Vidarbha Auto Components: Supplier A or Supplier B on total cost, not on price
Vidarbha Auto Components, a Tier-2 supplier in Pune, buys 96,000 machined bushes a year over 300 working days for a customer line that stops when stock runs out. The part has no approved alternate. Purchasing has two quotes. Supplier A, Rajkot: ₹182 per piece ex-works, freight ₹18 per piece, 12-day lead time, 2.5% rejection at goods-in, 30-day credit, no minimum order. Supplier B, Nashik: ₹196 ex-works, freight ₹6 per piece, 5-day lead time, 0.6% rejection, 45-day credit, minimum 2,000 pieces per schedule. Every rejected piece costs ₹250 in sorting, rework and line disruption. The company's cost of capital is 12% a year. The plant head wants to stay with A because its unit price is ₹14 lower; the quality head wants B; the CFO wants a number, not an opinion. Both suppliers can handle the full annual volume, and B's rejection rate has held steady for eight quarters.
1. Build a total cost of ownership (TCO) comparison per piece for A and B, and state which supplier is cheaper on the numbers. Show every step.
Read the worked answer
Step 1 - Landed price. A: 182 + 18 = ₹200.00. B: 196 + 6 = ₹202.00.
Step 2 - Expected quality cost. Rejection % × ₹250. A: 0.025 × 250 = ₹6.25. B: 0.006 × 250 = ₹1.50.
Step 3 - Pipeline (in-transit) inventory. Daily demand = 96,000 ÷ 300 = 320 pieces. In-transit stock = 320 × lead time. A: 3,840 pieces × ₹200 = ₹7,68,000; at 12% = ₹92,160/year = ₹0.96 per piece. B: 1,600 pieces × ₹202 = ₹3,23,200; at 12% = ₹38,784/year = ₹0.40 per piece.
Step 4 - Credit benefit. B gives 15 extra days on annual spend of ₹202 × 96,000 = ₹1,93,92,000. Value = 1,93,92,000 × 0.12 × 15 ÷ 365 = ₹95,632 ≈ ₹1.00 per piece in B's favour.
TCO per piece
| Element | A | B |
|---|---|---|
| Landed price | 200.00 | 202.00 |
| Quality | 6.25 | 1.50 |
| Pipeline carrying | 0.96 | 0.40 |
| Extra credit | 0.00 | (1.00) |
| TCO | 207.21 | 202.90 |
Annual gap: (207.21 − 202.90) × 96,000 = ₹4,13,760 in favour of B. B's shorter lead time also reduces safety stock, which is not yet credited, so ₹4.13 lakh is a floor rather than a ceiling. Note the trap: A's ₹14 lower price is more than cancelled by ₹4.75 of quality cost, ₹10 of freight and ₹0.32 of extra pipeline stock.
2. Should the company single-source with B? Recommend a sourcing structure and the commercial terms it should put to A.
Read the worked answer
No. A 2.1% TCO advantage does not justify a single source for a no-alternate part feeding a line that stops. Single sourcing removes the benchmark that keeps B honest, and one fire, strike or tooling failure at Nashik idles the customer line.
Recommended structure: 70:30 split, B primary, A secondary, reviewed quarterly. Keep A alive on 30% so it stays approved and competitive, and tell A exactly why it lost the volume - this is the leverage that produces a real price.
What A must close: ₹4.31 per piece. Managable routes: ₹2 of freight (consolidate to full-truck loads), rejection from 2.5% to 0.6% (worth ₹4.75), or two days off lead time. Set the ask as '₹200 landed with ≤1% rejection and 9-day lead time', not a bare price cut.
B's terms to watch: MOQ 2,000 pieces = 6.25 days of demand, so schedule weekly, not monthly, or the credit advantage is eaten by extra stock. Verify B can hold 96,000 pieces and check its own sub-supplier and power backup. Build a written SLA with rejection above 0.6% debited at ₹250 per piece, and a 12-month price-hold clause.
B's 45-day credit is worth ₹1.00 per piece only if it is actually taken - confirm the payment run honours it rather than paying early.
3. Which three assumptions could reverse your answer, and what would you verify before signing?
Read the worked answer
The ₹250 rejection cost. This is a goods-in estimate. If a rejected bush escapes to the customer line, the cost is a stoppage, not a sort, potentially ₹2,000+ per piece. At that level A's 2.5% is fatal and the case for B becomes overwhelming. Verify against the last 12 months of line-stop and debit-note data.
Whether freight is paid on rejected pieces. If it is, add 18 × 2.5% = ₹0.45 to A. Also check whether rejected pieces are returned free or scrapped, and who pays return freight.
Rate stability and capacity. Freight and steel prices move; a ₹6 per piece rise in B's freight more than wipes out the ₹4.13 lakh annual gain. Verify whether B's quote is firm for 12 months, whether B has spare capacity for 96,000 pieces, and whether A's ₹182 is ex-works only because it is quoting below cost to hold the part.
Also confirm the 12% cost of capital is the rate the CFO actually applies, and test sensitivity: at 18% capital cost, the pipeline and credit effects shift by roughly ₹0.48 per piece, which changes the size but not the direction of the decision.