Essay on Prahinski Exam 3 Study Outline Spring

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Procurement and Supply Management, SCM 371
Dr. Prahinski
Exam III– Material Outline

1. Strategic Cost Management
a. Develop accurate price and cost information
Compare price against external benchmarks
Information Sources:
Published price lists
Competitive bidding
Other buyers
Trade journals

i. Market-based and cost-based pricing – know definitions, information sources, and be able to list a few specifics
Market-based pricing Cost-based pricing (Price)
Quantity discounts
Penetration pricing
Market skimming
Fixed costs pricing
Promotional pricing
Competition pricing model
Cash discounts
Target costing

When evaluating prices from different suppliers, you may become aware of certain prevalent practices in your industry. The following list represents some of the most prevalent practices, which can be quite effective in gaining benefits. For the supplier, additional revenue (by taking advantage of those without negotiation clout), additional sales volume, or an ease of cash flow are benefits. In turn, for the savvy buyer, the buying firm can obtain savings through an effective use of these mechanisms:

Quantity Discounts – a discount when buying a large volume
Penetration pricing – supplier offers a low price in an effort to penetrate into a new market (gain market share) (e.g., low ball negotiation tactic).
Market-Skimming Model - Backdoor selling (maverick buying)
Revenue Pricing Model - “The Goal” by Goldratt: Covering fixed costs (operating costs) by ensuring full capacity – important with efficient supply chains
Promotional Pricing Model - To enhance sales of product line (a group of related products), not necessarily to ensure each product’s profitability
Competition Pricing Model - Dynamic pricing, such as reverse auctions
Cash Discounts – the buyer will gain a discount if it pays the bill early.
Target costing – The buying firm works with the supplier to design a product to eventually be sold for a specific target price.

Cost-plus Pricing Model - Supplier adds % to product cost. $100 cost *(1+.20 markup)= $120
Margin Pricing Model - Supplier ensures specific margin. $100 cost / (1-.20 margin) = $125
Rate-of-Return Pricing Model - Unit cost + unit profit (offset by investment) = $100 cost +.20 return x $600,000/4000 units = $130
Should-cost pricing model – will be further described today, starting with the next slide.

In this course, we will develop an in-depth understanding of should-cost pricing.

ii. Should-cost model - (possible math problem and/or multiple choice) –similar to assignment #4 without data collection or BOM or cycle.
1. Assumptions
Direct Material
+ Direct Labor
+ Factory Overhead
= Cost of Goods Sold
+ Operating Expenses
+ Operating Profit
= Should Cost Price

2. Purchasing Law (Contracts)
a. Requirements of a contract; definition and components of offer and counteroffer; definition of boilerplate (see slide on contracting process); the purchase order is an offer
THE REQUIREMENTS OF A VALID CONTRACT (according to the U.S. Commercial Code):
The parties must be capable. The parties must each be of good mind – not mentally incapable (e.g., drunk or other mental impairment)
Subject matter is legal and valid. Contracts for illegal products (drugs) or illegal activities (killing someone or enslaving them) are not legal
There is mutual consideration (value must be exchanged). Each party must get something from the other party – even if it is nominal (not very much).
An agreement is reached by offer and acceptance. One party must extend an offer (or counter-offer) and the other party must accept it.

NOTE: Contracts do not require a time frame. Time, which is covered later in this slide packet, is a recommended feature of the contract, not required.

An Offer
A proposal to enter into a contract

A proposal made to someone to enter into a contract.
Three components:
Intent to make an offer
Communication of the offer intent (e.g., a purchase order)