Lecture Purchasing and supply chain management (3rd/e): Chapter 13 - W. C. Benton

Chapter 13 - Price determination. Chapter 13 focuses on price determination, which is one of the most important decisions that successful organizations make. The purchasing professional must become an expert on the product or services for which they are responsible.

Chapter13: PriceDetermination PurchasingandSupplyChainManagement 3rdedition PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PurchasingandSupplyChainManagement3rdedition,Copyright2013W. Contents ThePurchasingDecisionandPurchasingProfessional • Price • • Discounts • Pricing Methods   Cost  • • • Learning Curves  Cost Structure Analysis • Terminology • The Breakeven Analysis The Negotiation Process  Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Price of a Product or Service • • Usually based on a variation of cost and cover  • Production • Promotion • Distribution • A reasonable profit  Purchasing professional • Responsible for determining price • Must be aware of market conditions and prices associated with  quality levels  Must become an expert in the item being purchased  PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PriceSettingStrategies(Economics) Theformulaforsettingprices Differbetweenfirmandindustry Generalapproaches: • Cost­based approach • Market approach  • • E.g., chemical industry and computer industry  The most popular approach for competitive environments  Target pricing PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Thepricesetbythebuyingfirmthatfitsitscompetitivecost PriceSettingStrategies(Psychological) Power Themajorpsychologicalinfluenceinabuyersupplier relationship Apowerfulbuyer: Couldforceasuppliertoeliminateitsoverheadfromtheultimate price Coulddrivethesupplieroutofbusinessandreducecompetition inthesupplymarket PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. GeneralSourcesofPriceInformation Published price lists Quotations Other buyers in the market Trade journals Negotiations Competitive Bidding Distribution PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Discounts Popular discount types: • Cash Discounts  • When payments for goods and services are promptly remitted • Example: Cash discount of 3/10, net 30 • • Trade Discounts  • • If the buyer pays within 10 days of the shipment date of the invoice, it  may deduct a 3 percent from the invoice price Buying firm splits the middlemen profit margin and buys directly Quantity Discounts  • Granted to the buyer for buying larger quantities  • The Robinson–Patman Act PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PricingMethods(cont.) Competitivebidding Mustbeginwithanassessmentofthesupplierspricingstrategies Takesfromfourtoeightweeksformostindustrialfirms Conditions for competitive bidding: The dollar value of the spend must be large enough to justify  the expense of the competitive bidding process The specifications of the product or service must be precise  enough for both the buying and selling firms to accurately  estimate There are enough selling firms in the market PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. CompetitiveBidding Aprobabilisticbiddingstrategy Buyingstrategyforcompetitivebiddingprocess Basedontheprofitưmaximizationstrategy • Assumes that the buying firm will select the firm with the lowest  bid • Used by the most well­managed selling firms that use the  competitive bidding  An estimate of a reasonable bid amount • Based on: • Thedollarvalueofpreviousbids PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Costs Costcomponents: Directcosts Costs are not incurred if the unit is not produced • E.g., direct labor, direct materials costs  Indirect costs  • • Non–manufacturing­related costs E.g., insurance, managerial salaries, property taxes, and  depreciation expenses 10 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. LearningCurves Amethodforpredictingtheefficienciesof increasingoutputs Reflectsasystematicimprovementoflaborper unitasafunctionofcumulativeunitsproduced 80%learning curve 11 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. LearningCurves(cont.) Characteristics: Exponential Aconstantpercentagereductionoflaborasafunctionof cumulative units produced • Especially important in various assembly operations Uses: • Cost estimating • Pricing • Negotiating contracts 12 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. CostStructureTerminology Definitions: Grossmargin Includes overhead and profit Net margin  • • The difference between the price of the job and the costs to build  a job Refers to profit alone Markup  • A job costs times a factor that covers direct costs, overhead  cost,andprofit Grossmarginandmarkuparenotthesame13 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. MarginversusMarkupConversionChart 14 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Contents CostStructureAnalysis Terminology TheBreakevenAnalysis TheNegotiationProcess Price/CostAnalysis 15 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. The Negotiation Process • The negotiation process is a learned behavior • • • Win­win for both buyer and the seller  Each and every aspect of a business transaction is  negotiable • Thereexistsapossibilityfornegotiationofpeggedcosts Useprice/costanalysis Excellentcandidatesfornegotiations Directlabor,overhead,andadministrativecosts 16 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Price/CostAnalysis A buying firm must: • • Consider the price variation in order to understand: • Various design specifications • Associated costs Obtain reasonable cost comparisons based on:  • Historicaldataofsimilarequipment Experiencewithconditionsinthespecificindustry 17 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Questions? 18 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ... PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2 013, W.C.BentonJr.,Allrightsreserved. Questions? 18 Purchasing and Supply Chain Management,  3rd edition, Copyright © 2 013, W. C. Benton Jr., All rights reserved.           ... PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2 013, W.C.BentonJr.,Allrightsreserved. MarginversusMarkupConversionChart 14 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2 013, W.C.BentonJr.,Allrightsreserved.... Could drive the supplier out of business and reduce competition  in the supply market Purchasing and Supply Chain Management,  3rd edition, Copyright © 2 013, W. C. Benton Jr., All rights reserved.