Every company can benefit from adding an appropriate pricing strategy to its purchasing process. To identify which approach is suitable for your industry, you must weigh a number of key considerations.
In order to determine whether a price is appropriate in a competitive marketplace, it is essential to know how to find and use the right tools during the assessment process. One such tool is price analysis, which is a measure of pricing on the market. Cost analysis is an assessment of the direct and indirect costs of the product or service. After implementing these techniques, vendors and buyers can establish prices, and discuss how to produce the best possible quality.
Below is a breakdown of some of the key factors and standard formulas associated with these two strategies.
An Overview of Price Analysis
Use price analysis to compare products to other “similar” contracts. Essentially, the purpose of this analysis is to determine whether the price is fair. This depends on the type of market in which the retailer works. Performing a price review typically involves a few additional elements, including historical prices, market prices and reported prices.
How to Use Price Analysis
- Search for the product online, checking various retailers to get a range of reported pricing.
- Call suppliers directly for quotes and estimates.
- Seek advice from industry colleagues to gain a better understanding of what others have paid for the same item.
After using these techniques, the consumer determines if a product is priced fairly and possibly negotiate a lower cost. Also, this research will help determine if there has been a recent increase in price.
An Overview of Cost Analysis
Sometimes a specific cost analysis of a process or component is necessary during procurement. Cost analysis is a more complex strategy than price analysis because it involves direct (traceable) and indirect costs. It is essentially a comprehensive breakdown of the product. Cost analysis is also useful when the manufacturer cannot access price quotes, and the procurement is not easily comparable to others. Use this approach when manufacturing an element internally, for example.
Before Getting Started with Cost Analysis
Professionals suggest that purchasers form an open line of contact be formed with the vendor at the early stage of the contract cycle. This way, vendors know that a proposal for individualized pricing on products will be a continuous process. Patrick S. Woods, founder of “Purchasing At All Costs?” Knowing The Supplier’s Cost Structure, “tells purchasers in his post,”… convince the supplier that your purpose to gain costing knowledge is not to reduce their benefit.
How to use Cost Analysis.
In order to understand the cost drivers behind the product or service, it is useful to identify direct costs, which are described as elements— material or otherwise— and profit that can be attributed to the final cost of the product. The list includes basic salary, labor, supplies and staff, such as subcontractors, fringe benefits, referred to as 30-33%, transportation, and all that can be paid to the final product. Throughout his paper, Woods cites the example of a steel sheet for a car company as a direct cost.
Io order to identify indirect costs that are usually less apparent, consideration should be given to components and non-materials that are not directly related to the final product.
Examples of indirect costs may include advertising and marketing, indirect labor, legal fees, travel, rent and repairs, costs of communications and office supplies, insurance, taxes, depreciation and utilities, as well as additional’ non-project specific expenses.’
Indirect and direct costs are factored in benefit, which is simply the value of the work performed and the risk expected during the work performed for the project.
