CIPS L4M2 Chapter 1 (1.2) Flashcards
Identify how costs and prices can be estimated for procurement activities
The understanding of the business requirements will help:
To target which market to analyse
• Identify the kind of information that needs to be collected
• Confirm the most appropriate collection from what source
Chapter 1: Page 22
Two (2) ways for collecting further information (source)?
Desk Research
Field Research
Chapter 1: Page 22,23
Desk Research is which market source?
Secondary Research
Examples:
• Local business reference library
• Trade associations
• Official statistics
• Business magazine and national newspapers reports
• Local authorities and Chambers of Commerce
• The internet
• Commercial publishers of market reports
• Business’ own data
Chapter 1: Page 22
Field Research is which market source?
Primary research
Examples:
• Quantitative – provides statistical information
• Qualitative – examines people’s feelings and attitudes towards an organisation or service
• Advice for field research
Chapter 1: Page 23
Which document can be used to gather information about suppliers in the procurement process?
Request for information (RFI)
A document used in the early stages of buying a new product or service
• Used to test the supply market to see what is available in terms of supplier capability
• Does not imply that any procurement will subsequently be made, or contract awarded
• Often used to create a potential shortlist of suppliers for the next stage
Points to consider:
• Questions should be framed appropriately
• The purpose of the RFI is to gather information,
document should be brief
• Not a promise of work, but should be worded to gain
interest
• Questions should focus on supplier’s understanding
and interpretation of the organisations problem
• Suppliers should be encouraged to ask questions
Chapter 1: Page 24
What is price and cost?
Price
• Is what supplier charges for a package of benefits offered by the buyer
Cost
• Is what the buyer pays to acquire the goods or services purchased
Chapter 1 Chapter 1: Page 25
When estimating cost there are different categories/ classification of costs to consider.
Question to ask
Can it attribute to the production of the specific goods or services or not?
Direct costs
• Directly related to producing and selling products
• Cost directly linked to final product
Example: Bakery
Cost of the ingredients
Labour (wages- staff mixing the ingredients)
Indirect Costs • Other costs involved in running a business • Overhead costs • Cost to multiply activities, don't attributed to any one product or service Example: Running Bakery Building costs, business rates Stoves,baking pans,utensils Supervisors,Managers Salaries of the Supervisors,Sale Staff Chapter 1: Page 25
Two (2) Classification of the Value Chain created by Porter’s in 1985
Primary activities (direct costs): • Inbound logistics • Operations • Outbound logistics • Sales and marketing • Service Secondary activities (indirect costs): • Organisation infrastructure • Human resource management • Technology • Procurement Chapter 1: Page 25,26
Other methods to classify cost
Fixed costs
• Do not change (constant/do not vary) with the level of output
Examples:
Warehouse worker salary to be paid regardless how
many deliveries he takes in (per day/per month)
Variable costs
• Do change (do vary) with changes in the number of products made (units made)
Example: Raw material
The more products made, higher cost
The less products made, lower cost
No products made, variable cost = zero Total cost of output
Semi-variable costs
• Those costs that show characteristics of both fixed and variable costs
Example
Cellphone contract 1 GB p/month (fixed cost), over the
1 GB buy more data (variable cost) .
Semi-variable cost = Fixed cost + variable cost
Chapter 1: Pages 26,27
What is cost estimate?
• Approximation of the cost of the program,project or operation
• Cost Estimate is the product of the costing estimating process
• Cost estimate has a single total value and may have identifiable component values
Chapter 1: page 28
Three (3) ways to produce estimated costs and budgets
Question
How to use this information for the above cost?
• Break even analysis
• Purchase price cost analysis
• Purchase price analysis
Chapter 1: Page 28
Break-even analysis (break even point)
Break-even analysis
• The point at which sales and total costs meet
(sales value = total cost value)
• Calculating break-even point
• Understanding the break-even point for a key supplier
can be extremely useful in negotiations
(‘win-win’ outcome)
• Above break-even point results in ‘super-profits
• Calculating break-even point
Formula: F/(R-V) = Q
Fixed cost /(Revenue-Variable Cost) = Units (Quantity)
Chapter 1: page 28,29
Purchase cost analysis (PCA)
Purchase cost analysis (PCA)
• A tool used to analyse the costs of things bought to identify strategies to reduce costs and improve supplier relationships
✔ Use a Segmentation model for PCA to consider the nature of the businesses _ongoing or a once-off.
(refer to model on page 31)
✔ Use a Segmentation model for PCA Arms-length relationships (desired relationship with the supplier)
✳ Produce 4 quadrants
• Leverage
• Strategic
• Low impact
• Critical projects
Strategic suppliers
• Careful handling of the relationship using cost
analysis
• Work co-operatively to find ways to reduce costs to
achieve ‘target cost’
✳ Sales - Profit = Target Cost
Target cost setting
• Carry out PCA to understand components which are
important to the customer
• Ranking of customer requirements
• Can use quality function deployment (QFD)
to capture data
✳ Convert data from QFD into percentages based
on contribution to overall customer satisfaction
• Estimate costs of each of components (price analysis)
• Identify appropriate action
Chapter 1: page 30,31,32
Purchase price analysis
Purchase price analysis
• In the long-run, suppliers must cover all of their costs
• In the short-run, price is dictated by supply and demand (competition)
• Cost and price analysis are usually considered together
• Attractiveness of the market to suppliers influencing price:
✳ Strategic
✳ Develop (price concessions)
✳ Exploit (premium price)
✳ Nuisance (maximize prices)Other influences on price
(name examples)
Chapter 1: page 33,34
Three (3) main sources of price comparator?
How to carry out a price analysis
• Comparing prices against a price comparator
(benchmark):
✳ Prices that have been paid in the past -account for
inflation
✳ Published prices - find in catalogues
✳ Pricing formula - square p/m for bldg between price
Chapter 1: page 35
Another why to analyse prices is?
Competitive bidding
• Use market competition to give each supplier best price for comparison
• Pre-requisites when considering competitive bidding
✳ Suppliers must be technical acceptable
✳ Enough suppliers to ensure competition
✳ Sufficient time to use the pricing method
• Reasons for not using competitive bidding
✳ Can not estimate the cost
✳ Change in specifications, price not only variable
✳ Set up costs are a major factor
Chapter 1: page 36
What contributes to the cost of a purchase made by the business?
Purchase price is not necessarily the only cost to a business when making a purchase • Additional costs can include: ✳ Freight costs ✳ Import duties ✳ Storage costs ✳ Wastage costs (perishable goods) ✳ Quality checking ✳ Replacement costs if item is sub-standard Chapter 1: page 36,37
The sum of all the cost of an item is called?
Total Cost of Ownership (TCO)
Refers to the sum of all costs incurred throughout the lifetime of owning or using an asset; they typically go beyond the original purchase price.
Chapter 1: page 36
Price + hidden costs relate to?
Iceberg concept
TCO = Price + Hidden Costs
Chapter 1: page 36
End-of-life costs
Disposable Costs / Depreciation of the equipment,item
✳ Equipment requires maintenance
✳ Training People using equipment
Chapter 1: page 37
Whole Life- cycle costing (WLC) three stages to the approach
Stage 1 – planning
• Typical objectives
• 3 basic groups of the WLC model:
✳Decision support models
to rank possible alternatives against agreed priorities
identification of the problem, not the symptom of the problem
✳Simulation models – take into account fact that come
cost variables are not specific value
✳ Monte Carlo model
✳ Optimisation models – most frequently used to
calculate support costs (i.e. inventory)
Stage 2 – preparation
• Testing the various models for calculating the WLC
Stage 3 – implementation
• Implement the model to get the results
Chapter 1: 38,39,40
