to the organization for both options.

DYNAMIC ELECTRICAL ENGINEERING CORPORATION

(A problem of buying ethics)