L4M5 Commercial Negotiation
Knowing what something 'should cost' does not mean - ANS you can always negotiate
this price, but it is clearly a major advantage to you in where the buyer has significant
power.
Saving levers and tactics - Volume concentration - ANS -Supplier reduction
-Volume pricing
-Volume redistribution
-Volume consolidation across categories
-Standardisation
-Buying consortia
Saving levers and tactics - Demand management - ANS -Lower price product/service
-Approvals
-Visibility
-Budget linkages
Saving levers and tactics - Best price evaluation - ANS -Benchmark internal prices
-Model 'should costs'
-Compare total cost of ownership
-Competitive bidding
-Index/cap prices
-Commodity hedging
Saving levers and tactics - Global sourcing - ANS -International suppliers
-Unbundling
-Exchange rate hedging
-Exchange rate price indexing
-Price indexing
Saving levers and tactics - Specification Improvement - ANS -Rationalise/standardise
parts
-Part substitution
-Off the shelf versus custom
-System versus component
-Value engineering
,-Life-cycle costs
Saving levers and tactics - Joint process improvement - ANS -Process re-engineering
-Integrated logistics
-Joint product development
-Long-term contracts
-Call-off ordering
-Online trading
-Vendor managed inventory
-On-site support
Saving levers and tactics - Relationships restructuring - ANS -Make versus
buy/outsourcing
-Alliances/partnerships
-Joint ventures
-Supplier development
-Use manufacturers instead of distributors
Purchase price cost analysis (PPCA)
(a combination of price analysis and cost analysis) - ANS is a method for gathering,
analysing and using price and cost information in a systematic way. The process allows
the identification of future savings and opportunities to improve current costs
Purchase price cost analysis (PPCA) is a versitile tool that promotes purchasing
decisions based on a sound analysis of the various costs, and enables you to do the
following - ANS -Set negotiating goals
-Validate pricing or support a challenge to pricing
-Identify cost drivers in the value chain
-Identify opportunities for improvement
-Establish a dialogue with a supplier based on cost versus price
-Establish suppy relationships based on cost-plus pricing
-Identify loss leader quotes
When to use purchase price cost analysis PPCA - ANS -On big spend items, relative
to total purchasing spend
-On items within categories that are 'strategic' or planned to move into 'Strategic' from
'leverage' (portfolio analysis)
-Especially on items with categories that are 'tailored', 'generic or 'custom'
-On items within categories that have major impacts on your cost base
,Purchase price cost analysis PPCA - high level questions to ask - ANS -Is price related
to the costs/market price/value/greed?
-What are the costs throughout the value chain?
-How much are the underlying raw materials/conversion cost/labour/OHDs/profit?
-Is the profit excessive?
-Do we want to develop cost-plus or open-book cost pricing
Purchase price cost analysis - Keys to success - ANS -Start building up detailed cost
profiles on the categories within the vategory management group
-Shift emphasis in discussion with suppliers from 'price' to 'cost'
-Beware across-the-board percentage price increases. An increase in one area dos not
justify a price increase when other costs may be decreasing
-Try to obtain cost breakdowns during the initial enquiry. Suppliers tend to be most
receptive at this stage
-Map out each stage of the value chain and examine them critacally for cost-reduction
opportunities
Getting started with Purchase price cost analysis (PPCA) - ANS -Create a simple cost
model on a spreadsheet, starting with your best guesses about cost categories
-Visit the supplier(s) if feasible and appropriate
-Ask questions in personal interviews i.e requests for information
-Do desk research
-Update and expand your starting point cost model, filling in data as it is gathered
-Repeat the process
-Consider presenting your model to the supplier(s) for reaction and feedback
Understanding suppliers costs assists procurement to do the following - ANS -Explain
to internal stakeholders what drives costs and so seek to reduce these to become a
more attractive customer with a lower cst to serve, attracting lower prices
-Understand what elements of expenditure with supplier(s) are addressable and so
potentially influenceable through commercial negotiations
-Establish realistic opening offers.price positions with suppliers and walk-away points
-Know the circumstances when suppliers can afford to make price concessions without
it hurting their profits too much and so focus on these
Microeconomics - ANS a branch of economics that considers the behaviour of
individuals and businesses and how decisions are made based on the allocation of
limited resources based on demand and supply, prices and costs. Considers things at
the level of the firm, industry and market
, Macroeconomics - ANS focused on the large, and considers things at the level of the
economy of the country, region or world. It covers the study of growth, inflation,
exchange rates and unemployment
Micro economics considers the factors that affect - ANS individual economic choices,
the effect of changes in these factors on the individual decision makers, how their
choices affect and are affected by markets, and how prices and demand are determined
in individual markets
Opportunity cost - ANS The cost of the opportunity forgone by making a choice of one
option over another
The law of diminishing returns - ANS states that if one keeps on adding a variable
factor of production (such as labour) to fixed factors (such as land), you will get
proportionally less output from each additional unit of factor added until, eventually,
overall output will start to decrease with each additional unit of factor added
Microeconomics proposes that prices are determined by the interaction of - ANS
Supply and demand
The factors that determine demand for a good or service include the following - ANS
-The necessity of the item for firms/existence/subsistence
-The price of the good or service
-The prices of other goods and services, especially substitutes and complements
-The income of buyers
-The tastes and preferences of buyers (influenceable by marketing)
-Expectations of buyers about the future
The determinants of supply are as follows - ANS -The physical feasibility and time and
energy required to produce the products
-Price
-Prices of other goods and services
-Relative revenues and costs of making the good or service
-The objectives of producers and their future expectations
-Technology and innovation
Equilibrium price - ANS the price that balances quantity supplied and quantity
demanded
Knowing what something 'should cost' does not mean - ANS you can always negotiate
this price, but it is clearly a major advantage to you in where the buyer has significant
power.
Saving levers and tactics - Volume concentration - ANS -Supplier reduction
-Volume pricing
-Volume redistribution
-Volume consolidation across categories
-Standardisation
-Buying consortia
Saving levers and tactics - Demand management - ANS -Lower price product/service
-Approvals
-Visibility
-Budget linkages
Saving levers and tactics - Best price evaluation - ANS -Benchmark internal prices
-Model 'should costs'
-Compare total cost of ownership
-Competitive bidding
-Index/cap prices
-Commodity hedging
Saving levers and tactics - Global sourcing - ANS -International suppliers
-Unbundling
-Exchange rate hedging
-Exchange rate price indexing
-Price indexing
Saving levers and tactics - Specification Improvement - ANS -Rationalise/standardise
parts
-Part substitution
-Off the shelf versus custom
-System versus component
-Value engineering
,-Life-cycle costs
Saving levers and tactics - Joint process improvement - ANS -Process re-engineering
-Integrated logistics
-Joint product development
-Long-term contracts
-Call-off ordering
-Online trading
-Vendor managed inventory
-On-site support
Saving levers and tactics - Relationships restructuring - ANS -Make versus
buy/outsourcing
-Alliances/partnerships
-Joint ventures
-Supplier development
-Use manufacturers instead of distributors
Purchase price cost analysis (PPCA)
(a combination of price analysis and cost analysis) - ANS is a method for gathering,
analysing and using price and cost information in a systematic way. The process allows
the identification of future savings and opportunities to improve current costs
Purchase price cost analysis (PPCA) is a versitile tool that promotes purchasing
decisions based on a sound analysis of the various costs, and enables you to do the
following - ANS -Set negotiating goals
-Validate pricing or support a challenge to pricing
-Identify cost drivers in the value chain
-Identify opportunities for improvement
-Establish a dialogue with a supplier based on cost versus price
-Establish suppy relationships based on cost-plus pricing
-Identify loss leader quotes
When to use purchase price cost analysis PPCA - ANS -On big spend items, relative
to total purchasing spend
-On items within categories that are 'strategic' or planned to move into 'Strategic' from
'leverage' (portfolio analysis)
-Especially on items with categories that are 'tailored', 'generic or 'custom'
-On items within categories that have major impacts on your cost base
,Purchase price cost analysis PPCA - high level questions to ask - ANS -Is price related
to the costs/market price/value/greed?
-What are the costs throughout the value chain?
-How much are the underlying raw materials/conversion cost/labour/OHDs/profit?
-Is the profit excessive?
-Do we want to develop cost-plus or open-book cost pricing
Purchase price cost analysis - Keys to success - ANS -Start building up detailed cost
profiles on the categories within the vategory management group
-Shift emphasis in discussion with suppliers from 'price' to 'cost'
-Beware across-the-board percentage price increases. An increase in one area dos not
justify a price increase when other costs may be decreasing
-Try to obtain cost breakdowns during the initial enquiry. Suppliers tend to be most
receptive at this stage
-Map out each stage of the value chain and examine them critacally for cost-reduction
opportunities
Getting started with Purchase price cost analysis (PPCA) - ANS -Create a simple cost
model on a spreadsheet, starting with your best guesses about cost categories
-Visit the supplier(s) if feasible and appropriate
-Ask questions in personal interviews i.e requests for information
-Do desk research
-Update and expand your starting point cost model, filling in data as it is gathered
-Repeat the process
-Consider presenting your model to the supplier(s) for reaction and feedback
Understanding suppliers costs assists procurement to do the following - ANS -Explain
to internal stakeholders what drives costs and so seek to reduce these to become a
more attractive customer with a lower cst to serve, attracting lower prices
-Understand what elements of expenditure with supplier(s) are addressable and so
potentially influenceable through commercial negotiations
-Establish realistic opening offers.price positions with suppliers and walk-away points
-Know the circumstances when suppliers can afford to make price concessions without
it hurting their profits too much and so focus on these
Microeconomics - ANS a branch of economics that considers the behaviour of
individuals and businesses and how decisions are made based on the allocation of
limited resources based on demand and supply, prices and costs. Considers things at
the level of the firm, industry and market
, Macroeconomics - ANS focused on the large, and considers things at the level of the
economy of the country, region or world. It covers the study of growth, inflation,
exchange rates and unemployment
Micro economics considers the factors that affect - ANS individual economic choices,
the effect of changes in these factors on the individual decision makers, how their
choices affect and are affected by markets, and how prices and demand are determined
in individual markets
Opportunity cost - ANS The cost of the opportunity forgone by making a choice of one
option over another
The law of diminishing returns - ANS states that if one keeps on adding a variable
factor of production (such as labour) to fixed factors (such as land), you will get
proportionally less output from each additional unit of factor added until, eventually,
overall output will start to decrease with each additional unit of factor added
Microeconomics proposes that prices are determined by the interaction of - ANS
Supply and demand
The factors that determine demand for a good or service include the following - ANS
-The necessity of the item for firms/existence/subsistence
-The price of the good or service
-The prices of other goods and services, especially substitutes and complements
-The income of buyers
-The tastes and preferences of buyers (influenceable by marketing)
-Expectations of buyers about the future
The determinants of supply are as follows - ANS -The physical feasibility and time and
energy required to produce the products
-Price
-Prices of other goods and services
-Relative revenues and costs of making the good or service
-The objectives of producers and their future expectations
-Technology and innovation
Equilibrium price - ANS the price that balances quantity supplied and quantity
demanded
