3.3.3 Flashcards
What is Price?
the amount expressed in units of currency, to be paid by the purchaser to the supplier to obtain the goods or services
What is a Price schedule?
an appendix to a contract setting out what the prices are
What is Cost?
the total sum of amounts paid by the supplier in order to produce the goods or provide the services
What is a Schedule of rates?
An itemized list of component parts within a lump-sum contract, or a list of individual products, giving a price for each unit. Note that the rate may be different for different order volumes
What is Non-linear pricing?
Multiple lines for price breaks. Higher the quantity, cheaper the price
What is Linear Pricing?
One price for any quantity
When are hourly rates/day rates used?
services, where most of the cost is for the person or people providing the service e.g. consultants, lawyers, training providers
How can standard schedules be used?
They can be used as reference points against which prices can be compared in tendering and negotiation
What are Combination rates?
Where the service being provided is a mixture of goods and services (parts and labor)
What is a Fixed pricing arrangement?
the purchaser will simply say they want ‘X’ amount of a product and will be quoted a fee for that one order. It can also be used for services.
What is the risk in using fixed-pricing arrangements?
The cost risk of fixed pricing arrangements is shared between the two parties, but it may not be shared equally. That will depend on the following -
How accurate the specification is?
How robustly the supplier resists post-contract change requests
How good the original price estimation is by both parties
What are the advantages of using fixed pricing arrangements?
Budget/income certainty
The impact of changes to the suppliers cost base is not fed through to the purchaser. If costs diminish, the supplier will benefit from this, and if cost rise, the purchaser will benefit
What are the disadvantages of using fixed pricing arrangements?
Time needed to fully specify exactly what is included and excluded in the price
The impact of changes to the suppliers cost base is not fed through to the purchaser.
Assumptions, e.g. on the balance of high cost/low-cost items not being met, could lead to disputes
Potential for quality issues if the fixed price is too low - supplier will deliver down to price
What are Variable costs?
Costs that change directly in line with the output of the organization
or
Cost that fluctuate as production increases and decreases
What are Fixed costs?
A cost that remains constant in the short term irrespective of production volumes
Why should purchasers seek to understanding supplier mark-ups and margins?
To help to determine whether they are getting a reasonable deal
What is Mark-up?
Profit as a percentage of costs
Example: Assume a product costs £1000 to make and it sells for £3000. The profit is £2000.
The Mark-up is £2000 as a percentage of £1000
£2000 / £1000 x 100 = 200%
What is Margin?
Profit as a percentage of sales value
Example: Assume a product costs £1000 to make and it sells for £3000. The profit is £2000.
The profit margin £2000 as a percentage of £3000
£2000 / £3000 x 100 = 66.67%
What is the cost-plus pricing model?
A model where the price is set based on cost, plus an agreed profit mark-up
Cost + (cost x % mark-up) = price
Example: £70 cost with 5% mark-up
£70 + (£70x5%) = £70 + £3.50 = £73.50
What should the supplier demonstrate to the purchaser’s satisfaction for a cost-plus pricing model?
Exactly what the input costs are
Whether they are fixed or variable
How the variables normally move
How much control the supplier has over them and that they are exercising that control
What are the advantages of Cost-plus pricing for the Purchaser?
Value for money demonstrated by fixed profit mark-up - knowledge that the supplier is not making excess profit
Risk of supplier collapse is reduced, particularly if the purchaser is a major customer of the supplier
What are the advantages of Cost-plus pricing for the Supplier?
All costs are covered - it cannot make a loss
Guaranteed profit levels aid forward planning and may assist small companies in accessing cheaper credit
Easy to justify price increases
What are the disadvantages of Cost-plus pricing for the Purchaser?
Lack of certainty over supplier cost base: how ‘real’ is the data sharing? Needs accurate data and a strong degree of trust between the parties
Changes in the supplier cost base feed directly into the price paid, with no room for negotiation
Supplier has no incentive to manage costs
What are the disadvantages of Cost-plus pricing for the Supplier?
Profit is limited, cannot gain from cost efficiencies
Cannot leverage market advantage to charge a higher price
Cannot refuse price reductions in response to input cost reduction
