CIPS L4M2 Chapter 1 (1.2) Flashcards

Identify how costs and prices can be estimated for procurement activities

1
Q

The understanding of the business requirements will help:

A

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

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2
Q

Two (2) ways for collecting further information (source)?

A

Desk Research
Field Research
Chapter 1: Page 22,23

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3
Q

Desk Research is which market source?

A

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

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4
Q

Field Research is which market source?

A

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

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5
Q

Which document can be used to gather information about suppliers in the procurement process?

A

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

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6
Q

What is price and cost?

A

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

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7
Q

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?

A

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
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8
Q

Two (2) Classification of the Value Chain created by Porter’s in 1985

A
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
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9
Q

Other methods to classify cost

A

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

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10
Q

What is cost estimate?

A

• 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

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11
Q

Three (3) ways to produce estimated costs and budgets

Question
How to use this information for the above cost?

A

• Break even analysis
• Purchase price cost analysis
• Purchase price analysis
Chapter 1: Page 28

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12
Q

Break-even analysis (break even point)

A

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

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13
Q

Purchase cost analysis (PCA)

A

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

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14
Q

Purchase price analysis

A

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

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15
Q

Three (3) main sources of price comparator?

A

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

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16
Q

Another why to analyse prices is?

A

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

17
Q

What contributes to the cost of a purchase made by the business?

A
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
18
Q

The sum of all the cost of an item is called?

A

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

19
Q

Price + hidden costs relate to?

A

Iceberg concept
TCO = Price + Hidden Costs
Chapter 1: page 36

20
Q

End-of-life costs

A

Disposable Costs / Depreciation of the equipment,item
✳ Equipment requires maintenance
✳ Training People using equipment
Chapter 1: page 37

21
Q

Whole Life- cycle costing (WLC) three stages to the approach

A

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