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Why Apply Cost/Price Analysis?
In looking back on one's academic career, accounting topics may not have rung with the same bell of excitement as world history, human psychology, or politics. Although it's interesting to study Napoleon, Freud, and the Nixon Administration, these topics are nowhere near as applicable to relationships with suppliers as are basic cost accounting principles.
Fundamentals of Price Analysis
Price analysis involves summarizing the quotes from two or more suppliers, assuming that each bidder is relatively comparable in all other factors (i.e., quality delivery, service, capacity), and awarding the lowest bidder the business. Depending on the situation and the market conditions for the good or service you're purchasing, you may also want to look at historical and market prices and also compare catalog prices.
Fundamentals of Cost Analysis
Once you've mastered price analysis, you're ready to move into the more extensive tool of cost analysis. Here's a question that your suppliers may or may not find painful: Would you be willing to provide me with a cost breakdown of your proposal? Detailed and accurate cost breakdown(s) — or as the Japanese popularized in the 1980s: "You show me your books and I'll show you mine" — are the basis for performing a good cost analysis.
Patrick Woods, C.P.M., A.P.P., CPIM
Patrick (Pat) Woods serves as commodity manager for Emerson Electric, a Fortune 100 company, and is based at the Fisher Controls Division in Sherman, Texas. Mr. Woods leads and participates in cross-divisional teams in commodity leveraging, supplier rationalization, long-term agreement development, and other strategic procurement activities.
Mr. Woods has served the Professional Development leadership role for NAPM on both the district and local levels. He has also been involved in training and consulting in key purchasing topics including the C.P.M. review course for both NAPM organizations and for major U.S. corporations. He has been a workshop presenter at past NAPM Annual International Purchasing Conferences, including the 83rd Annual International Conference, with subjects including supplier benchmarking and contractual price change clauses.
- Allen, B.T. Managerial Economics, Harper and Row, 1988
- Dobler, D. and Burt, D. Purchasing and Supply Management: Text and Cases, McGraw-Hill, 1996
- Horngren, C.T. Cost Accounting: A Managerial Emphasis, Prentice-Hall, 1982
- Leenders, M.R. and Flynn, A.E. Value-Driven Purchasing: Managing the Key Steps in the Acquisition Process, NAPM, 1995
- Monczka, R. Trent, R., and Handfield, R. Purchasing and Supply Chain Management, South-West College Publishing, 1998
- Raedels, A. Value-Focused Supply Management: Getting the Most out of the Supply Function, NAPM, 1995
FOR FURTHER READING
- Cox, P.A., English, K., and Lopoukhine, S.R. "Cost/Price (Plus) Analysis = Opportunity," Purchasing Today®, September 1997
- Ellram, L. "What Tool To Use When?" NAPM Insights, September 1995
- Harding, M.L. "Calculating Unit Total Cost," Purchasing Today®, May 1996; "Pieces of the Puzzle," Purchasing Today®, July 1996
- Heaton, W. "Pat Purchaser, Private Investigator," Purchasing Today®, January 1998
- Mathers, M. "Finding the Best Lifetime Price," NAPM Insights, July 1995
- Pye, C. "Suppliers Speak Out: Let's Cut Costs!" Purchasing Today®, September 1997
- Sevege, D. "How Much Is Too Much?" Purchasing Today®, January 1997
- Snitzer, J.A. "The Right Amount at the Right Price," Purchasing Today®, July 1997
- White, J.A. "Learning Pricing Moves and Strategies," NAPM Insights, September 1995
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