1. Price Determination Marketing 3860 – Purchasing July 26, 2004 Kimball Bullington, Ph.D. Associate Professor of Operations Management Middle Tennessee State University

2. How is supplier cost related to price?

3. Total Cost Total Cost = Direct materials +Direct labor +Factory Overhead + General, administrative, and selling Manufacturing Cost

4. Cost + Profit = Price Price - Cost = Profit Price - Profit = Cost Cost Approach – Typical Seller’s Perspective Market Approach – Typical Buyer’s Perspective Market Approach – Enlightened Buyer’s & Seller’s Perspective

5. Sherman Antitrust Act of 1890 Any combination, conspiracy, or collusion with the intent of restricting trade in interstate commerce is illegal.

6. Sherman Antitrust Act of 1890  It is illegal for suppliers to get together to set prices (price fixing) or determine the terms and conditions under which they will sell.  It is illegal for buyers to get together to set the prices they will pay.

7. Robinson-Patman Act Federal Anti-price Discrimination Act of 1936  A supplier must sell the same item, in the same quantity, to all customers at the same price. The seller can charge a lower price for a larger purchase quantity, if cost justified. The seller can charge a lower price to move distress or obsolete merchandise. The seller can lower the price to meet local competition in a particular geographic area.

8. Types of Purchases  Raw materials – copper, wheat, crude oil, steel, etc.  Special items – custom items  Standard production items – fasteners, valves, tubing, etc.  Items of small value – office supplies, MRO

9. Types of Purchases  Capital goods  Services  Resale

10. Conditions that Ensure an Efficient Bid Process 1.There must be at least two, and preferably several, qualified suppliers 2.The suppliers must want the business 3.The specifications (requirements) must be clear 4.There must be honest bidding and the absence of any collusion between bidders

11. Negotiation

12. Negotiate - Quality 1.Specification compliance 2.Performance compliance 3.Test criteria 4.Rejection procedures 5.Liability 6.Reliability 7.Design changes

13. Negotiate - Support 1.Technical assistance 2.Product research, development, and/or design 3.Warranty 4.Spare parts 5.Training 6.Tooling 7.Packaging 8.Data sharing, including tech data

14. Negotiate - Supply 1.Lead times 2.Delivery schedule 3.Definition of “on-time” 4.Consignment stocks 5.Expansion options 6.Supplier inventories 7.Lot sizes 8.Cancellation options

15. Negotiate - Transportation 1.FOB terms 2.Carrier 3.Commodity classification 4.Freight allowance / equalization 5.Multiple delivery points

16. Negotiate - Price 1.Purchase order price 2.Discounts 3.Escalation provisions 4.Exchange terms 5.Import duties 6.Payment of taxes 7.Countertrade credits 8.Shared cost reductions

17. Developing a Negotiation Strategy 1.Develop the specific objectives desired from the negotiation. 2.Gather pertinent data - cost analysis. 3.Determine the facts of the situation. 4.Determine the issues (areas of potential disagreement). 5.Develop the positions of strength of both parties.

18. Developing a Negotiation Strategy 6.Set the buyer’s position on each issue, and estimate the seller’s position on each issue based on your research. What data will be used to support each? Which position is stronger? Which points give each side the most strength? 7.Plan the negotiation strategy. 8.Brief all persons on the team.