Management Accounting Case Study: Supplier Performance at Fast Lane

This case study analyzes the supplier performance of two suppliers, Hot Exhausts and Chrome Manufacturers, for Fast Lane Manufacturers, a motorbike producer. The analysis begins by calculating the cost per unit of activity driver, total cost of ownership, and total cost per unit for both suppliers, revealing that Hot Exhausts is less costly. The supplier performance index is then calculated, followed by a detailed comparison of the two suppliers' performance across various cost categories. The study further explores the impact of reduced late deliveries and production downtime for Chrome Manufacturers, demonstrating how these improvements could make Chrome Manufacturers the more cost-effective supplier. The case concludes by suggesting changes the Purchasing Manager and Financial Controller can implement to lower supplier-associated costs, focusing on reducing late deliveries, improving communication, and enhancing quality control. The study also outlines criteria for contract renewal and the advantages of using electronic systems for supplier transactions, providing a comprehensive financial perspective on supplier management.

Management Accounting Problem (Case Study)
Page 1

Table of Contents
Introduction............................................................................................................................. 4
1. Cost per Unit of Activity Driver, Total Cost of Ownership, and Total Cost Per Unit for the
Two Suppliers......................................................................................................................... 4
2. Supplier Performance Index for the Two Suppliers.............................................................5
3. Comparison of the Performance of the Two Supplies.........................................................6
4. Impact of Reduced Receive Late Deliveries and Production Downtime Due To Late
Deliveries of Chrome Manufacturers on Its Total Cost per Unit...............................................7
5. Changes that Purchasing Manager and Financial Controller Can Implement to Lower
Supplier Associated Costs......................................................................................................8
6. Criteria to be Used by Fast Lane Manufacturers to Determine Whether or Not to Renew
Supplier Contract along with Suggestion of Performance Measures to Evaluate Suppliers’
Performance......................................................................................................................... 10
7. Advantages of Using Electronic Systems for Transacting with Suppliers..........................12
Conclusion............................................................................................................................ 12
References............................................................................................................................ 14
Page 2

List of Tables
Table 1: Cost per Unit of Activity Driver, Total Cost of Ownership, and Total Cost Per Unit for
the Hot Exhausts and Chrome Manufacturers........................................................................5
Table 2: Supplier Performance Index for Hot Exhausts and Chrome Manufacturers..............6
Table 3: Comparison of the Performance of Hot Exhausts and Chrome Manufacturers.........7
Table 4: Determination of Total Cost per Unit of Chrome Manufacturers if Receive Late
Deliveries is reduced to 12 hours and Production Downtime Due To Late Deliveries to 30
Hours..................................................................................................................................... 8
Page 3

Introduction
Fast Lane Manufacturers is a producer of motorbikes, which assembles the different parts
derived from Australian suppliers. It has two main suppliers, which are Chrome
Manufacturers and Hot Exhausts. The company uses non-financial measures to evaluate the
performance of the suppliers. The objective of this report is to assess the suppliers’
performance from a financial perspective.
1. Cost per Unit of Activity Driver, Total Cost of Ownership, and Total Cost Per Unit for
the Two Suppliers
There are two main suppliers of Fast Lane Manufacturers, which are Hot Exhausts and
Chrome Manufacturers. From the given total costs of different activities along with the
number of activities, the costs per activity have been identified. The cost per activities of
order components from suppliers is $300, receive order is $900, return reject companies to
supplier is $700, receive late deliveries is $2000, production downtime due to late deliveries
is $3000, production downtime due to defective materials is $1200, process invoice and pay
supplier is $350, dispute invoiced amount is $800, and quality audit of suppliers is $50000.
Besides, considering the number of activities of Hot Exhausts and Chrome Manufacturers,
the cost of each of the activities has been estimated. This has led to the determination of the
total activity cost of the two suppliers, which are $3,46,100.00 for Hot Exhausts and
$6,00,900.00 for Chrome Manufacturers. In addition, the units purchased and cost per unit of
Hot Exhausts is provided, which are 3,000 and $100.00 respectively. The units purchased
and cost per unit of Chrome Manufacturers are 4,000 and $90.00 correspondingly. The cost
per unit of activity driver has been calculated, which entails dividing total activity cost by the
units purchased. This for Hot Exhausts and Chrome Manufacturers is $115.37 and $150.23.
The cost of the total unit purchased for Hot Exhausts and Chrome Manufacturers is
determined by multiplying units purchased with cost per unit, which is $3,00,000.00 and
$3,60,000.00 respectively.
Page 4

The total cost of ownership has been identified by adding the total cost of activity driver and
the cost of the total unit purchased, which for Hot Exhausts and Chrome Manufacturers are
$6,46,100.00 and $9,60,900.00 respectively. The total cost per unit has been estimated by
the total cost of ownership by units purchased, which for Hot Exhausts and Chrome
Manufacturers are $215.37 and $240.23 respectively. The calculations have thus been
presented below. Thus, from the perspective of Fast Lane Manufacturers, it can be inferred
that purchasing items from Hot Exhausts is less costly than Chrome Manufacturers.
Therefore, the company can opt for extending the contract with Hot Exhausts, while
terminating the same with Chrome Manufacturers.
Total Cost
Number of
Activities
Cost per
Activities
Hot
Exhausts
Chrome
Manufacturers
Cost of Hot
Exhausts
Cost of Chrome
Manufacturers
Order components from suppliers (orders) 18,00,000.00$ 6,000 300.00$ 90 130 27,000.00$ 39,000.00$
Receive order (deliveries) 90,00,000.00$ 10,000 900.00$ 90 150 81,000.00$ 1,35,000.00$
Return reject companies to supplier (returns) 38,500.00$ 55 700.00$ 15 16 10,500.00$ 11,200.00$
Receive late deliveres (late deliveries) 2,60,000.00$ 130 2,000.00$ 6 28 12,000.00$ 56,000.00$
Production downtime due to late deliveries (hours) 24,00,000.00$ 800 3,000.00$ 45 59 1,35,000.00$ 1,77,000.00$
Production downtime due to defective materials (hours) 36,00,000.00$ 3,000 1,200.00$ 20 29 24,000.00$ 34,800.00$
Process invoice and pay supplier (invoices) 10,50,000.00$ 3,000 350.00$ 12 130 4,200.00$ 45,500.00$
Dispute invoiced amount (disputes) 40,000.00$ 50 800.00$ 3 3 2,400.00$ 2,400.00$
Quality audit of suppliers (audits) 5,00,000.00$ 10 50,000.00$ 1 2 50,000.00$ 1,00,000.00$
Total Cost of Activity Driver 3,46,100.00$ 6,00,900.00$
Units Purchased 3,000 4,000
Cost per Unit 100.00$ 90.00$
Cost per Unit of Activity Driver 115.37$ 150.23$
Cost of Total Unit Purchased 3,00,000.00$ 3,60,000.00$
Total Cost of Ownership 6,46,100.00$ 9,60,900.00$
Total Cost Per Unit 215.37$ 240.23$
Table 1: Cost per Unit of Activity Driver, Total Cost of Ownership, and Total Cost Per
Unit for the Hot Exhausts and Chrome Manufacturers
2. Supplier Performance Index for the Two Suppliers
For the two suppliers of Fast Lane Manufacturers, which are Hot Exhausts and Chrome
Manufacturers, the supplier performance index have been calculated as well as presented in
table 2. In this regard, corresponding to the calculation of cost per activities, the costs of Hot
Exhausts, as well as the cost of Chrome Manufacturers, have been determined by
multiplying with the respective number of activities. Order components from suppliers for Hot
Exhausts are $27,000.00, while for Chrome Manufacturers is $39,000.00, while Receive an
order for Hot Exhausts is $81,000.00 and for Chrome Manufacturers is $1,35,000.00. The
return rejects companies to supplier for Hot Exhausts is $10,500.00, while for Chrome
Page 5

Manufacturers is $11,200.00. The receive late deliveries and production downtime due to
late deliveries for Hot Exhausts is $12,000.00 and $1,35,000.00, while that of Chrome
Manufacturers are $56,000.00 and $1,77,000.00. The Production Downtime due to defective
materials and Process Invoice and Pay Supplier for Hot Exhausts are $24,000.00 and
$4,200.00, while that of Chrome Manufacturers is $34,800.00 and $45,500.00 respectively.
The dispute invoiced amount for Hot Exhausts is $2,400.00 and for Chrome Manufacturers is
$2,400.00. The quality audit of suppliers for Hot Exhausts is calculated to be $50,000.00, but
that of Chrome Manufacturers is $1,00,000.00.
Cost of Hot
Exhausts
Cost of Chrome
Manufacturers
Order components from suppliers (orders) 27,000.00$ 39,000.00$
Receive order (deliveries) 81,000.00$ 1,35,000.00$
Return reject companies to supplier (returns) 10,500.00$ 11,200.00$
Receive late deliveres (late deliveries) 12,000.00$ 56,000.00$
Production downtime due to late deliveries (hours) 1,35,000.00$ 1,77,000.00$
Production downtime due to defective materials (hours) 24,000.00$ 34,800.00$
Process invoice and pay supplier (invoices) 4,200.00$ 45,500.00$
Dispute invoiced amount (disputes) 2,400.00$ 2,400.00$
Quality audit of suppliers (audits) 50,000.00$ 1,00,000.00$
Total Cost of Activity Driver 3,46,100.00$ 6,00,900.00$
Units Purchased 3,000 4,000
Cost per Unit 100.00$ 90.00$
Cost per Unit of Activity Driver 115.37$ 150.23$
Cost of Total Unit Purchased 3,00,000.00$ 3,60,000.00$
Total Cost of Ownership 6,46,100.00$ 9,60,900.00$
Total Cost Per Unit 215.37$ 240.23$
Table 2: Supplier Performance Index for Hot Exhausts and Chrome Manufacturers
3. Comparison of the Performance of the Two Supplies
The performance comparison of the two supplies, i.e. Hot Exhausts and Chrome
Manufacturers can be effectively made by considering the values with respect to the units
purchased. Thus, by dividing the cost of each of the activities by the respective number of
units purchased, the cost per unit has been calculated. In this regard, the per-unit cost of
order components from suppliers of Hot Exhausts is $9.00, while that of Chrome
Manufacturers is $9.75. For the Receive order, the per-unit cost of Hot Exhausts is less than
Page 6

Chrome Manufacturers that are $27.00 and $33.75. The per-unit cost of return reject
companies to the supplier of Chrome Manufacturers is less than Hot Exhausts, which are
$2.80 and $3.50 respectively. Similarly, the dispute invoiced amount for Chrome
Manufacturers is lower than Hot Exhausts that are $0.60 and $0.80 per unit of purchase.
Nevertheless, the per-unit cost for receiving late deliveries, production downtime due to late
deliveries, production downtime due to defective materials, process invoice and pay supplier,
along with a quality audit of suppliers are lower in Hot Exhausts than Chrome Manufacturers.
In this regard, the respective per unit costs for Hot Exhausts are $4.00, $45.00, $8.00, $1.40,
and $16.67, while that of Chrome Manufacturers are $14.00, $44.25, $8.70, $11.38, and
$25.00.
Cost of Hot
Exhausts
Cost of Chrome
Manufacturers
Per Unit Cost of
Hot Exhausts
Per Unit Cost of
Chrome Manufacturers
Order components from suppliers (orders) 27,000.00$ 39,000.00$ 9.00$ 9.75$
Receive order (deliveries) 81,000.00$ 1,35,000.00$ 27.00$ 33.75$
Return reject companies to supplier (returns) 10,500.00$ 11,200.00$ 3.50$ 2.80$
Receive late deliveres (late deliveries) 12,000.00$ 56,000.00$ 4.00$ 14.00$
Production downtime due to late deliveries (hours) 1,35,000.00$ 1,77,000.00$ 45.00$ 44.25$
Production downtime due to defective materials (hours) 24,000.00$ 34,800.00$ 8.00$ 8.70$
Process invoice and pay supplier (invoices) 4,200.00$ 45,500.00$ 1.40$ 11.38$
Dispute invoiced amount (disputes) 2,400.00$ 2,400.00$ 0.80$ 0.60$
Quality audit of suppliers (audits) 50,000.00$ 1,00,000.00$ 16.67$ 25.00$
Total Cost of Activity Driver 3,46,100.00$ 6,00,900.00$
Units Purchased 3,000 4,000
Cost per Unit 100.00$ 90.00$
Cost per Unit of Activity Driver 115.37$ 150.23$
Cost of Total Unit Purchased 3,00,000.00$ 3,60,000.00$
Total Cost of Ownership 6,46,100.00$ 9,60,900.00$
Total Cost Per Unit 215.37$ 240.23$
Table 3: Comparison of the Performance of Hot Exhausts and Chrome Manufacturers
4. Impact of Reduced Receive Late Deliveries and Production Downtime Due To Late
Deliveries of Chrome Manufacturers on Its Total Cost per Unit
In case, the receive late deliveries and production downtime due to late deliveries of Chrome
Manufacturers is lowered to 12 hours and 30 hours, it would majorly impact the overall cost
of the supplier as presented in the table below. The respective total cost for receive late
deliveries would reduce from the initial $56,000.00 to $24,000.00. Moreover, the production
downtime due to late deliveries would lower from $1,77,000.00 to $90,000.00. This would
create an impact on the total cost of activity drivers of Chrome Manufacturers, which would
Page 7

reduce to $4,81,900.00 from the previous $6,00,900.00. The cost per unit of activity driver
would lower from $150.23 to $120.48, while the total cost of ownership from $9,60,900.00 to
$8,41,900.00. The total cost per unit of Chrome Manufacturers would lower from $240.23 to
$210.48. This lowered total cost per unit of Chrome Manufacturers is even less in
comparison with that of Hot Exhausts, which is $215.37. Thus, it can be inferred that if
Chrome Manufacturers are able to lower receive late deliveries and production downtime due
to late deliveries up to 12 hours and 30 hours, Fast Lane Manufacturers should select it as
the supplier than Hot Exhausts.
Total Cost
Number of
Activities
Cost per
Activities
Hot
Exhausts
Chrome
Manufacturers
Cost of Hot
Exhausts
Cost of Chrome
Manufacturers
Order components from suppliers (orders) 18,00,000.00$ 6,000 300.00$ 90 130 27,000.00$ 39,000.00$
Receive order (deliveries) 90,00,000.00$ 10,000 900.00$ 90 150 81,000.00$ 1,35,000.00$
Return reject companies to supplier (returns) 38,500.00$ 55 700.00$ 15 16 10,500.00$ 11,200.00$
Receive late deliveres (late deliveries) 2,60,000.00$ 130 2,000.00$ 6 12 12,000.00$ 24,000.00$
Production downtime due to late deliveries (hours) 24,00,000.00$ 800 3,000.00$ 45 30 1,35,000.00$ 90,000.00$
Production downtime due to defective materials (hours) 36,00,000.00$ 3,000 1,200.00$ 20 29 24,000.00$ 34,800.00$
Process invoice and pay supplier (invoices) 10,50,000.00$ 3,000 350.00$ 12 130 4,200.00$ 45,500.00$
Dispute invoiced amount (disputes) 40,000.00$ 50 800.00$ 3 3 2,400.00$ 2,400.00$
Quality audit of suppliers (audits) 5,00,000.00$ 10 50,000.00$ 1 2 50,000.00$ 1,00,000.00$
Total Cost of Activity Driver 3,46,100.00$ 4,81,900.00$
Units Purchased 3,000 4,000
Cost per Unit 100.00$ 90.00$
Cost per Unit of Activity Driver 115.37$ 120.48$
Cost of Total Unit Purchased 3,00,000.00$ 3,60,000.00$
Total Cost of Ownership 6,46,100.00$ 8,41,900.00$
Total Cost Per Unit 215.37$ 210.48$
Table 4: Determination of Total Cost per Unit of Chrome Manufacturers if Receive Late
Deliveries is reduced to 12 hours and Production Downtime Due To Late Deliveries to
30 Hours
5. Changes that Purchasing Manager and Financial Controller Can Implement to Lower
Supplier Associated Costs
From tables 1 to 4, it is notable that the activity driver cost for both Hot Exhausts and Chrome
Manufacturers is higher than the expenditure of the total unit purchased. This is highly
discouraging from the perspective of Fast Lane Manufacturers, as it increases cost without
benefiting any of the stakeholders. Thus, the Purchasing Manager and Financial Controller of
Fast Lane Manufacturers must implement some of the changes so that the activity driver cost
can be lowered. In this regard, one of the most decisive changes is the lowering of the late
Page 8

deliveries of the raw materials from both the suppliers. It has two types of involved costs,
which are received from late deliveries along with production downtime associated with the
same issue of late deliveries. The combined costs for Hot Exhausts are $22,500, while that
of Chrome Manufacturers is $67,200. Fast Lane Manufacturers must enhance its
communication with the two suppliers so that the products can be quickly supplied within the
scheduled time-frame. Another change that the company can undertake is the creation of an
incentive structure, wherein the good performers can attain monetary benefits. This change
would further discourage the suppliers to conduct late deliveries of the items. The Purchasing
Manager and Financial Controller of the company can witness another change with the
development of a sale forecast data and this must be shared with the respective suppliers.
This would further enable the suppliers to remain prepared when there is a major alteration in
demand (Fredendall and Hill, 2016).
The Receive order costs of both the suppliers, i.e. Hot Exhausts and Chrome Manufacturers
are relatively higher, which are $81,000.00 and $1,35,000.00 respectively. These costs need
to be reduced. The costs relating to the order components from suppliers for both the
suppliers should be lowered. Besides, on many occasions, Fast Lane Manufacturers have
witnessed a supply of damaged items. This has led to the major increase in cost, as the
expenditure for the production downtime due to defective materials was $58,800 for the
combined two suppliers, while the cost associated with return reject companies to the
supplier was $21,700. Thus, the Purchasing Manager and Financial Controller need to apply
changes so that these costs can be lowered. In this regard, there is a need for improved
communication with the suppliers so as to inform them about the items that are found to be
defective. The suppliers can quickly work on those areas so that the chances of defects can
be minimized. The Purchasing Manager and Financial Controller should also ensure
manufacturing flexibility so that the delays due to the poor quality materials do not affect the
overall production process. Moreover, changes in the company also need to be implemented
with respect to improved inspection, preventative measures, and quality control. The
Page 9

employees should be highly trained for successful inspection of the defects. The equipment
and the machines should be advanced so that the manufacturing process does not cause
any damage to the materials (Ninlawan, et al., 2010).
The combined costs for the dispute invoiced amount along with the cost for process invoice
and pay supplier for the two suppliers are $54,500. Thus, Fast Lane Manufacturers must
implement changes to lower down the related costs. The company should attempt to reduce
the cost for a quality audit of suppliers, which is $150,000. In this regard, the related costs
can be lowered with the maintenance of electronic records and documentation management.
The company should maintain process and product traceability (Fredendall and Hill, 2016).
6. Criteria to be Used by Fast Lane Manufacturers to Determine Whether or Not to
Renew Supplier Contract along with Suggestion of Performance Measures to Evaluate
Suppliers’ Performance
Based on the evaluation from tables 1 to 4, there are three main criteria to be used by the
Fast Lane Manufacturers to decide whether it should renew the contract of the existing
suppliers, i.e. Hot Exhausts and Chrome Manufacturers. These three criteria involve on-time
deliveries, faultless materials, and no invoice disputes. In this regard, it is apparent that late
deliveries have been relatively more in Chrome Manufacturers than Hot Exhausts. This
severely affects the production process of the company with reduced efficiency. The
production gets delayed and even causes insufficiency in manufacturing. The company is
unable to meet the demand in the market, which in turn, directly affects the fall of sales,
revenue collection, and profit earning. The customers are dissatisfied with the respective
brand or company. It affects their loyalty and the company loses competitive advantages.
Thus, on-time delivery of the items is one of the major criteria for the renewal of the
suppliers’ contract. On-time delivery further reflects upon the effective implementation of the
Just-in-Time inventory or supply chain management. It indicates the improved effectiveness
of the supply chain process and reduces the cost in the inventory management process.
Page
10

Specifically, the costs relating to storing and damage of the raw materials in the warehouse
have been reduced. It is also notable that Hot Exhausts has been relatively effective in
meeting this criterion as compared to the Chrome Manufacturers, although not being entirely
successful. Thus, the supply contract of Hot Exhausts must be extended and not Chrome
Manufacturers. To evaluate the supplier’s performance with respect to on-time delivery, two
performance measures must be utilized by Fast Lane Manufacturers. One of the measures is
whether the supplier is able to meet the scheduled deadline for every lot of materials.
Another performance measure is determining whether the supplier is able to forecast the
supply need one’s own effort (Nakandala, Samaranayake and Lau, 2013).
The faultless material is another major criterion that Fast Lane Manufacturer needs to
consider. It is notable that Chrome Manufacturers have comparatively more instances of
defective materials than Hot Exhausts. Thus, Fast Lane Manufacturer should extend the
contract of Hot Exhausts instead of Chrome Manufacturers. Hot Exhausts pose innumerable
instances of defective materials and these cannot be ignored. The reason is that defective
materials lead to the development of poor quality products, which in turn, causes
dissatisfaction among the customers. It eventually affects the sales and revenue collection of
the company. In this regard, the company needs to evaluate the supplier’s performance by
utilizing two measures with respect to faultless materials. In this regard, one of the measures
is the implementation of machines or equipment that would detect the number of defective
materials. The machines or equipment must identify the extent of damage of each unit of
materials. It would also involve evaluating whether the defective materials can be rectified.
Another measure is the training of the employees in the inspection and quality control
department, who would be able to detect the amount or the extent of damage of the
materials (Mitreva et al., 2017; Prytherch, 2016).
Another criterion is the absence of invoice disputes, wherein it is notable that the issue is
more prevalent in Chrome Manufacturers than Hot Exhausts. This justifies the extension of
Page
11

the supply contract of Hot Exhausts and terminating that of Chrome Manufacturers.
However, Hot Exhausts has been facing the issue to a certain extent and this need to be
addressed. The reason behind this is that it can cause wastage of time and resources. It can
result in the conflict among the stakeholders, which is especially between the suppliers and
employees. In this context, two supplier’s performance measures must be implemented,
wherein one is the implementation of electronic records technology. Another measure is the
training of the employees in documentation management so that they can detect certain
issue (Prytherch, 2016).
7. Advantages of Using Electronic Systems for Transacting with Suppliers
Based on the discussed criteria that fast lane manufacturers should use to renew supplier
contracts along with the implementation of measures to evaluate suppliers’ performance, it
can be evaluated that electronic systems for transacting must be utilized. It would assist in
meeting the three criteria of Fast Lane Manufacturers, which are on-time deliveries, faultless
materials, and no invoice disputes. The reason is that there are many benefits of using
electronic systems for transacting with suppliers, which involve reduced costs in the supply
chain and improved inventory management. It has the advantage that it allows transparent
spending, which reduces the chances of corruption and fraudulence. It largely contributes to
the elimination of paperwork, thereby not only reducing related costs but also increasing
efficiency. Electronic systems for transacting to be implemented in Fast Lane Manufacturers
would certainly contribute to enhanced productivity. It would reduce the possibility of errors in
the supply chain and inventory management. It would ensure standardized purchases from
the suppliers. Thus, it would benefit Fast Lane Manufacturers as well as its suppliers
(Alshehri and Drew, 2011).
Conclusion
Based on the overall financial calculation and discussion, it is apparent that Chrome
Manufacturers is more costly for Fast Lane Manufacturers than Hot Exhausts. Thus, the
Page
12