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Cost Management



Class lecture notes on Cost Management (Purchasing)

Class lecture notes on Cost Management (Purchasing)



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Cost Management Cost Management Presentation Transcript

  • LOGI200 Purchasing Week 10 Chapter 9
  • Cost Management
    • why do we need to have an idea of supplier’s costs?
    • what is the purpose of cost analysis?
  • Total Cost of Ownership (TCO)
    • acquisition price is only one of the costs
    • need to find a way to analyze cost elements
  • Major Categories for the Components of Total Cost of Ownership Follow-up and correction Return of parts Cost of maintenance and repairs Inspection     Cost of repair part Billing/payment
    • Educating:
    • Supplier in firm’s operations
    • Firm in supplier’s operations
    Customer goodwill/reputation of firm Tariffs/duties Adding supplier to internal systems Field failures Repair/replacement in field Delivery/transportation Qualifying sources Defective finished goods rejected before sale Order placement/preparation Investigating sources Line fallout (damaged during assembly or failed components) Price Identifying need Post-transaction Components Transaction Components Pre-transaction Components
  • Target Pricing
    • design costs OUT instead of eliminating costs after production has already begun
    • define selling price and margin requirements – work backwards from there
  • Discounts
    • can be offered by suppliers or negotiated by purchasers
  • Cash Discounts
    • purpose is to get paid – FASTER
    • cash now means company is more liquid
    • purchasers almost always take the discount (whether they pay on time or not)
  • Trade Discounts
    • incentive to distributors (purchasers) to carry and promote product
    • purchaser may add value to the product – get a discount in recognition of this
  • Multiple Discounts
    • common in industries where there are multiple intermediaries
    • wholesale distributor -> jobber -> mechanic -> end consumer
    • example: 10-10-10 discount = 27.1% discount
    • (Price-10%) – 10%(Price-10%)- 10%[(Price-10%) – 10%(Price-10%)]
    • ($100-10%) – 10% ($100-10%) – 10% [ ($100-10%) – 10% ($100-10%) ]
    $90 $90 $90 $90 $9 $9 $81 $8.1
  • Quantity Discounts
    • seller specifies quantity that purchaser must buy to get a quantity discount
    • seller saves either marketing/distribution costs or production costs
    • purchaser has to consider inventory carrying costs vs benefit of lower price
    • buying larger quantity is like anticipation inventory
  • Quantity Discounts and Source Selection
    • quantity discounts restrict the number of suppliers (lower choice)
    • reasonable to expect seller to not charge more for costs NOT related to their production (example: freight or packing materials)
    • unreasonable to expect seller to charge less because of the larger volume of purchases that you could provide
  • Cumulative or Volume Discounts
    • another type of quantity discount
    • varies in proportion to quantity purchased over a period of time
    • seller wants to get more of purchasers business
    • way to keep invoice price the same but offer a “deal” to certain customers
    • allows seller to create different classes of purchasers
  • Negotiation
    • ethics is important
    • good contract is win-win
    • supplier needs to make money otherwise they will not exist in future
  • Any Aspect of the Purchase Agreement is Subject to Negotiation Quality Specification compliance Performance compliance Test criteria Rejection procedures Liability Reliability Design changes Support Technical assistance Product research, development, and/or design Warranty Spare parts Training Tooling Packaging Data sharing, including technical data MIS Supply Lead times Delivery schedule Consignment stocks Expansion options Supplier inventories Cancellation options Transportation FOB terms Carrier Commodity classification Freight allowance/ equalization Multiple delivery points Price Purchase order price Discounts (cash, quantity and trade) Escalation provisions Exchange terms Import duties Payment of taxes Counter trade credits