After making the decision on where to source goods and services from, buyers have to decide on the prices to pay for them. Even though tools like closed bids and online auctions make it easy to spot the lowest market prices, buyers must still study the prices before making a contracting decision.
There are three methods of managing prices:
Price Analysis
Tactical sourcing primarily utilizes this method, which involves the following techniques:
- We should compare multiple independent, qualified bids without giving an unfair advantage to the lowest offer.
- Comparing bids to prices established by law or regulation, catalog, or the current market.
- We can compare historical quotes and prices for the same or similar product or service.
- We need to compare the cost estimate with an independent assessment that is unbiased and justifiable.
Cost Analysis
When using this method, purchasers will assess and evaluate the current or projected expenses that are needed to produce and deliver the desired product or service. This approach is typically used for non-standard items. During the analysis, each individual cost component (such as materials, labor, overheads, tooling, administration, and so on) will be added together to determine a base cost. The objective is to determine the actual cost, which will allow the buyer and seller to agree on a fair and reasonable price. A “break-even” analysis can be conducted to determine the point at which the quantity of goods produced and the associated revenue equals the total cost, resulting in zero profit.
Total Cost Analysis
In order to use this method, buyers need to identify and assess costs that go beyond just the price per item. These costs typically include:
- The purchase price refers to the total amount paid for goods and services.
- The acquisition costs refer to the total amount paid for the delivery of goods and services, which includes sourcing, administration, freight, duties, and taxes.
- Usage costs refer to the total amount paid for various aspects such as planning, engineering, materials, process conversion, scrap, warranty, installation, training, documentation, downtime, opportunity costs, and production technologies.
- The end-of-life costs refer to the expenses incurred when a product or equipment is retired from service. These expenses comprise salvage, obsolescence, proper disposal, clean-up, project termination, and recovery.
