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Making the
Purchase
The major objectives in making the
purchase are:
1. To obtain a fair and reasonable price.
2. To negotiate the terms of sale and determine type of purchasing
contract.
3. To motivate the supplier to meet all obligations.
4. To develop a solid relationship with competent suppliers.
Fair and Reasonable Price
Cost analysis and Value Analysis, are two methods for obtaining the
information with which to negotiate a good price. Competitive bidding and
an investigation of published price lists, where available, are two other
ways for assuring that the price you arrive at will be a fair and
reasonable one. In competitive bidding, it is important, however, not to
accept the lowest price, unless it is clear that the vendor will be able
to deliver and make a reasonable profit on the sale.
It is rarely to your advantage to accept an exceptionally low price
from an inexperienced vendor, or one which is the result of an error.
Competitive bidding is appropriate in situations where:
- the bids are easy to obtain (through a phone call or simple letter)
- the value of the purchase is large enough to justify the expense to
obtain and evaluate bids
- the specifications of the item or service to be purchased are simple
and clear to both the buyer and seller
- there are an adequate number of sellers in the market who wish to
bid on the contract and are willing to price competitively to get it
- there is sufficient time to utilize this method of purchasing
Negotiating Terms of Sale
To run your business efficiently you must have reliable and prompt
delivery. Furthermore, you want to keep the lowest inventory possible
while keeping enough stock on hand to satisfy customer needs. You also
would like to sell as many units of a new shipment as possible, before you
have to pay for it. When negotiating a purchase, therefore, you want to
obtain:
- prompt delivery
- split shipments
- as much time as possible, after delivery, to pay the bill (dating of
invoices)
- cash discounts
- lowest possible freight costs
Obviously, you cannot expect to get everything from your supplier all
the time and still be considered a desirable customer. Therefore, you must
use judgment on how hard you want to push.
Split shipments are important only when there are quantity discounts;
if the vendor grants such split shipments to other customers then there is
no reason why you should not get them too.
The same is true of "dating" of invoices, a practice in which, at least
at certain times of the year, some suppliers will permit you to buy and
accept delivery but pay as much as 60 to 120 days after receipt of the
merchandise.
Cash discounts usually are shown on vendor invoices. Sometimes,
however, they have to be requested. These discounts can be 1 or 2 percent
off the total order if you pay in full within 10 days. While 1% may seem
unimportant, a 2% discount does represent a small saving. Besides, paying
promptly may create better relations with vendors and may lead to better
credit ratings. This, in turn, can lead to better deals with suppliers.
Freight costs can be an important item, especially if purchased
components are either bulky or heavy. Sometimes a good buyer can get the
vendor to absorb freight costs or, if that is not possible, obtain special
freight arrangements in which the supplier routes and schedules shipments
in such a way that shipping costs are minimized.
Sometimes, if you do not ask for it, the representative may not tell
you that split shipments or dating or cash discounts can be granted. It is
up to you, therefore, to bargain for them.
Reciprocal Buying. One type of negotiation which deserves special
mention is reciprocal buying. Reciprocal buying is simply the practice of
giving preference to suppliers who are also customers. Since it is rare
that a customer can also be a supplier, reciprocal buying is not a
widespread practice.
Obviously in those situations where it is possible, it can be good
business to buy from companies that are also customers if all factors of
service, quality and price are equal, since this practice strengthens the
relationship and turns a customer into an even better one.
Unfortunately, reciprocity is not used only when quality price and
service are equal. If either party is less than a highly desirable
supplier, problems can develop.
Furthermore, although reciprocity is not against the law by itself, it
could develop into conspiracy and commercial bribery, which are illegal.
In the case of large corporations, it may be a violation of the anti-trust
laws.
Reciprocity, for all these reasons, should be approached with caution.
If you are in a situation where it can be important, it would be wise not
to use your customer as a sole source of supply for the product or service
involved.
Determination of Purchasing Contract Type
The type of purchasing contract selected for any given order always
affects the purchase price of the order. It is, therefore, important to
consider different contract types.
There are two basic types of contract: Fixed price contracts and cost
type contracts.
Fixed price contracts
Firm fixed price contract is a type of contract which is most
preferred by all buyers and perhaps most frequently used in small
businesses. Whenever a fair and reasonable price can be determined, a
fixed price contract is desirable to use. Such a contract provides the
vendor with a maximum incentive to produce efficiently and all financial
risks are borne entirely by the vendor.
Fixed price contract with an escalation clause is often used for
contracts involving purchases upwards of $200,000 and a long production
period. The escalation clause allows for an upward or downward change in
price as a result of changes in either material prices or labor rates.
This type of contract is often used in construction industries.
Fixed price contract with redetermination is often selected in
situations where the amounts of labor and/or material (as well as prices
in some cases) are difficult to estimate because changes in specifications
or other requirements are likely to occur. In such uncertainty, a firm
fixed price contract would be impractical but a fixed price can still be
useful since it establishes a mutually agreed-upon base which covers the
bulk of the purchase and establishes a formula for calculating fair prices
for the expected changes from the basic package.
Fixed price incentive contract is another variation of the fixed
price agreement. It provides for a target price, and a cost plus profit
formula. The agreement usually specifies a higher profit for the vendor if
savings below the target price can be achieved. Sometimes this is coupled
with a penalty which applies if the formula would bring a price equal to,
or exceeding a ceiling figure. Sometimes this ceiling is higher than the
target and sometimes it is the same.
Cost Type Contracts
Cost type contracts are used when it is impossible to contract on any
of the variations of a fixed price discussed above. The major difference
between a fixed price and a cost type contract is that under a cost type
contract, the buyer assumes almost all the financial risks. The seller is
usually guaranteed all costs up to a predetermined amount as well as a
fee. A seller, therefore, has no real incentive to keep costs or prices
down. Cost type contracts have the additional disadvantage that they may
require thorough auditing.
Cost plus percentage of cost contract is the most undesirable of
all of these types of contracts. It is often used in many private firms,
mostly in the construction industry. This type of contract tends to
inflate costs since higher costs will bring greater profit to the
supplier.
Cost plus fixed fee contract provides that the supplier be paid for
all allowable costs plus a fixed fee which is either a percentage of the
estimated cost or a lump sum.
Cost plus incentive fee contract is basically the same as the fixed
price incentive contract except that the supplier usually is paid for all
costs and the fee varies depending on the relationship between actual
costs and budget.
Cost sharing contracts are often used in situations in which the
supplier can benefit if the product being developed for the buyer can
later be used with other customers. Under such conditions, the buyer and
seller often agree to split the costs.
Cost without fee contracts also exist. They are usually only use
with non-profit institutions where work such as research is done without a
fee except that which is necessary to recover overhead costs. Some
government supported consulting organizations and colleges may provide
services on this basis.
Food For Thought
Whatever you dwell upon,
grows. The more emotionally and intensely you think about it and
concentrate on it, the more it grows and expands. What do you think
about?
Do you constantly think about your problems? Then they will increase.
Instead, dwell upon your goals. You can only hold one thought in your
mind at a time. So get in the habit of substituting positive thoughts
for negative ones.
That is why goals are so important. They give you something positive
to focus on. When you continually think about your goals, there's
simply no room left for negative thoughts.
You subconscious mind is a powerful resource that can work for you or
against you. The subconscious mind makes no judgments -- it simply
carries out the orders sent to it by the concious mind. When you focus
on the positive things that you want to achieve, when you repeatedly
visualize them in detail, you are sending commands to your subconcious
mind. Once you've given it a clear direction, your subconcious will
find a way to bring your goals into reality.
Constantly think positive thoughts.
Fast food. Instant coffee. Overnight delivery. Microwave ovens. Faxes.
Email. Everywhere you look there is technology for instant
gratification. We've come to expect immediate results. There's
certainly nothing wrong with having a sense of urgency -- that's the
way we get things done. However, some of the best things in life
simply take time.
The more you invest in the future, the better it will be. Sure, you
want to put plenty of energy into living for today. But today turns
all too soon into yesterday. And when you suddenly find yourself in
what used to be the future, it helps when you've sent some energy
ahead.
Investing in the future will make time your friend, and give you a
reason to look forward to each new day.
Do something that will bring you instant gratification, and it's gone
at the end of the day. Do something today that won't benefit you for
six months, and suddenly your future is brighter. The farther into the
future you plan and work, the greater your influence will be when your
effort comes to fruition.
Make a habit of planting seeds each day, and the future will bring a
bountiful harvest.
What? That seems like a contradiction. It's not.
Do the hard work first. Go ahead and get it out of the way in the
beginning. When you do that, it makes everything that comes after it
much easier. For one thing, if you do the hard work first, you don't
have it "hanging over your head" all the time. You don't have to spend
time and effort worrying about it because it's already done!
Even more importantly, doing the hard work first almost always gives
you a solid foundation and preparation that makes everything else flow
much more smoothly. When you work hard now, you'll work less later.
And you'll be more effective, too.
Generally, the hardest part of any project is also the most critical.
When you do the hard part first, you're less likely to run into a time
crunch at the end. After all, when the critical part is already done,
the other stuff can slip if it has to.
You're going to have to do the hard part sooner or later. So you might
as well do it sooner, get it over with, and start reaping the benefits
from it right away. |
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