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