isqa 439/539 price and cost analysis. five requirements of competitive bidding five requirements of...
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ISQA 439/539
Price and Cost Analysis
Five Requirements of Competitive Bidding
Five Requirements of Competitive Bidding Enough Dollars Enough Suppliers Enough Time Suppliers WANT Business Clear and Complete Specifications
When Not to Use Competitive Bidding
Difficult or Impossible to Estimate CostWhere Other Non-Price Issues are
ImportantSpecifications Likely to ChangeLarge/Special Tooling or Set-Up CostsWhen Supply Industry Has Big Backlog
Two Step Bidding
Price and Cost Analysis Objectives
Buyer’s Biggest Fear?
Determine a Fair PriceRemove Excess or Unrelated Costs Ensure Supplier Earns a Fair ProfitFind Ways to Reduce Overall Cost of
Ownership
Price and Cost Analysis
Price Analysis: Comparison of prices without regard to cost elements Quick, Easy Inexpensive Doesn’t yield much information
Suitable for industry standard products
Price and Cost Analysis
Cost Analysis: An examination of the elements of cost Direct Materials Direct Labor Overhead Profit
Takes Time, More Complex, More ExpensiveYields Much More Information
Price AnalysisFour Tools
Competitive Price Proposals Compare Catalog or Market Prices Historical Price Comparison Independent Estimate
Most Suitable for Industry Standard Items
Often Used With Competitive Bidding
Contract PricingFixed PriceFixed Price + IncentiveCost PlusCost Plus Fixed FeeCost Plus, Not to ExceedTime and Materials Indexed Price
Types of Discounts
Trade Resale End User
Volume By Item or By Total
Prompt PaymentSeasonal2%10 ARI vs 2%10 EOM
Prompt Payment Discounts
2% 10, Net 30 Give up use of money for 20 days in
exchange for 2% discount 365 / 20 = 18.25 Periods 18.25 X 2% = 36.5 % Annually
Even if We Only Pay Monthly, Not ARI 12 Periods, 2% Each = 24% Annually
What If We Negotiate 3% 7 Days?
Value of Negotiating Extended Terms
From Net 30 to Net 60Additional 30 Days (1/12 Year) Use of
MoneyAssume Alternate Use of Money Earns
6% Per Year6% / 12 = .50%/moWhich is Better – Extended Terms or
Prompt Payment Discount?
Payment Issues, ContinuedHow to Get A Discount Without Getting
a Discount
Productivity Improvement Curves (Learning Curves)
Graphic Illustration of Productivity Improvement from Repetition
Constant Rate at Each Doubling of Repetitions
Cost for One X Quantity Ordered
Learning Curves, Illustrated
Learning Curves and Volume Discounts
Ways to Hide Profits
Surcharges for MaterialsSurcharges for EnergyChange OrdersCounting Indirect Labor as DirectAllocation of Overhead
Additional Thoughts on Pricing
Minimum Order QuantitiesPrepaid FreightOvercoming Price Increases
Smile and Say ‘No’ Require Justification
Incentives for Suppliers to Reduce Their Costs Helping With Their Purchasing
Robinson-Patman Act
Sources of Information for Price Analysis
ISM Report on Business (www.ism.ws). U.S. Government’s Bureau of Labor Statistics (
www.bls.gov). PPI of particular interest.
U.S. Department of Commerce (www.commerce.gov).
Commercial commodity indexes (e.g., those offered by Dow Jones).
Cost Analysis Custom Products High Volume Requirements Cost Elements
Design Quality/Tolerances Processes Productivity Economies of Scale Sourcing Volume/Learning Curve
Types of Costs ALL Costs are Variable With Enough Time Variable, Within Time Limits
Vary With Decision Variable (Usually Volume) Direct Materials Direct Labor Machine Operating Costs Depreciation – Based on Usage Set-up Costs? Profits
Types of CostsFixed Costs
Building Light, Heat Set-up Costs? Depreciation – Based on Time Administrative / Overhead Costs
Types of Overhead
Manufacturing Overhead Engineering / R&D Overhead Sales and Marketing Overhead General and Administrative Overhead
Application of Overhead
Overheads Pooled Applied as a Percentage of Direct Labor
Applied to a Mature or Industry Standard Product?
Applied to Products Under Long Term Contract?
On the Value of SimplicityComplexity Often Originates With
Creative (Engineering Driven) Cultures Too Many Products Too Much Product Complexity Too Many Low Volume Products Little Component Reuse Too Many Parts Many Non-Standard Parts
Motorola Example145 Batteries78 Displays1447 Software Versions2-4 Times More Complex Than
Competitors
Lean and Complexity Complexity Complicates Supply
Systems Requires More Suppliers Larger Inventories Slower Require More People Harder to Manage Dramatically Increases Costs
Lean and ComplexityMotorola Example
Average Part Count 35% Reduction
Average Assembly Time 47% Improvement
Average Test Time 58% Improvement
Warranty ManagementFour Warranties of UCCNegotiating Extended and Expanded
WarrantiesLabor Costs of ReplacementLonger DurationBegins at Date of Installation
Warranty Tracking System
Concluding Thoughts
Price Analysis Takes Time Cost Analysis Takes More Time Negotiating With a Supplier Without One or
the Other is Going into Battle Unarmed Good Data is the Foundation Planning is Essential Never Talk to a Supplier Without a Plan Negotiate to Achieve Your Plan Quantify Results