1 Oxford Professional Education Group Ltd 1 Diploma in Procurement & Supply Business needs in Procurement & Supply Session 2 Estimating costs and prices

2 Oxford Professional Education Group Ltd 2 Session Learning Outcomes On completion of this session you should be able to:  Explain how costs and prices can be estimated for procurement activities. Syllabus reference 1.2

3 Oxford Professional Education Group Ltd 3 Some definitions Costs The total sum involved including price plus any additions that may be associated with ownership, use and/or disposal. Note: Cost is not, and should not be used as a synonym for PRICE or VALUE. (Source: adapted by CIPS from The official dictionary of purchasing & supply by KH Compton and DA Jessop) Price ‘What a seller charges for a package of benefits offered to a buyer. CIPS (2012)

4 Oxford Professional Education Group Ltd 4 What is the price? There are a range of ways prices are communicated to potential buyers including:  Standard price lists  Quotes  Negotiation  Competition  Market  Economic indices

5 Oxford Professional Education Group Ltd 5 Research Primary research Secondary research Quantitative research Qualitative research

6 Oxford Professional Education Group Ltd 6 Primary sources of market data on costs and prices  Communication with suppliers  The buyer’s database of market data  The marketing communications of suppliers  Online market exchanges, auction sites and forums  Advisory and information services  Trade fairs, exhibitions and conferences  Informal networking and information exchange

7 Oxford Professional Education Group Ltd 7 Secondary sources of market data on costs and prices  Financial and trade or industry press  Published economic indices  Published and online market analysis  Published statistical surveys compiled by the government  Price listing and price comparison websites

8 Oxford Professional Education Group Ltd 8 Suppliers pricing decisions External factors  Prices charged by competitors  Extent of competition (market structure)  The nature of competition in the market  Market conditions  Market penetration  Customer perceptions of value  Price elasticity of demand  What a particular (desirable, powerful) customer is prepared to pay  Environmental factors affecting the cost of raw materials  Environmental factors affecting demand and affordability

9 Oxford Professional Education Group Ltd 9 Suppliers pricing decisions Cont/d Internal factors  Costs of production and sales  How badly the supplier needs the business  Risk management  How attractive a particular customer is  Financial position and product portfolio  Where the product is in its ‘lifecycle’  Shareholders’ expectations and managerial objectives in regard to profit margins  The strategic objectives of the organisation

10 Oxford Professional Education Group Ltd 10 Oxford Professional Education Group Ltd Supplier pricing strategies  Cost based pricing  Market driven pricing

11 Oxford Professional Education Group Ltd 11 Oxford Professional Education Group Ltd Cost based pricing  Full-cost pricing  Cost-plus or mark-up pricing  Marginal pricing  Rate of return or ‘target return’ pricing  Contribution pricing

12 Oxford Professional Education Group Ltd 12 Oxford Professional Education Group Ltd Market driven pricing  Price volume  Market share pricing (or penetration pricing):  Market skimming  Current revenue pricing (or contribution pricing)  Loss Leader  Promotional pricing  Market segment pricing (also called differential pricing or price discrimination)  Competition pricing (or dynamic pricing)

13 Oxford Professional Education Group Ltd 13 Oxford Professional Education Group Ltd Buyers pricing decisions  Relative bargaining power  Number of potential suppliers  Type of purchase  Prices paid by competitors  The total value offered  What can be afforded  What is a ‘reasonable’ price  What is a ‘fair’ price

14 Oxford Professional Education Group Ltd 14 Oxford Professional Education Group Ltd Price and cost analysis Price analysis – is the price offered to the buyer by the supplier fair and appropriate Cost analysis – a supplier is required to justify it’s price in relation to the cost of production. Open book costing Cost transparency

15 Oxford Professional Education Group Ltd 15 Oxford Professional Education Group Ltd Costs Components of the costs base  Raw materials (and/or components, subassemblies and consumables)  Labour  Overheads

16 Oxford Professional Education Group Ltd 16 Oxford Professional Education Group Ltd Direct and indirect costs Direct costs  Main examples include  direct materials  direct labour Indirect costs  Often many and varied

17 Oxford Professional Education Group Ltd 17 Oxford Professional Education Group Ltd Total costs

18 Oxford Professional Education Group Ltd 18 Oxford Professional Education Group Ltd Fixed and variable cost

19 Oxford Professional Education Group Ltd 19 Oxford Professional Education Group Ltd Understanding costs  The importance of understanding costs  Some other cost issues  Calculating costs  Profit  Contribution  Break even analysis

20 Oxford Professional Education Group Ltd 20 Oxford Professional Education Group Ltd Lifecycle costing  Total cost of ownership  Whole life costing (WLC)  Investment appraisal methods  Accounting rate of return (ARR)  Payback period (PP)  Discounted cash flow (DCF)  Internal rate of return (IRR)

21 Oxford Professional Education Group Ltd 21 Oxford Professional Education Group Ltd The price-cost iceberg Bailey, Farmer, Jessop and Jones 1998,

22 Oxford Professional Education Group Ltd 22 Oxford Professional Education Group Ltd Statistical forecasting techniques  Simple moving average  Weighted average (or exponential smoothing)  Time series (trend) analysis  Regression analysis

23 Oxford Professional Education Group Ltd 23 Oxford Professional Education Group Ltd Estimating or predicting costs  What are the direct or variable costs of sales?  What are the indirect or fixed costs or overheads?  Premises costs  Labour and staff costs  Utilities  Printing, postage and stationery  Equipment costs  Fleet and vehicle costs  Advertising, promotion and sales activities  Financing costs  Legal and professional costs (including insurance)  What are the one-off capital costs for the period or project?