The Global

Sourcing Wire
Harness
Decision

Sheila Austin, a buyer at Autolink, a

Detroit-based producer of
subassemblies for the automotive
market, has sent out requests for
quotations for a wiring harness to four
prospective suppliers. Only two of the
four suppliers indicated an interest in
quoting the business: Original Wire
(Auburn Hills, MI) and Happy Lucky
Assemblies (HLA) of Guangdong
Province, China.

Case study solution

Submitted to: Dr. Nadeem

Kureshi
Submitted by: Rida Munir Khan
Enrollment No. 01-296161-014
MS SCM
Dated: April 7, 2016

WIRE HARNESS DECISION

Total cost per unit of purchasing from Original Wire

Cost
Unit Price
Packing costs
Tooling1
Freight cost2
Cost per unit
purchasing

Basis

Calculation

$6000 one-time fixed charge

$5.20 per 100 pounds

$6000/60000
$5.20/10

Per Unit
($)
30.00
0.75
0.10
0.52
31.37

1. Calculate the total cost per unit of purchasing from Original Wire.
WORKINGS:
1TOOLING:
Lets suppose Austin enters a one-year contract
Demand per month: 5000 units
Demand per year: 5000*12 = 60000 units
Tooling cost spread over 60000 units = $6000/60000 units = $0.10 per unit
2FREIGHT COST:
Freight cost/100 pounds =$5.20
Freight cost/1 pound =$5.20/100 =$0.052
Each unit weighs 10 pounds approx. hence per unit cost =$0.052*10
=$0.52
The total cost per unit of wiring harnesses purchased from Original
Wire is $31.37.
2. Calculate the total cost per unit of purchasing from Happy Lucky
Assemblies.

Total cost per unit of purchasing from Happy Lucky

Assemblies
Cost
Unit Price
Tooling3
Packing costs
Inland transportation
1

Basis

Calculation

$3000 one-time fixed

charge

$3000/60000

200/ container

($200*3)/5000

Per unit
($)
19.50
0.05
2.00
0.12

Freight forwarder's fee

$100/shipment

Cost of ocean transport

$4000/container
$0.50 per $100 of
shipment

Marine Insurance4
U.S. port handling charges
Customs duty
Customs broker fees
Transportation (Seattle to Detroit)5
Warehousing6
Currency hedging - broker fees
Administrative7
Visits to China twice a year
Cost per unit purchasing

$1200/container
5% of unit cost
$300/shipment
$1.86/hundred pounds
$1.00/cubic foot per month
$400/shipment
4 hrs/shipment @$25/hour

$100/5000
($4000*3)/500
0

0.02

$487.5/5000
($1200*3)/500
0
0.05*19.50
$300/5000
$0.186*10
$1.00*1
$400/5000
$100/5000
$20000/60000

0.10

2.40

0.72
0.98
0.06
1.86
1.00
0.08
0.02
0.33
29.24

WORKINGS:
3TOOLING:
Lets suppose Austin enters a one-year contract
Demand per month: 5000 units
Demand per year: 5000*12 = 60000 units
Tooling cost spread over 60000 units = $3000/60000 units = $0.05 per
unit
4MARINE INSURANCE:
Marine insurance
Marine insurance
Marine insurance
=$487.5/month
Marine insurance

per $100 of shipment: $0.50

per $1 of shipment: $0.50/$100 =$0.005
for $97500 ($19.50*5000)of shipment: $(0.005*97500)
per unit =$487.5/5000 units = $0.98

5TRANSPORTATION COST (SEATTLE TO DETROIT):

Transportation cost per 100 pounds = $18.60
Cost per pound = $18.60/100 = $0.186
Cost per 10 pounds = $0.186*10 = $1.86
6WAREHOUSING COST:
Warehousing cost per cubic foot per month = $1.00
Volume of one carton (foot): 2*1*0.5 =1cubic foot
Cost of 1 cubic foot = $1.00, hence cost per unit of warehousing = $1.00

 7ADMINISTRATIVE COST: Additional administrative time to monitor international

shipment
$25 per hour for 4 hours =$100
Cost per unit =$100/5000 units =$0.02
The total cost per unit of wiring harnesses purchased from Happy
Lucky Assemblies in China is $29.24.
3. Based on the total cost per unit, which supplier should Sheila
recommend?
Ans: Based on cost per unit only, Happy Lucky Assemblies should be
recommended by Sheila as one wiring harness from Happy Lucky Assemblies
costs $29.24 and the same wiring harness from the local firm Original Wire
costs $31.37 which is $2.13 less than Original Wires cost per unit, despite all
the costs involved in importing the harnesses from China.
4. Are there any other issues besides cost that Sheila should evaluate?
Ans: Sheila must assess the pros and cons of both the options carefully. While
the cost incurred from purchasing wire harnesses from Original wire maybe
greater but Autolink and Original Wire have the opportunity to collaborate and
take steps for cost reduction as they are passionate and hungry for business,
they are likely to be willing to go the extra mile to cut costs with Autolink.
Secondly, Sheila should also consider proximity as one of the factors while
evaluating both the options, Original Wire is located just 20 miles away from
Autolink headquarters, which means delivery could be made daily, shorter lead
times and also minimal inventory and risk, but Original Wire is charging a higher
price. On the other hand, Happy Lucky Assemblies harness costs less but
factors other than cost should be considered to arrive at an optimal decision
such as currency risk (foreign exchange), hidden costs that havent been
included in the unit price, political and geographical risks, the need to keep
safety stock because of longer lead time and also consider the multiple stop
shipping (harnesses travel from Guangdong province to the port in Shanghai,
then travel via container ship to Seattle and then inland transportation to
Detroit) process.

5. Based on this case, do you think international purchasing is more or

less complex than domestic purchasing? Why? Is it worth the
additional effort?

Ans: It is definitely more complex than domestic purchasing as a host of costs

and risks are involved including warehousing cost, cost to maintain safety
stocks, unit prices do not include international shipping costs, political risk, the
risk of natural disasters. Also, international purchasing may lack cultural
concurrence between the buyer and seller which might hinder relationship in
the long run. Since, major players in the world market such as China have
emerged as low-cost suppliers, business owners have discovered their profit
margins can widen colossally, hence the shift from domestic to international
markets for purchasing. Also, the instantaneous access to information between
buyers and sellers worldwide has made it possible for buyers to meet the right
supplier who meets all the specifications effectively and efficiently, therefore
making it worth the buyers while to scour international supply markets in their
respective industries and select the right supplier.