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?

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

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

Educating:

Supplier in firm’s operations

Firm in supplier’s operations

Target Pricing design costs OUT instead of eliminating costs after production has already begun define selling price and margin requirements – work backwards from there

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

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)

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

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

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%) ]

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

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

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

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

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