CIPS L4M2 Chapter 1 (1.2) Flashcards
Identify how costs and prices can be estimated for procurement activities
Why should I understand business requirements?
- To target which market to analyse
- To identify the kind of information that needs to be collected
- To confirm the most appropriate collection and from what source
What are the two (2) ways for collecting further information (source)?
- Desk Research
- Field Research
Desk Research is which market source?
- Desk research is secondary research which involves gathering information already available from published sources.
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
Field Research is which market source?
Field research is primary research and is the collection of original or raw data
Examples: • Quantitative – provides statistical information • Qualitative – examines people’s feelings and attitudes towards an organisation or service • Advice for field research. Talking to customers and monitoring their buying habits and how they behave is one of the best methods or market research.
What questions should be asked when monitoring Supply Market trends?
- Is the demand for the product or service growing or strinking?
- What are the general economic and market trends?
- How might the customer requirements and behavior change in the future?
- What new products are in the suppliers pipeline?
- How are the competitors in the supply market changing, what are their plans?
- Is there any forthcoming legislation that might affect the market?
Which document can be used to gather information about Suppliers in the procurement process?
- Request for information (RFI) is the document used to test the supply market to see what is available in terms of supplier capability and is used in the early stages of buying a new product or service
It 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
What is the difference between price and cost?
- Price is what the supplier charges for a package of benefits offered by the buyer
- Cost is what the buyer pays to acquire the goods or services purchased
What are the two categories/ classification of costs?
- Direct costs
- Indirect Costs
→Direct Cost is directly related to producing and selling products. example in a Bakery: cost of the ingredients, labour (wages- staff mixing the ingredients)
→Indirect Costs are other costs involved in running a business. example in a Bakery: building costs, business rates, stoves, baking pans, utensils, salaries of the supervisors and sale staff
What are the two (2) classification of cost in 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.
What are Fixed, Variable and Semi-variable Costs?
- Fixed costs do not change (constant/do not vary) with the level of output
- Variable costs do change (do vary) with changes in the number of products/units made
- Semi-variable costs are costs that show characteristics of both fixed and variable costs. Semi-variable cost = Fixed cost + variable cost
Fixed costs examples: Warehouse worker salary to be paid regardless how many deliveries he takes in (per day/per month)
Variable cost examples: Raw material the more products made, higher the cost less products made, lower the cost no products made the variable cost is zero
Semi-variable examples: Cellphone contract 1 GB p/month (fixed cost), over the 1 GB buy more data (variable cost).
What is a cost estimate?
- An approximation of the cost of a program, project or operation and is a single total value which may have identifiable component values
What are the three (3) ways to produce estimated costs and budgets?
- Break even analysis
- Purchase price cost analysis
- Purchase price analysis
What is Break-even analysis (break even point)?
- Break-even analysis is the point at which sales and total costs meet (sales value = total cost value)
- Break-even point can be stated as the fixed cost divided by the marginal profit.
Calculating break-even point Formula: F/(R-V) = Q
Fixed cost /(Revenue-Variable Cost) = Units (Quantity)
Sales revenue = R, Variable cost = V.
Sales revenue - Variable cost (R-V) is the marginal profit.
Fixed cost = F
Q is the number of units that need to be produced. Fixed cost divided by the marginal profit. F/(R - V)
Q units have been produced, the marginal profit is units produced x (Sales revenue - Variable costs) Q x (R -V). At break even, this value is also the value of fixed cost F.
This means Fixed Cost = Units produced x (Sales revenue - Variable costs) F = Q x (R - V).
Divide each side of the equation by Sales revenue - Variable costs (R - V) to get Fixed cost divided by (Sales revenue - Variable costs) = Units. F/(R - V) = Q.
Example:
WASH&GO is a cleaning company. it has a standard price of $ 10 per item. You estimate that the variable cost are $3.50 per item, and its accounts show it has a fixed annual cost of $34,000. How Many items does WASH&GO have to clean every day before is starting making profit?
F/(R-V)=Q 10-3.50 = 6.50 → 34,000/6.50
If the sales are greater than 5231 then it makes profit, and it makes a loss if it sells les than this.
What is Purchase Cost Analysis (PCA)?
- A tool used to analyse the costs of things bought to identify strategies to reduce costs and improve supplier relationships
The is a 4 quadrant segmentation model for PCA which is:-
- Leverage focus = cost analysis
- Strategic focus = continuous improvement
- Low impact focus = price analysis
- Critical projects focus = life-cycle costing
✳ Sales - Profit = Target Cost
Target cost setting
For public sector or nonprofit organizations, the equivalent to the target cost is the proportion of revenue that the product or service should equal.
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
What is Purchase Price Analysis?
- Its the analysis of price and costs together. In the long-run, suppliers must cover all of their costs and in the short-run, price is dictated by supply and demand (competition)
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
Attractiveness of the market to suppliers influencing price: ✳ Strategic ✳ Develop (price concessions) ✳ Exploit (premium price) ✳ Nuisance (maximize prices)
Other influences on price •Keep workforce busy. •Buy the business by predatory pricing. •Competition among suppliers. •Supplier has plenty work.
