Question

1. One very important supplier information for the buyer is the supplier's cost information. If you are a powerful company like Wal-Mart, you may ask your suppliers to open their financial books. But most companies do not have the influence to do so. If your supplier is unwilling or unable to provide a detailed cost breakdown, how will you be able to estimate their costs? What are the major cost categories that you would include when estimating a supplier's cost for a manufacturing item? How about same problem for a service supplier?

2. People always overlook the fact that there are other costs associated when purchasing products. For example, a Keurig coffee machine means that you need to spend much more on the K-cups than on normal coffee. A cheaper pair of shoes may wore out faster. The same thing happens in business. A cheaper machine may mean shorter lifetime, or higher maintenance cost. The question is how a person, or a company can easily estimate the total cost of ownership? What are factors to be considered? What are pitfalls that need to avoid?

Answer 1

Pricing is usually done as follows:

Cost+Profit = Price of the product.

Cost is further broken down into Fixed costs and Variable costs. Fixed costs include administration costs, Finance costs, Capital expenditure, etc. These remain fairly constant. Variable costs, on the other hand change with change in quantity, process, etc. Labor cost, material cost, factory overheads are all examples of variable costs.

The major of the cost lies with the variable costs. I would need to focus on that and determine the material and labor required for the project or product. Thus, realise the cost of manufacturing the product can be known through this method.

For service cost estimation, the major component is estimating labor cost. This can be achieved by comparing with the firm's competitor pricing strategy and general pay being offered to the service-providers. Thus, the cost incurred by a service-based company can be determined.

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Following are some of the factors which a person needs to analyse before making the purchase:

1. Purpose of the product or service. Why is the product required? Is it an essential commodity or a luxury? Long-time or short-time requirement?
2. Frequency of use of the product or service?
3. Quality desired? Do you require clothes of high quality which last for a life time or inexpensive clothes which wear out soon and you could purchase new design clothes frequently.
4. Brand loyalty or not
5. Budget constraints.
6. Presence of substitutes.

In order to avoid making faulty purchase decisions one needs to:

1. Be unbiased.
2. Must not make any assumptions. Clarify about specifications or quality if not clear .
3. Must be rational while decision making. Think about all issues.
4. Must spend time as per requirement. For example, taking a decision to purchase a high-end LED TV can take two or three days, but individual should not spend same amount of time deciding on purchasing of a basic commodity like rice or vegetables.
5. Not be influenced by others, however may consider other's experiences w.r.t. to the product or service prior to making decisions.