RE: Switch to a Single Supplier Impact on Cost Factors
Dear Madam,
As a result of the decision by the company to switch from sourcing its inventory suppliers from eight contractors to a single one who will handle all eight orders, it is expected that the company’s shortage costs will significantly increase due to the fact that the identified supplier will supply the company on a fixed-interval basis. Shortage costs in this case are described as the costs that will arise when the demand for the inventory will exceed the supply, leading to situation where there will be no inventory in the stores. These shortage costs will last for the entire duration until the next scheduled supply date, given the fact that the supplier can only send the supplies at previously agreed time intervals. Shortage costs are also referred to as unrealized profits.
However, certain cost elements are also expected to significantly decrease as a result of the switch to the single-supplier. The first cost which will drastically decline is the carrying or holding cost of inventory. This cost is described as as the cost of holding a single unit of inventory for a given time period usually a financial year. In other words, these are the cost that the company will incur in keeping and maintaining he stock of the goods in the storage department. These costs will decline because the inventory will be supplied at regular expected time periods and hence it will be easy to anticipate and manage these costs.
The other cost element which will decline is the ordering cost of inventory which is described as the cost of ordering or acquiring a single unit of inventory. These costs can also be described as the incremental costs that arise as an order is processed from the supplier of the inventory. This decline will be attributed to the fact that the inventory will be sourced from a single supplier hence a predictable cost element as opposed to when eight suppliers were involved.
