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A manufacturer purchases 40,000 cases of a certain component for $100 per case from two suppliers: Supplier A and Supplier B.
Supplier A is currently responsible for 1/2 of the total demand.The two suppliers currently pay $6 per case for transportation and achieve the same average delivery time of 8 days. However, for each day that a supplier can reduce in the average delivery time, the manufacturer is willing to shift 5% of its total purchase to the supplier offering the premium service. A supplier earns a margin of 20% of the selling price on each case before transportation cost kicks in.
a) How much profit does Supplier A make currently?
b) Suppose Supplier A is willing to reduce its average delivery time by 3 days and the transportation rate increases by $0.50 per case for each day in the average delivery time. How much profit can Supplier A make by offering the premium transportation service? Assume that Supplier B takes no action.
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