Pricing of bought-out parts

990504MB-MMY010-(L)
2
TYPICAL PRICE SETTLEMENT PROCESS
Cost Price
Negotiation
990504MB-MMY010-(L)
3
AGENDA
1. Should be costing ! "inutes
To#ic
2. Negotiations 20 minutes
3. Material cost reduction 20 minutes
Du$%tion
4. Initiatives in Sourcing
0 minutes
990504MB-MMY010-(L)
4
AGENDA
1. Should be costing ! "inutes
To#ic
2. Negotiations 20 minutes
3. Material cost reduction 20 minutes
Du$%tion
4. Initiatives in Sourcing
0 minutes
990504MB-MMY010-(L)
5
S&O'LD (E COSTING ) *%$ious cost ele"ents
Cost
Raw Material
Conversion Profit
Over heads I. C. C. Packing &
Transport
990504MB-MMY010-(L)
6
S&O'LD (E COSTING ) *%$ious cost ele"ents
Cost
Raw Material
Conversion Profit
Over heads I. C. C. Packing &
Transport
990504MB-MMY010-(L)
7
ESTIMATION O+ RA, MATERIAL COST
!
Material "sed # Specification $
!
%ate per &g.
!
Input 'eight
!
Scrap recover(
990504MB-MMY010-(L)
8
ESTIMATION O+ RA, MATERIAL COST
!
Material "sed # Specification $
!
%ate per &g.
!
Input 'eight
!
Scrap recover(
Source)
*ra+ings
Supplier discussion
,ab
-e( points
.nsure that right material is
used
If re/uired chec& +ith
designer
990504MB-MMY010-(L)
9
ESTIMATION O+ RA, MATERIAL COST
!
Material "sed # Specification $
!
%ate per &g.
!
Input 'eight
!
Scrap recover(
Source
Mfgrs. Price list
Maga0ines 1 periodicals
Metal e2changes
3ssociate companies# M"S456etc.$
-e( points
,anded cost to be considered
*iscounts due to bul& /t( or
consortium bu(ing efforts # M7M
rates $
.nsure tat %M is procured from
mfr.. 3nd not through traders
-e( %M rates to be trac&ed
on periodic basis
Steel sheets
8orging steel
4u6 3l6 P9
Pol(mers PP6 39S6 Plastic
:lass
Pig iron
Impact 1 lin&age of metal
prices +ith ,M. 1 imports to
be understood
990504MB-MMY010-(L)
10
ESTIMATION O+ RA, MATERIAL COST
!
Material "sed # Specification $
!
%ate per &g.
!
Input 'eight
!
Scrap recover(
Source
*ra+ing
Ph(sicall( +eighing of parts
;heoretical estimation
-e( points
Input +t. Must be accurate
990504MB-MMY010-(L)
11
ESTIMATION O+ RA, MATERIAL COST
!
Material "sed # Specification $
!
%ate per &g.
!
Input 'eight
!
Scrap recover(
Source)
Scrap traders
3ssociate companies
-e( points
'hether scarp can be used
for other parts e.g. +ashers6
small parts6 etc.
990504MB-MMY010-(L)
12
ESTIMATION O+ RA, MATERIAL COST
RAW MATERIAL COST CALCULATIONS
RM BASIC PRICE 20.00
EXCISE DUTY 15% 3.00
SUB-TOTAL 23.00
SALES TAX 4% 0.92
SUB-TOTAL 23.92
OCTROI 2% 0.48
FREIGHT 0.50
TOTAL 24.90
LESS MODVAT 3.00
LESS SET OFF 0.00
LANDED COST 21.90
IPUT !EIGHT "#G$ 2.50
GROSS COST 54.75
FIISHED PART !T 2.00
SCRAP !T 0.50
RECOVERY 80% 0.40
SCRAP RATE 5.00
RECOVERED COST 2.00
NET COST 52.75
990504MB-MMY010-(L)
13
-%$ious cost ele"ents
Cost
Raw Material
Conversion Profit
Over heads I. C. C. Packing &
Transport
990504MB-MMY010-(L)
14
ESTIMATION O+ CON-ERSION COST
Machine hour rate %s.<0 %s.20 %s.=0
;ime # minutes$ 0 0 0
5peration cost %s.<0>01<0 %s.=0>01<0
%s.20>01<0
4utting tool cost %s.? %s.0 %s.?
4onversion cost %s.? %s.30 %s.4?
0 20 30
.2ample
990504MB-MMY010-(L)
15
ESTIMATION O+ CON-ERSION COST
Machine hour rate %s.<0 %s.20 %s.=0
;ime # minutes$ 0 0 0
5peration cost %s.<0>01<0 %s.=0>01<0
%s.20>01<0
4utting tool cost %s.? %s.0 %s.?
4onversion cost %s.? %s.30 %s.4?
0 20 30
.2ample
990504MB-MMY010-(L)
16
CALC'LATING MAC&INE &O'R RATE
990504MB-MMY010-(L)
17
ESTIMATION O+ CON-ERSION COST
Machine hour rate %s.<0 %s.20 %s.=0
;ime # minutes$ 0 0 0
5peration cost %s.<0>01<0 %s.=0>01<0
%s.20>01<0
4utting tool cost %s.? %s.0 %s.?
4onversion cost %s.? %s.30 %s.4?
0 20 30
.2ample
990504MB-MMY010-(L)
18
TIME MEAS'REMENT
!
;ime stud( +ith stop +atch # +idel( accepted$
!
M5S; techni/ue # e2pertise needs to be developed$
!
4onsultation +ith e2perts
!
;ime elements
@
Set up time
@
5peration time
;otal time ta&en
@
#Set up time1 batch si0e$ plus operation time
990504MB-MMY010-(L)
19
ESTIMATION O+ CON-ERSION COST
Machine hour rate %s.<0 %s.20 %s.=0
;ime # minutes$ 0 0 0
5peration cost %s.<0>01<0 %s.=0>01<0
%s.20>01<0
4utting tool cost %s.? %s.0 %s.?
4onversion cost %s.? %s.30 %s.4?
0 20 30
.2ample
990504MB-MMY010-(L)
20
C'TTING TOOLS COST
4utting ;ool cost A landed cost of tools 1 life of tools
L%nded cost
9ased on invoice
Li.e
mfgrs.1B catalogues
Shop e2pertise
Past consumption data
990504MB-MMY010-(L)
21
-%$ious cost ele"ents
Cost
Raw Material
Conversion Profit
Over heads I. C. C. Packing &
Transport
990504MB-MMY010-(L)
22
PAC/ING 0 TRANSPORTATION COST
P%c1ing cost
Pol( bags +t. 9ag 2 rate per &g
+tA,#inch$ 2 '#inch$ 2 ;#micron$133001000 &gs per bag
4arton +t. 1 carton 2 2 paise per gm
'ooden bo2 cu. 8t 2 rate 1 cu. 8t
T$%ns#o$t%tion
9ased on mar&et rates 1 M7M contract rates
990504MB-MMY010-(L)
23
-%$ious cost ele"ents
Cost
Raw Material
Conversion Profit
Over heads I. C. C. Packing &
Transport
990504MB-MMY010-(L)
24
OT&ER COST
ICC
*epends on credit offered b( supplier
;he credit offered b( supplierCs supplier to be discounted
;he mfg. lead to be considered
;(picall( I44 should be 2-3D of %M cost
O*e$he%ds %nd #$o.its
;(picall( it should be 0D of %M plus conversion cost
Re2ection
*epending upon criticall( of parts.
;(picall( D
990504MB-MMY010-(L)
25
S&O'LD (E COST
%a+ material cost ?0
4onversion cost 40
;ooling cost 03
Subtotal 3 E3
I44 on %M 2.0
Profit 7 5verheads on 9 E.3
Pac&ing 7 8or+arding 0.?
%eFection on 9 2.0
Should be cost 0G.=
990504MB-MMY010-(L)
26
ISS'ES ,IT& S&O'LD (E COSTING
!
*ifficult( in getting details
!
Proprietar( suppliers reluctant to share cost info
!
;ime constraints
990504MB-MMY010-(L)
27
ALTERNATE COSTING MET&ODS
!
9alance sheet anal(sis
!
,inear performance pricing
!
9enchmar&ing +ith e2isting parts
990504MB-MMY010-(L)
28
ALTERNATE COSTING MET&ODS
9alance sheet anal(sis
,inear performance pricing
9enchmar&ing +ith e2isting parts
990504MB-MMY010-(L)
29
(ALANCE S&EET ANALYSIS
P$o.it 0 loss %ccount
Income
Sales
5ther income
.2penditure
%a+ material consumed
.2cise dut(
Personnel cost
Stores consumed6 po+er
Interest
*epreciation
Pac&ing and transport cost
5ther costs
(%l%nce sheet
:ross bloc&
Net bloc&
Sources of funds
Sundr( creditors
Sundr( debtors
990504MB-MMY010-(L)
30
(ALANCE S&EET ANALYSIS) conti3.
Schedules to P$o.it 0 loss %ccount
8inished products-nos 7 value
4apacit( utili0ation # leverage$
Po+er units consumed6 rate
MaFor ra+ material procured
4astings
8orgings
Steel6etc.
MaFor imports 7 e2ports
990504MB-MMY010-(L)
31
&O, TO ESTIMATE COST 'SING (ALANCE S&EET
Esti"%te the RM cost
Stripping the parts # proto or production$
95M from dra+ings
9( using the spare catalogues
'eigh each parts and appro2imatel( find out %M cost
4ompare this +ith /uoted cost
+$o" P0L st%te"ent .ind out .ollo4ing #e$cent%ges
%a+ material cost
4onversion cost
Personnel cost
5verheads
Sales margin
.stimate final price b( appl(ing ratios to %M cost
990504MB-MMY010-(L)
32
ALTERNATE COSTING MET&ODS
9alance sheet anal(sis
,inear performance pricing
9enchmar&ing +ith e2isting parts
990504MB-MMY010-(L)
33
LINEAR PER+ORMANCE PRICING
!
5!!
1!!!
15!!
6!!!
65!!
! 1 6 7
Performance parameter
P
r
i
c
e

i
n

%
s
.
.2ample of Starter motor
Higher price
,o+ price
990504MB-MMY010-(L)
34
ALTERNATE COSTING MET&ODS
9alance sheet anal(sis
,inear performance pricing
9enchmar&ing +ith e2isting parts
990504MB-MMY010-(L)
35
(ENC&MAR/ ,IT& E8ISTING PROD'CTS
!
4ompare +ith similar parts supplier b( the supplier or other
suppliers
!
4ompare +ith spare parts prices
!
4ompare +ith M7M parts prices
!
;a&e help of retired persons from industr(
990504MB-MMY010-(L)
36
TYPICAL PRICE SETTLEMENT PROCESS
Cost Price
Negotiation
990504MB-MMY010-(L)
37
AGENDA
1. Should be costing ! "inutes
To#ic
2. Negotiations 20 minutes
3. Material cost reduction 20 minutes
Du$%tion
4. Initiatives in Sourcing
0 minutes
990504MB-MMY010-(L)
38
TERMS O+ P'RC&ASES TO (E NEGOTIATED
!
9asic price
!
.2plore sales ta2 +aiver option 1 +hether supplier has rightl( categori0ed
the parts for sales ta2
!
Supplier is in e2cise or not for modvat purposes
!
.2clude frt. 8rom basic price for 4S; purchases
!
Prices for spare purchases
!
Price for other plants
!
Price revision methodolog( 1 parameters e.g. 5ne rupee increase in %M
means %s..2? increase in basic price
!
Iolume based prices if initial volumes are lo+
!
Pa(ment terms depending upon interest rates and cash flo+s
!
%eduction in prices due to ideas 1 sharing of benefits
990504MB-MMY010-(L)
39
ART O+ NEGOTIATION
!
Negotiate onl( +ith those in authorit(
!
Start +ith an open mind and a positive attitude
!
9e prepared in all aspects- it +ill boost the confidence
!
,isten
!
4ommunicate clearl( and confidentl(
!
have a time perspective
!
Have a sense of humour
990504MB-MMY010-(L)
40
+O'R DON9T
!
*onCt accept the first offer- atleast not immediatel(
!
*onCt be the first
@
to /uote a price
@
to offer to split the difference
!
*onCt admit 1 sho+ (ou are under time pressure
!
*onCt leave a single issue outstanding
990504MB-MMY010-(L)
41
TIP +OR E++ECTI-E NEGOTIATION
!
,earn to read the other part( needs to become good negotiator
!
9e prepared to compromise +hen (ou negotiate
!
*etermine (our strateg( according to the t(pe of negotiation
!
9e sure to gather all information relevant to negotiation
!
Sit as an observer in other people negotiations
!
;al& to people +ho &no+s the other part(
!
'ear clothes +hich are comfortable
!
3void short tempers 7 frustrations +hen negotiating and never +al& out in rage
!
;r( to set agenda 3nd include timings for each issue under discussion
!
,isten to personCs tone of voice and the +ords
!
"se humour +hen appropriate
990504MB-MMY010-(L)
42
TIP +OR E++ECTI-E NEGOTIATION)) conti...
!
Indicate that ever( concession (ou ma&e is a maFor loss
!
3s& for brea& to consider an( ne+ proposal
!
.ngage onl( on arguments that are constructive
!
Never undermine of dignit( of the opposing part(
!
5ffer the smallest concession first- (ou ma( not need to go an( further
!
%ecord full( all agreements finali0ed at a negotiation.
990504MB-MMY010-(L)
43
&ANDLING DI++ERENT TYPES O+ NEGOTIATORS
CON+'SED
NEGOTIATOR
"se visual aids to clarif( issues that are causing confusion
Put comple2 proposals in +riting6 using short 7 clear sentences
8ollo+ a concise step-b(-step agenda to prevent further confusion
9e prepared to involve a third part( to revie+ the issues +ith fresh
e(e.
INDECISI-E
NEGOTIATOR
Proceed slo+l( and methodicall( and be prepared to reiterate points
Promise a revie+ of the issues under discussion after a set period of
time
3dFourn to allo+ an indecisive negotiator to consult others in their
team
;r( to present the issues in a fresh and original +a(
AGGRESSI-E
NEGOTIATOR
%eiterate all the facts6 &eeping calm and avoiding emotional
language
%efuse to be dra+n into aBbattle of +ords and sta( calm at all times
State firml( that intimidation6 bull(ing and threats are unacceptable
Suggest an adFournment in the negotiations until tempers cool
EMOTIONAL
NEGOTIATOR
*o not challenge the motives or integrit( of the negotiators
*o not interrupt outbursts6 +ait patientl( to ma&e (our response
%espond to an( emotional outburst +ith rational /uestioning
3dFourn to allo+ the emotional negotiators to calm do+n.
990504MB-MMY010-(L)
44
ESSENTIAL +OR E++ECTI-E PRICING
!
;rac&ing ra+ material trends and forecasting
!
;rac&ing &e( cost drivers of conversion cost
@
.lectricit(
@
,abour
@
5ther maFor costs
!
Have standard rates for commonl( used machines
@
,athe
@
Milling
@
*rilling
@
;raub6
@
Presses6 etc
!
4reate database of consumable and tools prices6 life
!
,ist of e2perts for costing or optimi0ation of processes
990504MB-MMY010-(L)
45
AGENDA
1. Should be costing ! "inutes
To#ic
2. Negotiations 20 minutes
3. Material cost reduction 20 minutes
Du$%tion
4. Initiatives in Sourcing
0 minutes
990504MB-MMY010-(L)
46
ZXP-537.2/11
Purchase cost
Internal
compan( costs
Joint supplier1
customer costs
;45
#;otal cost of
o+nership$
:
:
;
DE+INING TOTAL COST O+ O,NERS&IP
Warehousing
Purchasing
administration
R&
amaged field
product
!actor"
"ield
#pecifications
$%pediting
Production
capacit"
Transportation
Inventor" carr"ing
costs
Purchase
price
990504MB-MMY010-(L)
47
COST ('ILD)'P +OR TRANSMISSION CASE AT G&ATGE PATIL
IND'STRIES
> 3ssume metal sand ratio of )?
>> ,abour and po+er cost at 3D and =D of base price6 respectivel(
Source) ;eam anal(sis
%upees6 per casting of ?? &g

?43
32
32
0 30
< 30
?42
?=
23<<
44
3=4
G?
=24
4GE3
Pig
iron
Steel 8oun-
dr(
returns
4.I.
scrap
8erro
silicon
8erro
manga-
nese
Inno-
cultant
5ver-
head
and
other
9ase
price
8inish-
ing
and
fettling
Po+er1
fuel>>
,ab-
our>>
%a+
mate-
rials
Moul-
ding
sand
4ore
ma&ing
sand
GG.? 3E 3E @ 0.= 0.< 0.3 GG?> ?? <u%ntit=
#&g$
990504MB-MMY010-(L)
48
Source) M4* Purchasing database

4GE3 GG
220
?
?=4?
G0
40
4< ? 3 2
G3E
9ase
price
.2cise Sales
ta2
5ctroi Pur-
chase
price
8reight Machi-
ning
%eFects Hand-
ling
Inven-
tor(
'arr-
ant(
;otal
cost
COST ('ILD)'P +OR TRANSMISSION CASE AT G&ATGE PATIL
IND'STRIES >Continued?
%upees6 per casting of ?? &g
990504MB-MMY010-(L)
49
,AYS TO RED'CE P'RC&ASE COST
%educe
purchase
cost
,everage
mar&et
po+er
Standardise
Set correct
product
tolerances
Substitute
"nbundle contracts
4onsolidate suppliers
4ombine +ith other materials
4ompare across facilities
;r( out ne+ suppliers
.liminate middle person
%educe custom products
Increase purchase /uantities
Increase use of
components1subassemblies
;ighten
,oosen
%evise specifications
Ma&e process changes
! 4an total product costs
be reduced b(
consolidating or
unbundling purchase
volumesK
! 8re/uenc( of s+itching
competitors
! Industr( capacit( utilisation
! Historic rivalr(
! 4an alternative sourcing
channels be utilisedK
! .merging suppl( mar&ets
! Ne+ entrants
! 4an total costs be
reduced through
standardisationK
! Item proliferation
! ,evel of product development
standardisation
! High ra+ material levels
! 4an total costs be
reduced b( changing
specificationsK
! High or lo+ scrap rates6
set up and re+or& in
manufacturing
! measure of consumer
perceived value
! 4an total costs be
reduced b( using
alternative materialsK
! 4ompetitors using
alternative materials
! 5ther analogous products
using alternative materials
! Ne+ materials in foreign
mar&ets
St%$te$ @uestions Di%gnostic indic%to$s
990504MB-MMY010-(L)
50
,AYS TO RED'CE INTERNAL COSTS
%educe
internal
costs
.liminate
incoming
/ualit(
control
.liminate re+or&
%educe +aste1scrap
%educe lead time
! 4an total product costs
be reduced b(
consolidating or
unbundling purchase
volumesK
! ,o+ defect rates
! 8e+ certified vendors
! ,o+ use of certificates of
anal(sis
St%$te$ @uestions Di%gnostic indic%to$s
Improve
inventor(
management
Manage c(cle and
safet( stoc&
%emove sludge
! 4an inventor( levels be
reducedK
! ,o+ ra+ material turns
! High obsolescence levels
! ,evel of e2pediting
Share
information
internall(
%educe transportation
costs
Improve capacit(
utilisation
%educe inventories
! 4an costs be reduced
through information
sharingK
! Schedule changes
! ,evel of e2pediting
! .2plicit or implicit pricing
! ,evel of information on
carrier utilisation
Improve
process
steps and
c(cle time
*ebottlenec&
Streamline processes
! 4an processes to
improved to reduce cost
and c(cle timeK
! ,arge volume of
paper+or&
! 3verage vs. standard lead
time
990504MB-MMY010-(L)
51
,AYS TO RED'CE AOINT S'PPLIERBC'STOMER COSTS
%educe
Foint
supplier1
customer
costs
Involve
suppliers in
product
development
%educe1share %7*
costs
%educe processing
costs
4o-develop proprietar(
materials
! 4an an( costs be
reduced b( involving
suppliers in product
developmentK
! .volving technolog(
! 4ompetitors LoutsourcingM
to vendors
! High costs that can be
shared +ith other
customers
St%$te$ @uestions Di%gnostic indic%to$s
Share
information
+ith suppliers
and
customers
Share long-term volume
forecasts
Jointl( evaluate vendor
capital e2penditure plans
Ialue anal(se specifications
! 4an forecast information
be used to reduce
supplier costsK
! 8avourable long run-length
economics
! ./uipment efficienc(
potential
! High capacit( utilisation
! Nueuing1se/uencing
difficulties
4ollocate +ith
supplier
%educe transportation
costs
Improve capacit(
utilisation
%educe inventories
! 4an collection be used to
reduce ;45K
! High inbound freight costs
! 8re/uent deliveries
! %emote suppliers
! ,imited bac&haul
opportunities
Manage file
c(cle costs
%educe obsolete
materials
%educe field failures
! 4an lifec(cle management
reduce costsK
! High field damage e2penses
! High obsolete costs
! ,arge number of ne+
products
990504MB-MMY010-(L)
52
IDENTI+IED TCO RED'CTION LE-ERS IN +ES CASTINGS
A$e% Le*e$s
! ,everage mar&et
po+er
! Set correct product
tolerances
! Substitute
Ide%s
! %econfigure supplier base
@ 4onsolidate suppliers
@ ;r( out ne+ suppliers
! 4onsortium bu(ing of pig iron
and M.S. scrap
! .valuate ma&e vs. bu(
! .liminate middle person
! Manufacture to specifications
! Modif( design to reduce
comple2it(
! %evise specifications
! .liminate incoming
/ualit( control
! 5ther ideas
! %educe reFects
! %educe inventories
! %educe transportation
costs #detention and
demurrage$
! %educe logistics
costs
! %educe transportation
costs
%educe
purchase
cost
%educe
internal
business
costs
%educe
Foint
costs
Reduce
tot%l
TCO
990504MB-MMY010-(L)
53
AGENDA
1. Should be costing ! "inutes
To#ic
2. Negotiations 20 minutes
3. Material cost reduction 20 minutes
Du$%tion
4. Initiatives in Sourcing
0 minutes
990504MB-MMY010-(L)
54
INITIATI-ES IN SO'RCING MANAGEMENT
Su##l= "odules
M%P planning
Iendor connectivit(
,ogistic service providers
9ar coding
Self certification
*irect on line deliveries
Sub ass(. Purchases
990504MB-MMY010-(L)
55
INITIATI-ES IN SO'RCING MANAGEMENT
Sou$cing
4ommodit( teams to decide strategies
'hat to bu(
'here to bu(
Ho+ to bu(
3t +hat rate to bu(
.nd to end responsibilit( for a commodit(
Supplier transformation
"pgrading suppliers /ualit(6 deliver( and cost
Pricing 4ell 7 Purchasing .2cellence
990504MB-MMY010-(L)
56