Current Event Assignments 2
INeal
MGT533Chapter101.pptxChapter 10
Price
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Key Questions Addressed in Chapter 10
What is the right price to pay?
What represents best value?
How can we assure we are paying the right price?
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What is a Fair Price?
The lowest price that ensures a continuous supply of the proper quality where and when needed
A “continuous supply” is possible in the long run only from a supplier who is making a reasonable profit.
A fair price to one seller for any one item may be higher than a fair price to another or for an equally satisfactory substitute item.
The supply manager is called on continuously to exercise judgment about what the “fair price” should be under a variety of circumstances.
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Direct and Indirect Costs
Direct costs
Can be specifically and accurately assigned to a given unit of production of a product or service
Most direct costs are “variable”
Indirect costs
Incurred in the operation of a production plant or service process, but normally cannot be related directly to any given unit of production of a product or service
Often referred to as “overhead”
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Variable and Fixed Costs
Variable costs
Vary directly and proportionally with the units of products or services produced
Fixed costs
Generally remain the same regardless of the number of units of products or services produced
Semivariable costs
Vary with the number of units of products or services produced but are partly variable and partly fixed
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Typical Product Cost Buildup
Direct Materials $ 5,500
+ Direct labor 2,000
+ Factory overhead 2,500
= Manufacturing cost $ 10,000
+ General, admin. and selling cost 1,500
= Total cost $ 11,500
+ Profit 920
= Selling price $ 12,420
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How Prices are Set
Cost approach
Price is a certain amount over direct costs, allowing for sufficient contribution to cover indirect costs and overhead, leaving a margin for profit
Market approach
Prices are set in the marketplace and may not be directly related to cost
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Seven Types of Purchases
Raw and semiprocessed materials
Sensitive commodities, such as copper, wheat, and crude petroleum, and steel and cement
Parts, components, and packaging
Nuts and bolts, valves and tubing; prices are fairly stable and quoted on a basis of “list price with some discount”
Maintenance, repair and operating (MRO) supplies and small-value purchases (SVPs)
MRO items do not become part of the end product
Items of small comparative value
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Seven Types of Purchases (cont’d)
Capital Assets
Long-term assets
Not bought or sold in the regular course of business
Have an ongoing effect on operations
Have an expected use of more than one year
Involve large sums of money, generally depreciated
Tangible (land, buildings, and equipment) or intangible (patents, copyrights, ideas, knowledge)
Services
Includes many types of services, such as advertising, auditing, consulting, architectural design, legal, insurance, personnel travel, copying, security, and waste removal
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Seven Types of Purchases (cont’d)
Resale
Items formerly manufactured in-house but now outsourced
Items sold in the retail sector (clothing sold in general-line department stores; food in supermarkets; tools in hardware stores; and tires, batteries, and accessories in gasoline/filling stations)
Other
Custom-ordered items and materials that are special to the organization’s product line
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Requirements for Competitive Bidding
Bidders must be qualified to:
make the item according to the buyer’s specifications
deliver it by the date required
Bidders must be sufficiently reliable to warrant serious consideration as a supplier
Sufficient number of qualified bidders to ensure a competitive price
No more bidders than necessary for competition
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Conditions for Successful Competitive Bidding
There must be at least two, and preferably more, qualified bidders
The suppliers must want the business
a “buyer’s market”
Specifications must be clear and unambiguous
No collusion between bidders
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Four Contract Pricing Options
Firm-fixed-price (FFP)
Price not subject to change, under any circumstances
Cost-plus-fixed-fee (CPFF)
If the item is experimental and the specifications are not firm, or if future costs cannot be predicted
Buyer to reimburse supplier for all reasonable costs incurred (under a set of definite policies under which “reasonable” is determined) in doing the job or producing the required item or service, plus a specified dollar amount of profit
A maximum amount may be specified for the cost
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Four Contract Pricing Options (cont’d)
Cost-no-fee (CNF)
Only costs are reimbursed
Buyer must persuade supplier that there will be enough subsidiary benefits from doing a particular job
Cost-plus-incentive-fee (CPIF)
Both buyer and seller agree on a target cost figure, a fixed fee, and a formula under which any cost over- or underruns are shared
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Options for Provisions for Price Changes
Guarantee against price decline
For recurring purchases and for raw materials
The contract specifies how a price change is determined
Price protection clause
Long-term contracts for raw materials or other key purchased items with one or more suppliers
Purchaser may want the option to buy at a lower price from a different supplier
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Options for Provisions for Price Changes (cont’d)
Escalator
Provides for either an increase or decrease in price if costs change
Most favored customer
Specifies that the supplier will not offer a lower price to other buyers, or if a lower price is offered to others, it will apply to the purchaser as well
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Forward Buying
Forward buying is the commitment of purchases in anticipation of future requirements beyond current lead times
Purchases are confined to actually known requirements or for estimated requirements for a limited period
Speculation seeks to take advantage of price movements
Purchasers can forward buy, but should not speculate
An organization may buy ahead because of anticipated shortages, strikes, or price increases
Commodities represent a special class of purchases associated with forward buying
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Commodity Exchanges
Purpose:
To furnish an established marketplace where the forces of supply and demand may operate freely as buyers and sellers carry on their trading
Conditions for a commodity exchange:
The products traded are capable of reasonably accurate grading
There are a large enough number of sellers and buyers and a large enough volume of business so that no one buyer or seller can significantly influence the market
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Commodity Hedging
Hedging allows the purchaser the opportunity to offset transactions, and thus to protect, to some extent, against price and currency exchange risks
A hedging contract involves a simultaneous purchase and sale in two different markets, which are assumed to operate so that a loss in one will be offset by an equal gain in the other
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https://www.thebalance.com/hedging-controlling-price-risk-using-futures-markets-808965
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Conditions for Hedging
The ability to offer hedging requires the following conditions to be present:
Trading in “futures”— the buying or selling of the commodity for delivery at a specified future date.
A fairly close correlation between “basis” and other grades.
A reasonable but not necessarily consistent correlation between “spot” and “future” prices.
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Example of Hedging
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