In the price analysis, it is implied that the quality, quantity and time schedules are adhered to by the vendor. Obviously, if the vendor is not able to keep the requirements, then though his price may be lower, the actual cost to the organisation will be more.
For example, if the quality is not maintained, it will lead to rejections occupying the scarce stores’ space. The losses incurred due to increased rejections will have to be added to the cost of materials. Similarly, if the quality and time requirements are not met by the vendor, it can lead to idling of the buyers manufacturing facilities.
The opportunity cost of this loss in production must then be added to the cost of material. Alternatively if, this results in a rush order, the extra charges must be added to the cost. Thus, the right price will have to be compared, considering all such factors into account i.e., upto the final production of the material in the production process.
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Factors influencing the price can be enumerated as follows:
1. Service
2. Quantity
3. Quality
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4. Packaging
5. Vendor’s cost
6. Economic scene
7. Price paid by competitors
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8. Insurance
9. Materials handling
10. Taxes
11. Transportation costs.
1. Service:
After sales service is an important consideration. Buying from a distant supplier who has no arguments for rendering after sales service results in a purchaser incurring considerable expenditure for servicing the equipment or machinery and so it proves costlier in the long run.
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2. Quality:
The purchasers’ specifications will determine the price. Usually there is a wide variation in available quantities and, therefore, also in prices.
3. Quantity:
The purchaser will have to assess the right quantity he should buy. A large purchase may result in a lower price but may end up in high inventory carrying costs.
4. Packaging:
Selection of transportation will usually determine the type of packaging. If dispatch is by railway containers, little packaging may be necessary.
Also, newer packing materials appear in the market every day. The purchaser should select the lowest cost packaging consistent with the mode of transportation and the nature of goods.
5. Vendor’s Cost:
By for the most important factor is the costs incurred by the vendor in manufacturing the goods. Vendor’s price cost analysis is very important.
6. Economic Scene:
This has the greatest influence on price. The purchaser should study the economic situation carefully. Whether it is a buyer’s market or a seller’s market for the commodity under consideration, the strengths or weaknesses of the concerned industry, labour situation in the industry, governmental controls on the industry, etc.
7. Price Paid by Competitors:
A shrewd purchaser will not pay a price higher than that paid by the other competing companies. Only than he can remain in business.
8. Insurance:
Cost of insurance will be paid on the nature of material, packaging, transportation etc.
9. Materials Handling:
The choice of transportation will determine the number and quantum of materials handling. One should select the mode of transport such that cost of material handling is reduced.
10. Taxes:
Excise duties, central and local sales tax, octroi, customs duty etc. all adds up to the price ultimately.
11. Transportation Costs:
A proper choice of transportation is essential to keep transportation costs at the lowest level. At the same time the choice of transportation should be such that movement is reasonably prompt, otherwise lead time increases resulting in higher inventory costs.