C. Two weak and insignificant market partners meet. Both do not need the other, and normally their business relationship is loose and impersonal. Strategic considerations will, if at all, only be applied selectively as suppliers of that kind can be replaced at any time.
D. The supplier has a comparatively weak power position with regard to the buyer.
In this market constellation, the strategic considerations will focus on realising chances. Such chances may include generating savings but also the develop-ment of the supplier targeted to one’s needs. This market constellation is especially favourable to that aim as such suppliers are easily malleable because of their weak position.
As these two examples have shown, the portfolio technique can be applied variably if complex situations should be visualised in a clear form. By position-ing different objects strategically, the portfolio technique is useful to the planning process but also to daily questions.
Individual costs are measurable costs that can be directly attributed to a cost object: the most important cost components in this category are material and labour costs. A purchasing division should be able to comparatively accurately assess the costs of the production material; only the type and volume of the material to be deployed must be determined in advance. These costs can be established by breaking up (also literally) the product into its individual components. This process will result in a parts list in which the individual components are listed according to their types of material. By weighing, measuring, and counting the individual volumes can be included; percentages for scrap and clippings must be taken into account. In order to calculate the merchandise value, one’s own experience concerning prices may serve as a guideline. If no reference prices are available, they must be assessed by research in the markets in which the suppliers source their own supply, e.g. by concrete quote requests of sub-suppliers or by analysing market reports and price statistics. For assessing the material costs, it is advised to estimate medium prices in order to factor price fluctuations in.
At the next stage, the direct labour costs are assessed. Here, the two factors of time exposure and hourly wage have to be factored in. After establishing the needed qualifications of the employees deployed to the manufacturing process, the customary wage rates are assessed. As a basis for doing so, company-owned data from the human resources department or trade-specific publications such as pay scale tables may be used. The time exposure, however, is more difficult to estimate; for doing so, the production process must be known in detail. To break up the production process into its individual steps and to allocate the times, the support of departments such as production, development, or process planning may become necessary. If no clues to the production process are available in-house, a visit of the supplier’s plant may be helpful for understanding the production process in detail. The resulting manufacturing costs are the product of wages and time exposure.
In the further course of the analysis, one has to ascertain whether other cost components can de directly attributed to the product apart from the material and manufacturing costs. Such individual production costs include, amongst others, the costs of special tools, models, or special devices necessary for the manufacturing of the product. As these costs are often displayed separately in the respective offers, there will, as a rule, be no problems to assess them. Much more difficult, however, is the estimation of research and development costs. The only clues are provided by the development time that is estimated subject to the complexity, novelty, and unusualness of the product. As a rule, one will be reliant on the supplier’s information.
In contrast to individual costs, overhead costs cannot be attributed directly to a cost object. In company cost accounting, these costs are broken down with the aid of overhead rates that may differ greatly depending on the structure of the company.
Material overhead costs include all costs arising from the procurement, examina-tion, transport, and storage of materials. As an accurate assessment of these costs is hardly possible, normally a surcharge rate of 5–10% of the direct material costs will be estimated. Production overheads represent a much bigger pool of costs. These
include all production-related costs (imputed depreciations, occupancy and energy costs, wages, etc.). These costs can only be estimated roughly; a clue may be the supplier’s machinery in operation. Hardly any clue is available to the estimation of the administrative and selling overheads. These costs depend on the size of the administrative organisation and the number of different products these costs are apportioned among.
As for the given reasons assessing the overhead costs is difficult, in Germany normally cost statistics of the Statistisches Bundesamt are used. This agency assesses and publishes the cost structure of manufacturing companies sorted by industry and size of company in an annual report that provides clues to the customary overhead rates.
From all these collected data, now the supplier’s calculation can be reproduced and the original costs of the product can be estimated. The difference from the offer price is the margin for the negotiations in which a suitable mark-up must be conceded to the supplier.
Although the assessed original costs will never exactly coincide with the supplier’s actual costs, price structure analyses provide for a high degree of transparency in the price negotiations. The breakdown of the individual cost components gives facts and figures for discussions in which individual cost drivers can be identified and optimised. The key factor, however, is that the supplier is compelled to disclose information. If the assessed calculations do not meet the actual costs, the supplier will justify this discrepancy and thereby disclose valuable information, especially concerning the structure of the overhead costs. This infor-mation can be used for future price structure analyses. Thus, the accuracy of the price structure analysis increases the more often this instrument, which is very valuable for price negotiations, is applied.
References
Arnolds, H., et al. (2010).Materialwirtschaft und Einkauf. Wiesbaden: Gabler.
Wannewetsch, H. (2010).Integrierte Materialwirtschaft und Logistik. Heidelberg: Springer.