Chapter 1.2 Flashcards
What 3 things will understanding the business requirements help you target?
- Which market to analyse
- The kind of information that needs to be collected
- Collection from what source
Name 2 ways to collect further data
- Desk research
- Field research
What is desk research also known as?
Secondary research
What does desk research involve?
Gathering data from already published resources
Name 3 examples of desk research
- Market reports
- official statistics
- Trade publications
Name 8 sources that market reports can be otained from
- The local business reference library
- Trade associations
- UK Statistics Authority website
- National newspapers
- Chamber of commerce and local authorities
- Internet
- Commercial publishers of market reports
- The business will have its own data
Name 6 questions to ask when monitoring supply market trends
- Is demand for the product growing or shrinking?
- Is there any forthcoming legislation that might affect the market
- What are the general economic and market trends?
- How are competitors in the supply market changing - what are their plans?
- How might customer requirements and buying behaviour change in the future?
- What new products are in the supplier’s pipeline - could they make the one that is being bought look outdated?
Name a disadvantage of the internet as a source of market insight?
Not all the information on the internet is reliable
Name an advantage of field research
The data is more detailed and specific
Define field research
The collection of original or raw data which can be quantitative or qualitative
What is field research also known as
Primary data
What is quantitative data
Statistical data - provides numerical information
What is qualitative data
It tells you about people’s thoughts and feelings
Name 5 best practise principles to ensure you gather useful and unbiased data when conducting field research
- Choose a suitable sample of people to talk to
- Choose the best questioning style
- Avoid leading questions
- Consider how reliable your results are
- Analyse the results fairly
What’s one of the best methods of market research
Talking to customers and monitoring their buying habits and how they behave
What does a pricing strategy refer to?
The factors an organisation will consider when selling an end product or service
Why do procurement professionals need to be aware of pricing strategies?
To optimise their market position and ensure they are achieving the best value outcomes
Name 9 examples of pricing strategies
- Market penetration
- Market skimming
- Cost-plus
- Marginal
- Going rate
- Premium
- Buyer-based
- Discriminating
- Captive
Market penetration
Using a low price to win a large share of the market
Market skimming
Used in the absence of competition. A new product is priced high to make a large profit from purchases from initial customers. When competition does occur, the price is usually lowered
Cost-plus pricing
Production costs are calculated and a margin added for profit
Marginal pricing
Once all fixed costs have been recovered, the cost of any extra sales is the only variable cost associated with the product/service being sold. This permits pricing at below the total cost to be profitable
Going rate pricing
Pricing a product at a similar level to the competition
Premium pricing
Pricing products or services high because the market is prepared to pay for it. Usually associated with premium brands, with a reputation for quality or luxury
Buyer-based pricing
Pricing at a level the buyer will pay
Discriminating pricing
Such as off-peak, special rates for children and pensioners
Captive pricing
Pricing high because the buyer has no choice but to buy from the supplier relationship pricing. The price is aimed at maintaining a long-term relationship with the buyer
Define open-book costing
The supplier provides complete transparency of the costs associated with producing a product or service, which the buyer can analyse to ascertain if the final cost price is fair
Request for information (RFI)
A document used to gather information about suppliers and their capabilities prior to a formal procurement process
Request for quotation (RFQ)
An invitation to suppliers to bid on specific products or services
Request for proposal (RFP)
A document used to canvass potential solutions from suppliers when the specification is still unclear
Does an RFI imply that any procurement activity will subsequently be made or contract awarded?
No
What is the RFI often used as?
The initial step before RFQ or RFP
Name 5 useful points to consider in the RFI stage?
- Questions should be framed in such a way that the suppliers are invited to challenge what they are being asked for
- Remember that the purpose of an RFI is to gather information so the document should be brief
- An RFI is not a promise of any work, but it needs to be worded in such a way that it gets suppliers inetested
- Questions should focus on the supplier’s understanding and interpretation of the organisations problem and not on the suppliers capabilities
- Suppliers should be encouraged to ask questions
Direct costs
Costs that are directly associated with the production of a good or service
Indirect costs
The general running costs of the organisation - these costs cannot easily be attributed to specific products or services (also known as overheads)
Value chain
A business model created by Michael Porter that details the set of coordinated processes, people and resources within an organisation which generates corporate value
Name 2 important concepts when attempting to estimate costs and prices
- Identification
- Definition
What’s a sophisticated way of looking at the make-up of an organisation
Porter’s value chain
Name the 5 primary activities in porter’s value chain model
- Inbound logisitics
- Operations
- Outbound logistics
- Sales and marketing
- Service
Define inbound logistics
Interactions with suppliers and the activities of receiving, storing and distributing supplies internally
Define operations
All the activities which turn inputs into goods and services which can be sold to customers
Define outbound logistics
Activities that receive products from operations, store them and deliver them to customers
define sales and marketing
Activities that find and keep customers, make them aware of the products and services on offer and determine prices
Define service
Activities that maintain products after sales and achieve customer care
Name 4 secondary activities of porters value chain
- Firm infrastructure
- Human resource management
- Technology development
- Procurement
What type of costs are primary activities usually?
Direct costs
What type of costs are secondary activities usually?
Indirect costs
Fixed costs
Business costs that remain the same irrespective of the volume if activity of a business
Variable costs
Costs that change in proportion to the output of the business. They increase as the volume of the product or service produced is increased. As sales increase, variable costs increase. As sales go down, variable costs go down. For example, the amount of materials that are used or the cost of hours worked
Name another method of classifying costs
To identify whether they are fixed costs or variable costs
Do fixed costs change with output?
No
Do variable costs change with output?
Yes
If no products are made what would the variable cost be?
Zero
Can both direct and indirect costs be fixed and/or variable?
Yes
Semi-variable costs
A cost that is made up of both a fixed cost and a variable cost
Name 3 analysis’ used to estimate costs and prices
- Break-even analysis
- Purchase cost analysis
- Purchase price analysis
Break-even point
The level of output of a business at which revenue equals total costs
Calculation for marginal profit
Marginal profit = Sales revenue - Variable cost
Calculation for break-even point
Break-even point = fixed cost / marginal profit
Super-profits
Excess of average profit over normal profit
What can the break-even point be used for?
Negotiations
When will a supplier make super profits?
If a supplier charges the full price for additional work over and above its break-even point
Procurement Cost Analysis (PCA)
The analysis of the cost of the individual materials, components and activities that make up a purchased item
Name 6 key questions that PCA helps to answer
- Which costs are both necessary and legitimate in manufacturing this product or delivering this service?
- Are the values for these necessary cost items reasonable?
- Is the overhead allocation to this item potentially subsidising another item which the supplier sells
- Is the basis for allocating overheads reasonable?
- Has the supplier included allowances for contingencies?
- Are the resulting profits reasonable but not excessive and sufficient to keep the supplier motivated and interested in the organisations account?
What question does the PCA help to answer?
Is the price paid for goods and services the best it could be?
PCA Matrix - Leverage focus, name 5 cost analysis techniques
- Cost estimating
- Value analysis
- Supplier cost breakdowns
- ‘Should cost’ analysis
- Total cost modelling
Cost estimating
The process for arriving at the approximate cost of a product or service
Value analysis
The process of analysing costs to identify cost reduction and cost control opportunities to ensure that a product or service production costs are as efficient as possible in order to maximise profit
Supplier cost breakdowns
Where the supplier provides a breakdown of its costs and profits
‘Should cost’ analysis
A technique used by procurement for determining what a purchased product or service should cost based on the materials, components, processes and overheads of the supplier
Total cost modelling
S process which uses algorithms designed to arrive at the provable cost of a product or service
PCA Matrix - Strategic focus, name 4 continuous improvement techniques
- Open-book costing
- Target cost analysis
- Competitive assessment/’teardown’
- Whole-life cost analysis
Open-book costing
A process whereby one party agrees to allow the other access to its finances to scrutinise and analyse costs
Target cost analysis
An analysis of market price, volume and profit, from which a target production cost is derived
Competitive assessment/teardown
The act of disassembling a competitor or supplier product into its component parts so that its costs can be estimated
Whole-life cost analysis
A structured approach to calculating the full end-to-end cost of providing a service, manufacturing, or procuring a product
PCA Matrix - Low impact focus, Name 6 price analysis techniques used
- Competitive bids
- Comparison price lists/catalogues
- Market comparisons
- Comparison to past and historical prices
- Price indexes
- Comparison to similar purchases
Competitive bids
Supplier’s submissions in the process, by which an organisation selects from a number of competing suppliers to award the contract
Market comparisons
An approach for assessing the price of a product or service by comparing it to similar ones available in the market
Price indexes
A way of showing the percentage change in prices over a given period, based on a starting year (the base) which is taken to be equivalent to 100%. Indices above 100 indicate a rise; indices below 100 indicate a fall
PCA Matrix - Critical projects focus, name 3 life-cycle costing techniques
- Whole-life costing or total cost of ownership analysis
- Life-cycle costing
- Total cost analysis of the supply chain
Life-cycle costing
Relates to all costs of acquisition, owning and running the asset but does not include disposal
Arms-length relationship
The relationship between two parties where either or both of the parties are not interested in developing a closer relationship
Strategic suppliers
Those who have an integral role in an organisations value chain over and above the provision of a product or service
Non-profit organisation
A type of organisation that does not earn profits for its owners but reinvests any revenue back into the organisation
Quality function deployment (QFD)
A structured approach for defining customer requirements and translating them into product specifications
What tool should you apply in an arms-length relationship to build a case for the supplier reducing its prices
All tools available
What’s the aim with strategic suppliers?
To work cooperatively with them to find ways of reducing costs to achieve a target cost
Calculation for target cost
Sales price - Profit = Target cost
What’s the equivalent to a target cost for a public sector or non-profit organisation?
The proportion of revenue that the product or service should equal
What’s the starting point for setting target cost
To carry out a procurement cost analysis (PCA) to understand which components of the product or service are important to the customer
Name a way of collecting and analysing the data needed for target cost setting?
Quality function deployment
Price analysis
An approach for testing whether or not the price paid for goods or services is fair
What’s the next step after the procurement cost analysis?
Understand price analysis
Name a way to assess the fairness of a purchase
By analysing the price without investigating the costs used by the supplier in arriving at the price
What two topics are often overlooked?
Sustainability and ethical considerations
What should be considered alongside the cost or price?
Quality
What does the Iron triangle model add?
The concept of time to give the Quality-Time-Cost (QTC) assessment
Why do suppliers charge different prices for the same item?
Individual suppliers view both the market they supply to and the buying organisation as an account
Supplier Preferencing Matrix - Strategic
Suppliers will defend their position vigorously
Supplier Preferencing Matrix - Develop
Suppliers will try to expand their business with buyers and seek new opportunities
Supplier Preferencing Matrix - Exploit
Suppliers will seek to drive a premium price
Supplier Preferencing Matrix - Nuisance
Suppliers will seek to maximise prices as they have low interest in this market or the buyer’s account
Name 4 other influences on the price charged at any one time
- The need to keep the workforce busy (low price)
- An attempt to buy the business by predatory pricing because either the supplier wants to break into a market or defend it from new entrants
- There is great competition among suppliers and they are prepared to take a price that covers direct costs and makes a contribution to overhead recovery (low price)
- The supplier has plenty of work and sees winning the buyer’s business as a way of achieving a premium profit (high price)
Price comparator
A price that can be used as a benchmark against which the price of other products with similar characteristics can be assessed
What is price analysis a process of?
Comparing the price paid against a price comparator
Name three sources of price comparators
- Prices that have been paid in the past
- Published prices
- Pricing formula
What must you remember to do when using previous prices in a price analysis
Make some adjustment if there has been a period of inflation (or deflation) since the purchase
What can you use to adjust price for inflation or deflation?
A price index
Name another way analysing prices
Using market competition to give each supplier’s best price for comparison
Name 5 pre-requisites of competitive bidding
- The value of the purchase must be high enough to justify the cost to both side in preparing and analysing bids
- The specification must be explicitly clear and unambiguous
- The market must contain an adequate number of suppliers to ensure competition
- Suppliers must be technically qualified and actively want the contract so that they are willing to be price competitive
- There must be sufficient time for using this method of pricing
Name 4 reasons for not using competitive bidding
- When it is impossible to estimate costs with a high degree of certainty
- In situations where price is not the only variable
- If changes to the specification or some other aspect of the contract are anticipated
- Where significant set-up costs are a major factor
Name 3 terms for costing mechanisms
- Whole-life costs (WLC)
- Total cost of ownership
- Life-cycle costs
Which costing mechanism term do public sector practitioners talk about?
Life-cycle Costing (LCC)
Which costing mechanism do private sector practitioners talk about?
Total cost of ownership or whole-life costing
Which costing mechanism does CIPS favour?
Whole-life costing
What does WLAM stand for?
Whole-life asset management
Define whole-life asset management
The process of evaluating the total price and all associated costs of a product to make an informed decision as to which option will provide the best value for money
Where is whole-life asset management most commonly used?
In relation to fixed assets
What can some aspects of asset management be applied to?
The management of a service
What does whole-life asset management monitor?
The performance of the asset once it is in situ and calculates the optimum time to replace or refurbish the asset
What three things can be used to support whole-life asset management?
- WLC
- TCO
- LCC
Name 4 costs that should be considered under whole-life costs
- Acquisition costs
- Processing and maintenance costs
- End of life costs
- Non-value adding processes
Total cost of acquisition
The total cost incurred in acquiring a product from sourcing to receiving and installing
Quality assurance
Systematic processes and activities that together have the effect of preventing mistakes in the manufacture of a product or delivery of a service
What can alter a purchasing decision?
Knowledge of the WLC
What can knowing the WLC and its cost elements indicate?
Where major cost savings may be
What are the 3 stages of calculating WLCs?
- Planning
- Preparation
- Implementation
What should objectives have in the planning stage of WLCs?
Defined outputs that help management to reach a decision about the purchase to be made
Name 5 examples of typical objectives
- Determine a budget for the asset being procured
- Help clarify the contents of a contract
- Identify any support that might be needed to use the asset effectively and efficiently
- To help improve the specification of the asset in order to reduce costs
- To identify the range of output that the asset can achieve before additional costs need to be incurred
Name the 3 basic groups of the WLC model
- Decision support models
- Simulation models
- Optimisation models
Decision support models
Designed to rank possible alternatives based on a set of agreed priorities
Simulation models
Take into account the fact that some of the cost variable are not specific values but can come from a range of values
Give an example of a simulation model
Monte Carlo Model
Monte Carlo Model
A mathematical technique that generates and uses random numbers in the modelling of risk
Histogram
A graphical display in which data is grouped into ranges and then the frequency of those ranges is shown as a bar chart
Normal distribution
An arrangement of data points in which most of the points cluster around an average value with the remainder of the data points falling away to extremes on both sides
Standard deviation
A statistical term to calculate how much the conformance of an item deviates from the mean
Optimisation models
Most frequently used to calculate support costs, such as inventory levels or maintenance regimes
Lead time
The amount of time from placing the order to the goods/services being delivered
Safety stock (buffer stock)
Stock held as a contingency or insurance against disruption or unexpected demand
