6/13/2020

Bangladesh Institute of
Human Resource
Management

Procurement Management
Lec-4

Agenda

• Procurement Cost Analysis.

• Negotiation Basics
• Purchasing Contract

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Component of the cost base

Direct Cost Production overhead

(Raw material, Labor, Overhead) (Indirect, material, Labor

Selling and Distribution Total Production

Administration overhead
cost

Total cost

Component of the cost base

Direct Cost: Which can be directly identified with specific saleable

unit of output.
Indirect Cost: Expenditure which can not be identified with specific
saleable unit of output .

Fixed Cost: Some cost do not vary at all as the volume of sales or
production increase or decrease .
Variable cost: Some cost vary as the volume of sales or production
variation .

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Cost and Price Analysis

Suppler Pricing Strategy
Cost Base

Full cost pricing Supplier calculate the total cost of product ,add a mark
up to produce a profit .

Cost plus mark up pricing Suppler calculate direct cost of the product , add a mark
up sufficient to cover overheads and produce profit

Marginal pricing The suppler fix a price that wield a predetermined profit
margin

Contribution pricing Where price is the less than full cost of the product , but
covers variable cost to keep plant running , to avoid
coast of shutting down plant .

Cost and Price Analysis

Suppler Pricing Strategy
Market driving pricing
Price volume Supplier use cost –volume –profit , to determine the best volume to
cover fixed cost and allow to offer quantity to buyer to increase sales

Market Share Supplier set low introduction price , to win the customer , eliminate
competition .
Market skimming The supplier sets a high introduction price , to attract buyer .

Competition pricing The suppler set competitive price to win market

Promotional pricing The supplier offers a discount for a specific , limited period, in order to
boosts short term sales
Market segment pricing The supplier set different prices for different market segment .

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Price & Cost analysis

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Other Consideration

• Product Specification
• Break even Analysis
• Opportunity Cost

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Total Cost of Ownership

Precaution cost Research, Sourcing , Preparation of tender ,

Acquisition cost Purchase Price, cost of finance , delivery, installation, Commissioning

Operating cost Material, Labor , consumable, energy,

Maintenance cost Spare, service, repair, overhaul

Downtime Cost Lost of production,

End of life Disposal, sale of scrap

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TCO: Example

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Strategic cost Mgt Process

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Landed Cost

Product cost
+ Shipping: Costs associated with crating, packing, handling, and
freight
+ Customs: Duties, taxes, tariffs, VAT, brokers fees, harbor fees
+ Risk: Insurance, compliance, quality, safety stock cost
+ Overhead: Purchasing staff, due diligence cost, travel, exchange
rates
= Landed cost

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Stage of negotiation

•Planning and preparation:

•Opening
•Testing and Proposing
•Bargaining
•Agreement and closure

1. Identify or 2.Determine if 3.Plan for the 4.Conduct 5.Execute the

anticipate a negotiation is negotiation the agreement
purchase required negotiation
Requirement
•Purchase • Is bid process • Identify participants • Perform • Provide
requisitions inadequate? • Develop fact finding performance
• Inventory •Are many non-price objectives • Recess or feedback
issues involved? •Analyze
counts caucus as • Build on the
• Is contract large? strengths and
• Reorder point •Are technical weaknesses necessary success of the
systems requirements • Gather information • Manage negotiation
• New-product complex? • Recognize time
development • Does contract counterpart's pressures
• New facilities involve plant and needs • Maintain
equipment? • Identify facts informal
• Does contract and issues atmosphere
involve a partnership? • Establish
•Summarize
•Will supplier perform positions
value-added • Develop strategy and progress
activities? tactics periodical
•Will there be high • Brief personnel • Employ
risk and uncertainty? • Practice the tactics
negotiation • Keep
relationships
Positive

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Best alternative to a negotiated agreement

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In Getting to YES, the authors give 3 suggestions

of how you can accomplish this:

• Converting some of the more promising ideas

and transforming them into tangible and
partial alternatives

• Inventing a list of actions you might take if no

agreement is reached

• Selecting the alternative that sounds best

Negotiation Team

Mediator Facilitator Leader Exciter Analyzer

• Minimize • Speaks in • Leads the • Opposes • Does not

the favor of the team every move speak
excitement opposition much.
of the Analyzes
negotiation the data &
send it to
the team
members

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Nonverbal Signal

COMMON NONVERBAL
SIGNALS

Facial Expressions Taut lips may indicate frustration or anxiety

Flinch A flinch may be an uncontrolled response to an inadequate

offer or concession
Wringing of Hands This is frequently a sign of frustration or tension

Drumming Fingers Negotiators who exhibit such behavior are most likely
on Table displeased by the lack of progress they think is occurring.

Running Fingers These signals usually indicate stress or frustration

Through Hair

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Nonverbal Signal

COMMON NONVERBAL
SIGNALS

Looking at Watch Such signals would suggest a serious lack of interest

Sitting on the Edge of This is a definite sign of interest
One’s Chair

Leaning Back with Hands This is frequently a sign of frustration or tension

Behind Head

The tension associated with lying may cause speakers to engage in more
More Frequent Clearing throat clearing.
of Throat

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Contract
A contract is an agreement between two parties (or more) which is
intended to be enforceable by law

Element of Legally Binding contract

1. Offer and Acceptance ,

2. Consideration
3. Intention to Create Legal Relationship
4. Contractual Capacity
Contractual term and Schedule
Express term – price, delivery ,insurance ,exclusion clause ,
Implies term –Common law, Sale of good act ,
Schedule – Additional document included in main part of the
contract . Pricing schedule , Health Safety Commitment, Non
Discloser Agreement , Use of subcontract

Some General Term of a contract

• Definitions. • Termination • Notices
• Scope of Agreement • Intellectual Property • Severability
• Purchase Orders • Assignment and • Third-Party Rights
• Supply and Delivery Contracting • Free Trade Areas
• Specifications, • Technology Minority- or Women-
Improvements Owned
• Quality, and Health,
• Most Favored • Business Enterprises
• Safety, Environment Customer • General Governing
• Payment • Confidentiality Law
• Liability • Key Performance • Signatures
• Force Majeure • Indicators and
• Effective Date and Compensation

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Based on Agreement

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Elements of a Contract

• A contract typically begins with an introduction of the parties who will

be engaged in the contract. For example, it might begin with the
following:
• THIS AGREEMENT IS MADE this_______day of_______2008
• BETWEEN
• 1. ABC COMPANY LIMITED, a company registered in England and having
its registered office at 44 Downing Street, London (the "Buyer") and
• 2. XYZ, INC., a corporation duly organized under the laws of the State of
Illinois and having its principal place of business at 123 Ridge Road,
Chicago, Illinois 60014, U.SA. (the "Supplier").

1. Definitions. .9. Effective Date and 917. Notices

2. Scope of Agreement Termination 18. Severability
3. Purchase Orders 10. Intellectual Property 19. Third-Party Rights
4. Supply and Delivery 11. Assignment and 20. Free Trade Areas
5. Specifications, Quality, Contracting 21. Minority- or Women-
and Health, Safety, 12. Technology Owned Business
Environment Improvements Enterprises
6. Payment 13. Most Favored 22. General
7. Liability Customer 23. Governing Law
8. Force Majeure 14. Confidentiality 24. Signatures
16. Key Performance
Indicators and
Compensation

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Types of Contracts: Based on price
TYPE OF CONTRACT
Firm fixed price
Fixed price with escalation/
de-escalation
Fixed price with
redetermination
Fixed price with incentives
Cost plus incentive fee
Cost sharing
Time and materials
contract
Cost plus fixed fee
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DESCRIPTION
Price stated in the agreement does not change, regardless of any type of
environmental change
Base prices can increase or decrease based on specific identifiable
changes in material prices
Initial target price based on best-guess estimates of labor and materials,
then renegotiated once a specific level or volume of production is
reached.
Initial target price based on best-guess estimates of labor and materials,
then cost savings due to supplier initiatives are shared at a
predetermined rate for a designated time period.
Base price is based on allowable supplier costs, and any cost savings are
shared between the buyer and supplier based on a predetermined rate
for a designated time period.
Actual allowable costs are shared between
parties on a predetermined percentage basis
and may include cost productivity
improvement goals.
Supplier is paid for all labor and materials
according to a specified labor, overhead,
profit, and material rate.
Supplier receives reimbursement for all
allowable costs up to a predetermined
amount, plus a fixed fee, which is a
percentage of the targeted cost of the good
or service.
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Thanks

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