(25 points) You are on the procurement team of a new hotel site. You are in the planning phase and have a series of items that needed to be...

1. (25 points)

You are on the procurement team of a new hotel site. You are in the planning phase and have a series of items that needed to be purchased from outside sources.

1.     Sanitation systems

2.     Hallway art/decorations

3.     HVAC systems

4.     Mosaic tiles for rooms and common areas

5.     Construction steel

6.     Insulation for the building

7.     Hotel room entry systems

8.     Concrete

You have sat down with a number of people on the project to determine the how important each component is and how hard it is to source. When speaking with the interior design team, you have determined that while hallway art doesn't seem to impact room rates that can be charged, their research has shown that having specific types of high quality mosaic tiles in the common areas and rooms of the hotel greatly increases what guests are willing to pay.

After talking with the construction crew, you found out that using both the right kind of construction steel and concrete in the right areas (such as parking garages) adds a lot of value to the overall building. There are numerous suppliers that manufacture high quality construction steel, however finding sources of concrete can be difficult because the product is in such high demand. In addition, the construction crew will need large amounts of insulation for the building. This can be procured at a relatively low cost in such quantities. Many forms of insulation are deemed acceptable and because it is a necessity, it tends not to add value to the building.

Finally, you reached out to the team that is overseeing system installation during the construction process. Their job is to make sure that the hotel is equipped with up to date HVAC systems, sanitation systems, and hotel room entry systems (e.g., key card access). The team informed you that state of the art HVAC systems typically are made by only one company and add value to both the building and can increase what guests are willing to pay. Sanitation systems are a necessity. Guests pay close attention to building cleanliness but finding high quality systems is no easy task. Lastly, door entry systems are produced by numerous companies both nationally and internationally. They are relatively easy to find in large quantities and easy to replace if there are quality issues. Although many types of door entry systems can be implemented, guests of the hotel highly value the convenience of having key cards versus actual keys that can easily be replaced or duplicated for them.

a.     Categorize these eight items into Kraljic's matrix.

b.     Based on this categorization, what methods would you suggest for procuring each of the items?

c.      Which items would you choose to source via multiple suppliers versus a single supplier and why?

You are now tasked with actually selecting a supplier for construction steel. Currently, you have 4 suppliers that you are seriously considering. You went back to the team who you would be procuring construction steel for and asked them to list the factors that they would judge a supplier on. They told you that the 4 factors they used were: cost of construction steel, quality of the construction steel, handling

returns of damaged steel and opportunity for one-on-one communication with a sales rep. When pressed for further detail, they told you that they do place value on cost. However, they place twice as much value on quality. Many times steel needs to be returned. Therefore, they stated that that particular factor was just as important as cost but actual one-on-one communication was half as important as handling returns.

Based on this information, you went back to the 4 suppliers and evaluated each of them on each level using a 15 point scale (with 0 being bad in that category and 15 being good in that category). For cost, you scored supplier 1 with 11, supplier 2 with 8, supplier 3 with 7 and supplier 4 with 3. In terms of quality, you assessed supplier 1 with a score of 4, supplier 2 with a score of 6, supplier 3 with a score of 7 and supplier 4 with a score of 12. When assessing how they handled returns, you gave supplier 1 a score of 9, supplier 2 a score of 10, supplier 3 a score of 4, and supplier 4 a score of 8. Finally, for one-on-one communication, you found that supplier 1 had a score of 14, supplier 2 had a score of 11, supplier 3 had a score of 15 and supplier 4 had a score of 7.

d.     Using a weighted average criteria method, which single supplier should you choose for construction steel? *Please note that your weights do not have to sum to one. The answer will be the same as long as the weights have the correct relative relationship.

e.      Discuss in a few sentences the advantages and disadvantages of using this supplier.

2.     (30 points)

Please see the Supplier Selection Case Study.pdf (a case study on FarmCo in the homework files folder). Read that case study and answer the following questions. You DO NOT have to answer the question in the case study.

a.     What are three key challenges in using data for decision making?

b.     Using the guidelines presented by Ingrid, identify the top 40% of suppliers (i.e. the top 2 suppliers since there are 5).

c.      What are the advantages and disadvantages of the top suppliers?

d.     Currently, Ingrid is focusing on four supplier factors (SI, SD, SR and SM). For one of these factors, suggest a data driven measure OTHER than the one currently used that may also be useful. For example, currently, she is using distance from headquarters for SM. What other measure could you use to quantify SM?

e.      Explain what data you would need to build the measure in part d.

3.     (30 points)

A cross docking facility is currently operating at full capacity in terms of unloading. The business has grown so large that they are currently in the process of building a new, larger cross docking facility. They would like to avoid the long waits that trucks endure before being unloaded due to the fact that there are not enough unloading doors. If the company adds a new unloading door, this will result in a fixed cost. However, this fixed cost is negligible compared to the hourly costs incurred throughout the year. So, we will be considering a comparison of hourly costs.

The company would like to know how many doors to plan to have in the new building. For every new door added, a new worker must be hired at a rate of $20/hour. Given the unloading speed of an average worker, you know that with 2 unloading doors (i.e., 2 workers), trucks can be processed at a rate of 10 per hour. With 3 unloading doors, you can process trucks at 15 per hour. With 4 unloading doors, you can process trucks at a rate of 20 per hour. With 5 unloading doors, you can process trucks at a rate of 30 per hour and finally, with 6 unloading doors, you can process 40 per hour. Trucks arrive at a rate of 14 per hour (plus or minus 2). Because, the current facility only has two doors and this is not sufficient, we will disregard this option. Based on the arrival rate of the trucks and the unloading rates, this creates an average line size PER HOUR of:

3.2 (if 3 doors), 0.9 (if 4 doors), 0.2667 (if 5 doors), 0.1286 (if 6 doors). For every hour that a truck spends waiting, it costs the company $50 in truck driver labor costs and loss of profit due to idle time.

a.     How many doors should the facility plan for if they want to minimize total HOURLY cost?

b.     Holding labor cost constant at $20, how expensive would idle time per hour have to be to justify increasing the number of doors to one MORE than what you found in part a.?

c.      Holding the cost of idle time constant at $50, how expensive would labor costs per hour have to be to justify opening one LESS door than what you found in part a.?

d.     Comment on the sensitivity of your answer to changes in cost. For example, would you be confident that your choice of number of unloading doors would remain the same if there were small fluctuations in labor cost or idle costs?

4.     (25 points)

A newly formed firm must decide on a production facility location. There are three alternatives under consideration: (A) locate near the raw materials, (B) locate with the best access to transportation infrastructure, or (C) locate near the consumer market. Locating near the raw materials would lead to a lower fixed and variable cost than near the customer market. However, the owners believe that there would be a loss in sales volume since customers prefer local suppliers. At location A, they would only sell/produce 8,000 units as compared to location C where they expect to sell/produce 12,000 units. Locating near transportation infrastructure would result in the lowest fixed cost but the highest variable cost and a sales/production of 10,000 units. Suppose that your product sells for $185 per unit (this is revenue). The costs per location are as follows:

Location A: has a fixed cost of $1,200,000 and a variable cost of $36 per unit Location B: has a fixed cost of $1,000,000 and a variable cost of $62 per unit Location C: has a fixed cost of $1,400,000 and a variable cost of $47 per unit

a.     Based on the information regarding COST of each location, provide a recommendation of the cheapest alternative for all levels of production (e.g., 0-x units one location is cheapest while from x-y units another location is cheapest).

b.     Based on the expected production/sales at each of the three locations, which will generate the highest PROFIT?

c.      Describe two other factors that you might consider in your choice between location A, B and C.