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Reliable Measurement for purchase price performance #financial metrics #cost management

Writer's picture: Daragh KnoxDaragh Knox

In different manufacturing industries there are different margins but all have financial targets and objectives to report to their boards every quarter and/or year. For manufacturing companies who are buying items whether in the commodity or non-commodity markets, this cost is a focus. Commodity items are raw materials non-commodity items are derived or converted from commodities. #measurement


For example - you can buy a sheet of metal; stainless steel or aluminium. In this case the majority of the cost of this sheet is the metal itself - either steel or aluminium. Commodity items are commonly known as raw materials. #commoditymarkets

timber and logs
Timber is an example of a raw material from whence items like paper are created

An example of a non-commodity would be a pair of leather shoes - made mostly from leather and some rubber for the soles, a pair of leather shoes has a lot of value-add; there's the design, the shape, the size, laces and so on.




Non-commodity items are commonly known generically as components in industry









Each company knows their cost inputs which are managed on ERP systems typically; our wages cost X, our raw materials and components cost Y and our indirect costs (freight, electricity, rent, rates etc cost Z) . It's valuable for us then, as businesspeople, to understand not only how much we are going to spend on raw material and components in the period ahead. We can create projections and then we can measure against projections to generate a performance metric.


We have a bunch of price points to work with for each item



We've to keep an eye on a number of parts of these prices also known as cost breakdown #costbreakdown


Freight - how much it costs to get it to us. If we can get a handle on what the ex-works price is (EXW, below) then we can figure out how much the item costs before it leaves the supplier's premises. #logistics. If we have an underdeveloped relationship with the supplier we can request a quote from a freight provider. Could I have a quote for the delivery of x to y?


incoterms
I found this picture on Linkedin it one of the most straightforward description of incoterms I've come across










Material cost: The raw material content of the component material. This can be hard to get a hold of as but even it's not readily available, we should pursue this information from key suppliers. We can also look to unapproved suppliers and get a quote and create a quotation spreadsheet.








Price







%

€€


Raw Material Cost

(The cost of the raw material)




Conversion

(The cost of supplier inputs)




Freight

(The cost of transport)




Margin

(Profitability at the supplier)









Totals


100%




When we have a baseline we can start to compare and project. One way to create a future projection is to place a weighted average price on the cost of the items we have in our warehouse and factor that by expected demand. This is a simple evaluation though usually if there's an ERP system, this will be calculated for you. #pricemodel

Assumption

 

 

 




In this case we have 13000 items in our inventory and 5,000 more on Order for supply in 2024




We have an expected demand of 25,000 items for 2024

 

 




Inventory


 Purchase price 


Receipt Date


                                                                        13,000







 Breakdown 







                                                                          1,000


 €              1.00


Jul-23










                                                                          4,000


 €              1.10


Aug-23










                                                                          3,000


 €              0.95


Sep-23










                                                                          2,000


 €              1.01


Oct-23










                                                                          3,000


 €              0.90


Dec-23










                                                                        13,000


 €            0.992












Average price paid for the period July - December 2023




 €         0.99









Total Volume received





        13,000









Total Spend





 €     12,970


Weighted average price





 €       0.998









We have 5,000 on purchase order for supply in 2024













                                                                          5,000


 €              1.25












Spend





 €       6,250
















Weighted average price for 2024





 €         1.07









We have a weighted average price of €1.07 for 18,000 items (13,000 in inventory and 5,000 on PO yet to be delivered) or 72% of the projected demand covered on price








We're close now to creating a realistic price that we can measure against. This doesn't tell us if this is the best price we can get for the business. But we can get to that too. This exercise has two elements; one is the computation and analysis side and the other is the supply chain. How well we know and understand it and how well we understand the business cultures, not just the culture within the supply chain but our own business culture. #businessculture #relationshipmanagement #supplychainmanagement #pricemanagement. This will dictate how we access information that we need and what we do with it. And in this decade continuity of supply is becoming increasingly important as the supply chain is subject to economic, political and social factors that are outside of our control #riskassessment #riskmanagement #businessculture


And from here we can create sales prices. #salesprices

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© 2022 by Daragh Knox

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