Supply Chain Solutions No.29 – Price Versus Cost
Irrespective if the sourced item is direct or indirectly procured, the objective is to maximise perceived value which must maximise margin, be within cost and on time with the least amount of effort, and quality is fit for end use.
Sourcing by Price
Sourcing by Price is best used for OEM product when you are buying something off the shelf with very limited additional value added services. You know what the anticipated product sell is and the standard margin to calculate the buy price. The buy price then becomes a matter of negotiation to maximise value as product physical characteristic being purchasing won’t alter, but the value added services may change depending on your business need and the seller’s perceived value of your ability to return for additional sales.
When buying an OEM product ensure the seller provides all technical specifications and a master approval sample for reference. Some manufacturers will change product specifications to increase margin by altering physical or performance properties.
Sourcing by Cost
Sourcing by Cost is best used for ODM product. Like OEM product, you know the target sell price and the margin that must be achieved. The challenge is the development process may need to be complete to get the exact cost. Developing a cost maybe a rapid or prolonged practice depending on the complexity of the product, going through the development process decisions on raw materials and usage need to be made to ensure target price and the margin is achieved.
Sourcing the right vendor is critical in the process, you need to ensure you are working with a vendor that fits your value guidelines based on a similar product seen in the vendor and or same product you have manufactured with the vendor previously. To appraise the vendor, you will first need to source to price and complete due-diligence before moving to source to cost.
All products regardless of OEM or ODM, the vendor cost, needs to be supported by an open costing that details component and operational cost, that can further be used for vendor cost comparison and to ensure components equal the desired specification.
Irrespective of OEM or ODM product, T&C Terms and Conditions or MOU Memorandum of Understanding, need to be signed and agreed to, to ensure service levels and value commitment are enforced.
Are you getting Value from your Sourcing?
ID Global Concepts are experts in supply chain management. We add value to your supply chain through consultancy or management contract to ensure the business has the best practice systems that are the right fit for your business, customer and meet your value expectations.