03-498 -89-1 SAADIA ROLLING MILLS In January 1989, Asim Noor, General Manager Saadia Rolling Mills (SRM), Badami Bagh, Lahore, Pakistan, was contemplating several recent developments in the iron billet market. Asim was concerned because in its production of iron reinforcement rods SRM used about 20 tonnes of iron billets every month. Iron billets were being produced in only two locations in Pakistan, Lahore and Karachi. For several years SRM had bought iron billets from the supplier in Lahore.
Purchases were made on a weekly basis, and the expediting and clerical cost per requisition were Rs1 50 and Rs 33 respectively. Cost of unloading the iron billets into SRM was Rs 8. 30 per tonne 2 of iron billets. The storage space for iron billets at SRM was enough for two months demand with extra leased storage space available at Rs 199. 20/tonne/year. A few months back, Asim had been informed by his purchasing agent that the local supplier had followed his Karachi competitor in announcing a new price structure: 2 US $ 1. 00 = Pak Rs 19. 1. The six metre billets used by SRM weighed about 250 kg each. This case was written by Research Associate, Arif I Rana, under the supervision of Visiting Professor James A Erskine, to serve as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Some information has been disguised for purposes of confidentiality.
This material should not be quoted, photocopied or reproduced in any form without the prior written consent of the Lahore University of Management Sciences. © 1989 Lahore University of Management Sciences 03-498-89-1 Order (in tonnes) First 20 Next 20 All over 40 Unit Price/tonne Rs 8,300 Rs 8,134 Rs 7,885 SRM’s local supplier had just increased its rolling mill capacity and would now supply iron billets only to a select group of customers.
SRM now had to deal with the Karachi supplier whose prices were the same as the local supplier, except that they did not include the transportation costs from Karachi. Asim contacted a few transporters in Lahore and found that transportation cost of iron billets from Karachi was Rs 830 per tonne. However, large trucks with 20 tonne capacity were also available at Rs 10,000 per truck. It normally took one week for consignment from Pakistan Steel to reach their destinations in Lahore. Asim wondered what effects these new developments would have on his cost structure. 2